filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Interactive Brokers Group, Inc.
Greenwich, CT
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Interactive Brokers Group, Inc. and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of comprehensive income, changes in equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Income taxes — Refer to Notes 2 and 11 to the consolidated financial statements
Critical Audit Matter Description
The Company’s income tax expense, deferred tax assets and liabilities (net of valuation allowance, if any), and reserves for unrecognized tax benefits are based on enacted tax laws and reflects management's best assessment of estimated future taxes to be paid. The Company is subject to income taxes in both the U.S. and various foreign jurisdictions. The Company has deferred tax assets resulting from the tax basis step-up received in connection with the Company’s public equity offerings. Determining income tax expense requires significant management judgments and estimates.
We identified management’s calculation of income tax expense, deferred tax assets and liabilities (net of valuation allowance, if any), and reserves for unrecognized tax benefits as a critical audit matter because of the significant judgments and estimates management makes to determine these amounts. Performing audit procedures to evaluate the reasonableness of management’s interpretation of tax law in various foreign jurisdictions, and its estimate of the associated provisions, tax charges, and uncertain tax positions required a high degree of auditor judgment and increased effort, including the need to involve our income tax specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to income taxes included, among others, the following:
We tested the operating effectiveness of controls over income tax balances and disclosures, including the provision for income taxes, deferred tax assets and liabilities (including valuation allowance) and unrecognized tax benefits.
With the assistance of our income tax specialists, we assessed the Company’s income tax expense by:
-Evaluating the Company’s income tax provision calculation, including testing the appropriateness of income tax rates applied and of income allocations among the taxing jurisdictions, and the mathematical accuracy of the calculation.
-Evaluating the Company’s analyses supporting its conclusions as to the recognition and measurement of deferred tax assets and liabilities, including the calculation of the deferred tax asset related to the tax basis step-up received in connection with the Company’s public equity offering.
-Evaluating management’s assessment of the Company’s ability to utilize the net deferred tax assets in future years.
-Evaluating the appropriateness of the Company having no significant unrecognized tax benefits.
-Evaluating the Company’s disclosures related to the provision for income taxes, deferred tax assets and liabilities (including valuation allowance) and unrecognized tax benefits.
/s/ Deloitte & Touche LLP
New York, New York
February 25, 2022
We have served as the Company's auditor since 1990.
Interactive Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
| December 31, | ||||||
| (in millions, except share amounts) | 2021 | 2020 | ||||
| Assets | ||||||
| Cash and cash equivalents | $ | 2,395 | $ | 4,292 | ||
| Cash - segregated for regulatory purposes | 22,888 | 15,903 | ||||
| Securities - segregated for regulatory purposes | 15,121 | 27,821 | ||||
| Securities borrowed | 3,912 | 4,956 | ||||
| Securities purchased under agreements to resell | 4,380 | 792 | ||||
| Financial instruments owned, at fair value | ||||||
| Financial instruments owned | 559 | 544 | ||||
| Financial instruments owned and pledged as collateral | 114 | 86 | ||||
| Total financial instruments owned, at fair value | 673 | 630 | ||||
| Receivables | ||||||
| Customers, less allowance for credit losses of $8 and $17 as of December 31, 2021 and 2020 | 54,935 | 39,333 | ||||
| Brokers, dealers and clearing organizations | 3,771 | 1,254 | ||||
| Interest | 127 | 104 | ||||
| Total receivables | 58,833 | 40,691 | ||||
| Other assets | 911 | 594 | ||||
| Total assets | $ | 109,113 | $ | 95,679 | ||
| Liabilities and equity | ||||||
| Short-term borrowings | $ | 27 | $ | 118 | ||
| Securities loaned | 11,769 | 9,838 | ||||
| Financial instruments sold, but not yet purchased, at fair value | 182 | 153 | ||||
| Payables | ||||||
| Customers | 85,634 | 75,882 | ||||
| Brokers, dealers and clearing organizations | 557 | 182 | ||||
| Affiliate | 222 | 199 | ||||
| Accounts payable, accrued expenses and other liabilities | 492 | 298 | ||||
| Interest | 8 | 6 | ||||
| Total payables | 86,913 | 76,567 | ||||
| Total liabilities | 98,891 | 86,676 | ||||
| Commitments, contingencies and guarantees (see Note 14) | ||||||
| Equity | ||||||
| Stockholders’ equity | ||||||
| Common stock, $0.01 par value per share | ||||||
| Class A – Authorized - 1,000,000,000, Issued - 98,359,572 and 90,909,889 shares, Outstanding – 98,204,658 and 90,773,105 shares as of December 31, 2021 and 2020 | 1 | 1 | ||||
| Class B – Authorized, Issued and Outstanding – 100 shares as of December 31, 2021 and 2020 | — | — | ||||
| Additional paid-in capital | 1,442 | 1,244 | ||||
| Retained earnings | 953 | 683 | ||||
| Accumulated other comprehensive income, net of income taxes of $0 and $0 as of December 31, 2021 and 2020 | 4 | 26 | ||||
| Treasury stock, at cost, 154,914 and 136,784 shares as of December 31, 2021 and 2020 | (5) | (3) | ||||
| Total stockholders’ equity | 2,395 | 1,951 | ||||
| Noncontrolling interests | 7,827 | 7,052 | ||||
| Total equity | 10,222 | 9,003 | ||||
| Total liabilities and equity | $ | 109,113 | $ | 95,679 |
See accompanying notes to the consolidated financial statements.
Interactive Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
| Year-Ended December 31, | |||||||||
| (in millions, except share or per share amounts) | 2021 | 2020 | 2019 | ||||||
| Revenues | |||||||||
| Commissions | $ | 1,350 | $ | 1,112 | $ | 706 | |||
| Other fees and services | 218 | 175 | 141 | ||||||
| Other income (loss) | (2) | 59 | 7 | ||||||
| Total non-interest income | 1,566 | 1,346 | 854 | ||||||
| Interest income | 1,372 | 1,133 | 1,726 | ||||||
| Interest expense | (224) | (261) | (643) | ||||||
| Total net interest income | 1,148 | 872 | 1,083 | ||||||
| Total net revenues | 2,714 | 2,218 | 1,937 | ||||||
| Non-interest expenses | |||||||||
| Execution, clearing and distribution fees | 236 | 293 | 251 | ||||||
| Employee compensation and benefits | 399 | 325 | 288 | ||||||
| Occupancy, depreciation and amortization | 80 | 69 | 60 | ||||||
| Communications | 33 | 26 | 25 | ||||||
| General and administrative | 176 | 236 | 112 | ||||||
| Customer bad debt | 3 | 13 | 44 | ||||||
| Total non-interest expenses | 927 | 962 | 780 | ||||||
| Income before income taxes | 1,787 | 1,256 | 1,157 | ||||||
| Income tax expense | 151 | 77 | 68 | ||||||
| Net income | 1,636 | 1,179 | 1,089 | ||||||
| Less net income attributable to noncontrolling interests | 1,328 | 984 | 928 | ||||||
| Net income available for common stockholders | $ | 308 | $ | 195 | $ | 161 | |||
| Earnings per share | |||||||||
| Basic | $ | 3.27 | $ | 2.44 | $ | 2.11 | |||
| Diluted | $ | 3.24 | $ | 2.42 | $ | 2.10 | |||
| Weighted average common shares outstanding | |||||||||
| Basic | 94,167,572 | 79,939,289 | 76,121,570 | ||||||
| Diluted | 95,009,880 | 80,638,908 | 76,825,863 | ||||||
| Comprehensive income | |||||||||
| Net income available for common stockholders | $ | 308 | $ | 195 | $ | 161 | |||
| Other comprehensive income | |||||||||
| Cumulative translation adjustment, before income taxes | (22) | 26 | 4 | ||||||
| Income taxes related to items of other comprehensive income | — | — | — | ||||||
| Other comprehensive income (loss), net of tax | (22) | 26 | 4 | ||||||
| Comprehensive income available for common stockholders | $ | 286 | $ | 221 | $ | 165 | |||
| Comprehensive income attributable to noncontrolling interests | |||||||||
| Net income attributable to noncontrolling interests | $ | 1,328 | $ | 984 | $ | 928 | |||
| Other comprehensive income - cumulative translation adjustment | (75) | 98 | 20 | ||||||
| Comprehensive income attributable to noncontrolling interests | $ | 1,253 | $ | 1,082 | $ | 948 |
See accompanying notes to the consolidated financial statements.
Interactive Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| Year-Ended December 31, | |||||||||
| (in millions) | 2021 | 2020 | 2019 | ||||||
| Cash flows from operating activities | |||||||||
| Net income | $ | 1,636 | $ | 1,179 | $ | 1,089 | |||
| Adjustments to reconcile net income to net cash from operating activities | |||||||||
| Deferred income taxes | 23 | 9 | 24 | ||||||
| Depreciation and amortization | 50 | 42 | 31 | ||||||
| Amortization of right-of-use assets | 24 | 20 | 21 | ||||||
| Employee stock plan compensation | 80 | 65 | 60 | ||||||
| Unrealized (gain) loss on other investments, net | 9 | (50) | (8) | ||||||
| (Gain) loss on remeasurement of Tax Receivable Agreement liability | (1) | 3 | — | ||||||
| Bad debt expense | 3 | 13 | 44 | ||||||
| Impairment loss | — | 14 | 1 | ||||||
| Shares distributed to customers under IBKR Promotions | 9 | — | — | ||||||
| Change in operating assets and liabilities | |||||||||
| Securities - segregated for regulatory purposes | 12,700 | (9,997) | (2,229) | ||||||
| Securities borrowed | 1,044 | (1,040) | (585) | ||||||
| Securities purchased under agreements to resell | (3,588) | 2,319 | (1,869) | ||||||
| Financial instruments owned, at fair value | (32) | 1,286 | 210 | ||||||
| Receivables from customers | (15,605) | (8,041) | (4,332) | ||||||
| Other receivables | (2,540) | (515) | 4 | ||||||
| Other assets | (198) | (11) | (169) | ||||||
| Securities loaned | 1,931 | 5,428 | 373 | ||||||
| Securities sold under agreement to repurchase | — | (1,909) | 1,909 | ||||||
| Financial instruments sold, but not yet purchased, at fair value | 29 | (304) | (224) | ||||||
| Payable to customers | 9,754 | 19,634 | 8,255 | ||||||
| Other payables | 568 | (77) | 61 | ||||||
| Net cash provided by operating activities | 5,896 | 8,068 | 2,666 | ||||||
| Cash flows from investing activities | |||||||||
| Purchases of other investments | (116) | (5) | (19) | ||||||
| Distributions received and proceeds from sales of other investments | 5 | 5 | 4 | ||||||
| Purchase of property, equipment and intangible assets | (77) | (50) | (74) | ||||||
| Net cash used in investing activities | (188) | (50) | (89) | ||||||
| Cash flows from financing activities | |||||||||
| Short-term borrowings, net | 4 | 6 | (1) | ||||||
| Dividends paid to stockholders | (38) | (32) | (31) | ||||||
| Distributions from IBG LLC to noncontrolling interests | (374) | (283) | (357) | ||||||
| Repurchases of common stock for employee tax withholdings under stock incentive plans | (27) | (17) | (27) | ||||||
| Proceeds from the sale of treasury stock | 26 | 18 | 26 | ||||||
| Issuances of senior notes | 1,428 | 116 | — | ||||||
| Redemptions of senior notes | (1,524) | (20) | — | ||||||
| Payments made under the Tax Receivable Agreement | (18) | (17) | (29) | ||||||
| Net cash used in financing activities | (523) | (229) | (419) | ||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (97) | 124 | 24 | ||||||
| Net increase in cash, cash equivalents and restricted cash | 5,088 | 7,913 | 2,182 | ||||||
| Cash, cash equivalents and restricted cash at beginning of period | 20,195 | 12,282 | 10,100 | ||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 25,283 | $ | 20,195 | $ | 12,282 | |||
| Cash, cash equivalents and restricted cash | |||||||||
| Cash and cash equivalents | 2,395 | 4,292 | 2,882 | ||||||
| Cash segregated for regulatory purposes | 22,888 | 15,903 | 9,400 | ||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 25,283 | $ | 20,195 | $ | 12,282 | |||
| Supplemental disclosures of cash flow information | |||||||||
| Cash paid for interest | $ | 222 | $ | 284 | $ | 654 | |||
| Cash paid for taxes, net | $ | 114 | $ | 64 | $ | 51 | |||
| Cash paid for amounts included in lease liabilities | $ | 24 | $ | 21 | $ | 20 | |||
| Non-cash financing activities | |||||||||
| Issuance of common stock in exchange of member interests in IBG LLC | $ | 376 | $ | 609 | $ | 1 | |||
| Redemption of member interests from IBG Holdings LLC | $ | (376) | $ | (609) | $ | (1) | |||
| Adjustments to additional paid-in capital for changes in proportionate ownership in IBG LLC | $ | 25 | $ | 21 | $ | 24 | |||
| Adjustments to noncontrolling interests for changes in proportionate ownership in IBG LLC | $ | (25) | $ | (21) | $ | (24) | |||
| Non-cash distributions to noncontrolling interests | $ | (3) | $ | (5) | $ | — |
See accompanying notes to the consolidated financial statements.
Interactive Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Ch****anges in Equity
Three Years Ended December 31, 2021, 2020, and 2019
| 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, 2018 | 75,230,400 | $ | 1 | $ | 898 | $ | (3) | $ | 390 | $ | (4) | $ | 1,282 | $ | 5,874 | $ | 7,156 | |||||||||
| Issuance of common stock in follow-on offering | 21,075 | 1 | 1 | (1) | — | |||||||||||||||||||||
| Common stock distributed pursuant to stock incentive plans | 1,627,565 | — | — | |||||||||||||||||||||||
| Issuance of common stock - Promotions | 10,000 | — | — | |||||||||||||||||||||||
| Compensation for stock grants vesting in the future | 11 | 11 | 49 | 60 | ||||||||||||||||||||||
| Repurchases of common stock for employee tax withholdings under stock incentive plans | (27) | (27) | (27) | |||||||||||||||||||||||
| Sales of treasury stock | 27 | 27 | (1) | 26 | ||||||||||||||||||||||
| Dividends paid to stockholders | (31) | (31) | (31) | |||||||||||||||||||||||
| Distributions from IBG LLC to noncontrolling interests | — | (357) | (357) | |||||||||||||||||||||||
| Adjustments for changes in proportionate ownership in IBG LLC | 24 | 24 | (24) | — | ||||||||||||||||||||||
| Comprehensive income | 161 | 4 | 165 | 948 | 1,113 | |||||||||||||||||||||
| Balance, December 31, 2019 | 76,889,040 | $ | 1 | $ | 934 | $ | (3) | $ | 520 | $ | — | $ | 1,452 | $ | 6,488 | $ | 7,940 | |||||||||
| Issuance of common stock in follow-on offering | 12,710,608 | 264 | 264 | (264) | — | |||||||||||||||||||||
| Common stock distributed pursuant to stock incentive plans | 1,300,241 | — | — | |||||||||||||||||||||||
| Issuance of common stock - Promotions | 10,000 | (1) | (1) | 1 | — | |||||||||||||||||||||
| Net distribution of common stock - IBKR Promotion | 1 | 1 | 1 | |||||||||||||||||||||||
| Compensation for stock grants vesting in the future | 12 | 12 | 53 | 65 | ||||||||||||||||||||||
| Deferred tax benefit retained - follow-on offering | 13 | 13 | 13 | |||||||||||||||||||||||
| Repurchases of common stock for employee tax withholdings under stock incentive plans | (17) | (17) | (17) | |||||||||||||||||||||||
| Sales of treasury stock | 17 | 17 | 1 | 18 | ||||||||||||||||||||||
| Dividends paid to stockholders | (32) | (32) | (32) | |||||||||||||||||||||||
| Distributions from IBG LLC to noncontrolling interests | — | (288) | (288) | |||||||||||||||||||||||
| Adjustments for changes in proportionate ownership in IBG LLC | 21 | 21 | (21) | — | ||||||||||||||||||||||
| Comprehensive income | 195 | 26 | 221 | 1,082 | 1,303 | |||||||||||||||||||||
| Balance, December 31, 2020 | 90,909,889 | $ | 1 | $ | 1,244 | $ | (3) | $ | 683 | $ | 26 | $ | 1,951 | $ | 7,052 | $ | 9,003 | |||||||||
| Issuance of common stock in follow-on offering | 6,079,542 | 145 | 145 | (145) | — | |||||||||||||||||||||
| Common stock distributed pursuant to stock incentive plans | 1,220,141 | — | — | |||||||||||||||||||||||
| Issuance of common stock - Promotions | 150,000 | 3 | (11) | (8) | 8 | — | ||||||||||||||||||||
| Net distribution of common stock - IBKR Promotion | 9 | 9 | 9 | |||||||||||||||||||||||
| Compensation for stock grants vesting in the future | 18 | 18 | 62 | 80 | ||||||||||||||||||||||
| Deferred tax benefit retained - follow-on offering | 7 | 7 | 7 | |||||||||||||||||||||||
| Repurchases of common stock for employee tax withholdings under stock incentive plans | (27) | (27) | (27) | |||||||||||||||||||||||
| Sales of treasury stock | 27 | 27 | (1) | 26 | ||||||||||||||||||||||
| Dividends paid to stockholders | (38) | (38) | (38) | |||||||||||||||||||||||
| Distributions from IBG LLC to noncontrolling interests | — | (377) | (377) | |||||||||||||||||||||||
| Adjustments for changes in proportionate ownership in IBG LLC | 25 | 25 | (25) | — | ||||||||||||||||||||||
| Comprehensive income | 308 | (22) | 286 | 1,253 | 1,539 | |||||||||||||||||||||
| Balance, December 31, 2021 | 98,359,572 | $ | 1 | $ | 1,442 | $ | (5) | $ | 953 | $ | 4 | $ | 2,395 | $ | 7,827 | $ | 10,222 |
See accompanying notes to the consolidated financial statements.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to 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 23.5% of the membership interests of IBG LLC, which, in turn, owns operating subsidiaries (collectively, “IBG LLC”). IBG, Inc. together with IBG LLC and its consolidated subsidiaries (collectively, “the Company”), is an automated global electronic broker specializing in executing and clearing trades in stocks, options, futures, foreign exchange instruments, bonds, mutual funds and exchange-traded funds (“ETFs”) on more than 150 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 December 31, 2021, the Company had 2,571 employees worldwide.
IBG LLC is a Connecticut limited liability company that conducts its business through its significant operating subsidiaries: Interactive Brokers LLC (“IB LLC”); IBKR Securities Services LLC (formerly, Timber Hill LLC) (“IBKRSS”); 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 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 16). IB LLC, IBKRSS, 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 consolidated financial statements are presented in U.S. dollars and have been prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”) and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding financial reporting with respect to Form 10-K.
These consolidated financial statements include the accounts of the Company and its consolidated subsidiaries and reflect all adjustments of a normal and recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the periods presented.
Principles of Consolidation, including Noncontrolling Interests
These 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.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in these consolidated financial statements and accompanying notes. These estimates and assumptions are based on judgment and the best available information at the time. Therefore, actual results could differ materially from those estimates. Such estimates include the allowance for credit losses, valuation of certain investments, compensation accruals, current and deferred income taxes, and contingency reserves.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 if the Company may hold a large position whereby a purchase or sale could reasonably be expected to impact quoted prices.
Currency forward contracts are valued using broadly distributed bank and broker prices and are classified as Level 2 of the fair value hierarchy since inputs to their valuation can generally be 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.
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
The Company follows FASB ASC Topic 326 – “Financial Instruments – Credit Losses” (“ASC Topic 326”) which 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 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 the 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.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 consolidated statements of cash flows.
The table below presents the composition of the Company’s securities segregated for regulatory purposes for the periods indicated.
| December 31, | ||||||
| 2021 | 2020 | |||||
| (in millions) | ||||||
| U.S. government securities | $ | 4,729 | $ | 4,750 | ||
| Securities purchased under agreements to resell 1 | 10,392 | 23,071 | ||||
| $ | 15,121 | $ | 27,821 |
(1)These balances are collateralized by U.S. government securities.
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 daily, with additional collateral obtained or refunded as permitted contractually. The Company’s policy is to net, in the consolidated statements of financial condition, securities borrowed and securities loaned contracts 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 consolidated statements of comprehensive income.
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 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 consolidated statements of financial condition.
Customer Receivables and Payables
Receivables from and payables to customers include amounts due on cash and margin transactions, including futures contracts transacted on behalf of customers. Securities owned by customers, including those that collateralize margin loans or other similar transactions, are not reported in the consolidated statements of financial condition. Amounts receivable from customers that are
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
determined by management to be uncollectible are recorded as customer bad debt expense in the consolidated statements of comprehensive income.
Receivables from and Payables to Brokers, Dealers and Clearing Organizations
Receivables from and payables to brokers, dealers and clearing organizations include net receivables and payables from unsettled trades, including amounts related to futures and options on futures contracts executed on behalf of customers, amounts receivable for securities not delivered by the Company to the purchaser by the settlement date (“fails to deliver”) and cash 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 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.
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 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.
The table below presents the composition of the Company’s investments for the periods indicated.
| December 31, | ||||||
| 2021 | 2020 | |||||
| (in millions) | ||||||
| Equity method investments1 | $ | 123 | $ | 11 | ||
| Investments in equity securities at adjusted cost2 | 17 | 10 | ||||
| Investments in equity securities at fair value2 | 49 | 80 | ||||
| Investments in exchange memberships and equity securities of certain exchanges2 | 3 | 3 | ||||
| $ | 192 | $ | 104 |
(1)The Company’s share of income or losses is included in other income in the consolidated statements of comprehensive income.
(2)These investments do not qualify for the equity method of accounting and the dividends received are included in other income in the consolidated statements of comprehensive income.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Property, Equipment and Intangible Assets
Property, equipment and intangible assets, which are included in other assets in the 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 to five 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 consolidated statements of financial condition and any resulting gain or loss is recorded in other income in the 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 consolidated statements of 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 nine 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. 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 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 consolidated statements of comprehensive income.
Comprehensive Income and Foreign Currency Translation
The Company’s operating results are reported in the 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.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 consolidated statements of financial condition. In December of 2020, the Company liquidated its Canadian subsidiary, Timber Hill Canada Company, and accordingly reclassified the accumulated OCI loss of $34 million to other income in the consolidated statements of comprehensive income.
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 consolidated statements of comprehensive income. Commissions also include payments for order flow income received from IBKR LiteSM 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 Fees and Services
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 consolidated statements of comprehensive income.
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, dividend 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 consolidated statements of comprehensive income.
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 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 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 consolidated statements of comprehensive income.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 the 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 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 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 consolidated statements of comprehensive income.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
FASB Standards Adopted During 2021
| Standard | Summary of guidance | Effect on financial statements | ||
| Income Taxes (Topic 740) Issued December 2019 | Simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. | Adopted January 1, 2021. The adoption of the changes did not have a material impact on the Company’s consolidated financial statements. | ||
FASB Standards issued but not adopted as of December 31, 2021
| Standard | Summary of guidance | Effect on financial statements | ||
| Business Combinations (Topic 805) Issued October 2021 | Requires companies to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, “Revenue from Contracts with Customers”. At the acquisition date, an acquirer should account for the related revenue contracts as if it had originated the contracts. | Effective date: January 1, 2023. The changes are not expected to have a material impact on the Company’s consolidated financial statements. |
Interactive Brokers Group, Inc. and Subsidiaries
Notes to 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 ten currencies internally referred to as the “GLOBAL.” These strategies minimize the fluctuation of the Company’s net worth as expressed in GLOBALs, thereby diversifying its risk in alignment with these global currencies, weighted by the Company’s view of their importance. As the Company’s financial results are reported in U.S. dollars, the change in the value of the GLOBAL as expressed in U.S. dollars affects the Company’s earnings. The impact of this currency diversification strategy in the Company’s earnings is included in other income in the consolidated statements of comprehensive income.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Credit Risk
The Company is exposed to the 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.
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 daily and requiring additional collateral to be deposited with or returned to the Company as permitted under contractual provisions.
Concentrations of Credit Risk
The Company’s exposure to credit risk associated with its trading and other activities is measured on an individual counterparty basis, as well as by groups of counterparties that share similar attributes. Concentrations of credit risk can be affected by changes in political, industry, or economic factors. To reduce the potential for risk concentration, credit limits are established and exposure is monitored in light of changing counterparty and market conditions. As of December 31, 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 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 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 December 31, 2021.
| IBG, Inc. | Holdings | Total | ||||
| Ownership % | 23.5% | 76.5% | 100.0% | |||
| Membership interests | 98,230,127 | 319,880,492 | 418,110,619 |
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
These 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 consolidated statements of financial condition.
Recapitalization and Post**-**IPO Capital Structure
Immediately before 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”), under 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 the 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 December 31, 2021 and 2020, 1,000,000,000 shares of Class A common stock were authorized, of which 98,359,572 and 90,909,889 shares have been issued; and 98,204,658 and 90,773,105 shares were outstanding, respectively. Class B common stock is comprised of 100 authorized shares, of which 100 shares were issued and outstanding as of December 31, 2021 and 2020. In addition, 10,000 shares of preferred stock have been authorized, of which no shares are issued or outstanding as of December 31, 2021 and 2020.
As a result of a federal income tax election made by IBG LLC applicable to the acquisition of IBG LLC member interests by IBG, Inc., the income tax basis of the assets of IBG LLC acquired by IBG, Inc. have been adjusted based on the amount paid for such interests. Deferred tax assets were recorded as of the IPO date and in connection with subsequent redemptions of Holdings member interests in exchange for common stock. These deferred tax assets are included in other assets in the Company’s consolidated statements of financial condition and are being amortized as additional deferred income tax expense over 15 years from the IPO date and from the additional redemption dates, respectively, as allowable under current tax law. As of December 31, 2021 and 2020, the unamortized balance of these deferred tax assets was $209 million and $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 consolidated statements of financial condition. The remaining 15% is accounted for as a permanent increase to additional paid-in capital in the Company’s consolidated statements of financial condition.
The cumulative amounts of deferred tax assets, payables to Holdings and additional paid-in capital arising from stock offerings from the date of the IPO through December 31, 2021 were $634 million, $539 million and $95 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 $223 million through December 31, 2021 under 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 can 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 2020, IBG, Inc. issued 28,127,765 shares of common stock (with a fair value of $1.1 billion) directly to Holdings in exchange for an equivalent number of member interests in IBG LLC.
On July 27, 2020, the Company filed a Prospectus Supplement on Form 424B (File Number 333-240121) with the SEC to re-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
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
platform, increase assets held with the Company’s brokerage business and enhance customer loyalty. From 2019 through 2021, the Company issued 170,000 shares to IBG LLC for distribution to eligible customers of certain of its subsidiaries.
On July 30, 2021, the Company filed a Prospectus Supplement on Form 424B5 with the SEC to issue 6,079,542 shares of common stock (with a fair value of $376 million) in exchange for an equivalent number of shares 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 23.5%, with Holdings owning the remaining 76.5% as of December 31, 2021. The redemptions also increased the Holdings interest held by Mr. Thomas Peterffy and his affiliates from approximately 84.6% at the IPO to approximately 90.5% as of December 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.
| Year-Ended December 31, | |||||||||
| 2021 | 2020 | 2019 | |||||||
| (in millions, except share or per share amounts) | |||||||||
| Basic earnings per share | |||||||||
| Net income available for common stockholders | $ | 308 | $ | 195 | $ | 161 | |||
| Weighted average shares of common stock outstanding | |||||||||
| Class A | 94,167,472 | 79,939,189 | 76,121,470 | ||||||
| Class B | 100 | 100 | 100 | ||||||
| 94,167,572 | 79,939,289 | 76,121,570 | |||||||
| Basic earnings per share | $ | 3.27 | $ | 2.44 | $ | 2.11 |
Diluted earnings per share are calculated utilizing the Company’s basic net income available for common stockholders divided by diluted weighted average shares outstanding with no adjustments to net income available to common stockholders for potentially dilutive common shares.
| Year-Ended December 31, | |||||||||
| 2021 | 2020 | 2019 | |||||||
| (in millions, except share or per share amounts) | |||||||||
| Diluted earnings per share | |||||||||
| Net income available for common stockholders | $ | 308 | $ | 195 | $ | 161 | |||
| Weighted average shares of common stock outstanding | |||||||||
| Class A | |||||||||
| Issued and outstanding | 94,167,472 | 79,939,189 | 76,121,470 | ||||||
| Potentially dilutive common shares | |||||||||
| Issuable pursuant to employee stock incentive plans | 842,308 | 699,619 | 704,293 | ||||||
| Class B | 100 | 100 | 100 | ||||||
| 95,009,880 | 80,638,908 | 76,825,863 | |||||||
| Diluted earnings per share | $ | 3.24 | $ | 2.42 | $ | 2.10 |
Member Distributions and Stockholder Dividends
During the three years ended December 31, 2021, 2020, and 2019, IBG LLC made distributions totaling $489 million, $356 million and $438 million to its members, of which IBG, Inc.’s proportionate share was $112 million, $68 million and $81 million, respectively. The Company paid quarterly cash dividends of $0.10 per share of common stock, totaling $38 million, $32 million and $31 million during 2021, 2020, and 2019, respectively.
On January 18, 2022, the Company declared a cash dividend of $0.10 per common share, payable on March 14, 2022 to stockholders of record as of March 1, 2022.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Comprehensive Income
The table below presents comprehensive income and earnings per share on comprehensive income for the periods indicated.
| Year-Ended December 31, | |||||||||
| 2021 | 2020 | 2019 | |||||||
| (in millions, except share or per share amounts) | |||||||||
| Comprehensive income available for common stockholders | $ | 286 | $ | 221 | $ | 165 | |||
| Earnings per share on comprehensive income | |||||||||
| Basic | $ | 3.04 | $ | 2.77 | $ | 2.18 | |||
| Diluted | $ | 3.01 | $ | 2.74 | $ | 2.16 | |||
| Weighted average common shares outstanding | |||||||||
| Basic | 94,167,572 | 79,939,289 | 76,121,570 | ||||||
| Diluted | 95,009,880 | 80,638,908 | 76,825,863 |
Interactive Brokers Group, Inc. and Subsidiaries
Notes to 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 December 31, 2021 | ||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||
| (in millions) | ||||||||||||
| Securities segregated for regulatory purposes | $ | 4,729 | $ | — | $ | — | $ | 4,729 | ||||
| Financial instruments owned, at fair value | ||||||||||||
| Stocks | 548 | — | — | 548 | ||||||||
| Options | 22 | — | — | 22 | ||||||||
| U.S. and foreign government securities | 54 | — | — | 54 | ||||||||
| Precious metals | — | 10 | — | 10 | ||||||||
| Currency forward contracts | — | 39 | — | 39 | ||||||||
| Total financial instruments owned, at fair value | 624 | 49 | — | 673 | ||||||||
| Other assets | 215 | — | — | 215 | ||||||||
| Total financial assets at fair value | $ | 5,568 | $ | 49 | $ | — | $ | 5,617 |
| Financial Liabilities at Fair Value as of December 31, 2021 | ||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||
| (in millions) | ||||||||||||
| Financial instruments sold, but not yet purchased, at fair value | ||||||||||||
| Stocks | $ | 144 | $ | — | $ | — | $ | 144 | ||||
| Options | 22 | — | — | 22 | ||||||||
| Precious metals | — | 6 | — | 6 | ||||||||
| Currency forward contracts | — | 10 | — | 10 | ||||||||
| Total financial instruments sold, but not yet purchased, at fair value | 166 | 16 | — | 182 | ||||||||
| Accounts payable, accrued expenses and other liabilities | 166 | — | — | 166 | ||||||||
| Total financial liabilities at fair value | $ | 332 | $ | 16 | $ | — | $ | 348 |
| Financial Assets at Fair Value as of December 31, 2020 | ||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||
| (in millions) | ||||||||||||
| Securities segregated for regulatory purposes | $ | 4,750 | $ | — | $ | — | $ | 4,750 | ||||
| Financial instruments owned, at fair value | ||||||||||||
| Stocks | 558 | — | 1 | 559 | ||||||||
| Options | 28 | — | — | 28 | ||||||||
| U.S. and foreign government securities | 33 | — | — | 33 | ||||||||
| Corporate bonds | — | — | 1 | 1 | ||||||||
| Currency forward contracts | — | 9 | — | 9 | ||||||||
| Total financial instruments owned, at fair value | 619 | 9 | 2 | 630 | ||||||||
| Other assets | 80 | — | — | 80 | ||||||||
| Total financial assets at fair value | $ | 5,449 | $ | 9 | $ | 2 | $ | 5,460 |
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| Financial Liabilities at Fair Value as of December 31, 2020 | ||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||
| (in millions) | ||||||||||||
| Financial instruments sold, but not yet purchased, at fair value | ||||||||||||
| Stocks | $ | 120 | $ | — | $ | — | $ | 120 | ||||
| Options | 26 | — | — | 26 | ||||||||
| Currency forward contracts | — | 7 | — | 7 | ||||||||
| Total financial instruments sold, but not yet purchased, at fair value | 146 | 7 | — | 153 | ||||||||
| Total financial liabilities at fair value | $ | 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 consolidated statements of financial condition. As of December 31, 2020, Level 3 financial assets included $1 million in corporate bonds and $1 million in stocks, which were not traded in active markets and were valued by the Company based on internal estimates.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 consolidated statements of financial condition for the periods indicated. The tables below exclude certain financial instruments such as equity method investments and all non-financial assets and liabilities.
| December 31, 2021 | |||||||||||||||
| CarryingValue | FairValue | Level 1 | Level 2 | Level 3 | |||||||||||
| (in millions) | |||||||||||||||
| Financial assets, not measured at fair value | |||||||||||||||
| Cash and cash equivalents | $ | 2,395 | $ | 2,395 | $ | 2,395 | $ | — | $ | — | |||||
| Cash - segregated for regulatory purposes | 22,888 | 22,888 | 22,888 | — | — | ||||||||||
| Securities - segregated for regulatory purposes | 10,392 | 10,392 | — | 10,392 | — | ||||||||||
| Securities borrowed | 3,912 | 3,912 | — | 3,912 | — | ||||||||||
| Securities purchased under agreements to resell | 4,380 | 4,380 | — | 4,380 | — | ||||||||||
| Receivables from customers | 54,935 | 54,935 | — | 54,935 | — | ||||||||||
| Receivables from brokers, dealers and clearing organizations | 3,771 | 3,771 | — | 3,771 | — | ||||||||||
| Interest receivable | 127 | 127 | — | 127 | — | ||||||||||
| Other assets | 20 | 20 | — | 2 | 18 | ||||||||||
| Total financial assets, not measured at fair value | $ | 102,820 | $ | 102,820 | $ | 25,283 | $ | 77,519 | $ | 18 |
| Financial liabilities, not measured at fair value | |||||||||||||||
| Short-term borrowings | $ | 27 | $ | 27 | $ | — | $ | 27 | $ | — | |||||
| Securities loaned | 11,769 | 11,769 | — | 11,769 | — | ||||||||||
| Payables to customers | 85,634 | 85,634 | — | 85,634 | — | ||||||||||
| Payables to brokers, dealers and clearing organizations | 557 | 557 | — | 557 | — | ||||||||||
| Interest payable | 8 | 8 | — | 8 | — | ||||||||||
| Total financial liabilities, not measured at fair value | $ | 97,995 | $ | 97,995 | $ | — | $ | 97,995 | $ | — | |||||
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| December 31, 2020 | |||||||||||||||
| CarryingValue | FairValue | Level 1 | Level 2 | Level 3 | |||||||||||
| (in millions) | |||||||||||||||
| Financial assets, not measured at fair value | |||||||||||||||
| Cash and cash equivalents | $ | 4,292 | $ | 4,292 | $ | 4,292 | $ | — | $ | — | |||||
| Cash - segregated for regulatory purposes | 15,903 | 15,903 | 15,903 | — | — | ||||||||||
| Securities - segregated for regulatory purposes | 23,071 | 23,071 | — | 23,071 | — | ||||||||||
| Securities borrowed | 4,956 | 4,956 | — | 4,956 | — | ||||||||||
| Securities purchased under agreements to resell | 792 | 792 | — | 792 | — | ||||||||||
| Receivables from customers | 39,333 | 39,333 | — | 39,333 | — | ||||||||||
| Receivables from brokers, dealers and clearing organizations | 1,254 | 1,254 | — | 1,254 | — | ||||||||||
| Interest receivable | 104 | 104 | — | 104 | — | ||||||||||
| Other assets | 13 | 13 | — | 2 | 11 | ||||||||||
| Total financial assets, not measured at fair value | $ | 89,718 | $ | 89,718 | $ | 20,195 | $ | 69,512 | $ | 11 |
| Financial liabilities, not measured at fair value | |||||||||||||||
| Short-term borrowings | $ | 118 | $ | 118 | $ | — | $ | 118 | $ | — | |||||
| Securities loaned | 9,838 | 9,838 | — | 9,838 | — | ||||||||||
| Payables to customers | 75,882 | 75,882 | — | 75,882 | — | ||||||||||
| Payables to brokers, dealers and clearing organizations | 182 | 182 | — | 182 | — | ||||||||||
| Interest payable | 6 | 6 | — | 6 | — | ||||||||||
| Total financial liabilities, not measured at fair value | $ | 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 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 Consolidated Financial Statements
The tables below present the netting of financial assets and financial liabilities for the periods indicated.
| December 31, 2021 | |||||||||||||||||
| Gross | Amounts Not | ||||||||||||||||
| Amounts | Amounts | Net Amounts | Offset in the | ||||||||||||||
| of Financial | Offset in the | Presented in the | Consolidated Statement | ||||||||||||||
| Assets and | Consolidated | Consolidated | of Financial Condition | ||||||||||||||
| Liabilities | Statement of | Statement of | Cash or Financial | ||||||||||||||
| Recognized | Financial Condition | 2 | Financial Condition | Instruments | Net Amount | ||||||||||||
| (in millions) | |||||||||||||||||
| Offsetting of financial assets | |||||||||||||||||
| Securities segregated for regulatory purposes - purchased under agreements to resell | $ | 10,392 | 1 | $ | — | $ | 10,392 | $ | (10,392) | $ | — | ||||||
| Securities borrowed | 3,912 | — | 3,912 | (3,642) | 270 | ||||||||||||
| Securities purchased under agreements to resell | 4,380 | — | 4,380 | (4,380) | — | ||||||||||||
| Financial instruments owned, at fair value | |||||||||||||||||
| Options | 22 | — | 22 | (19) | 3 | ||||||||||||
| Currency forward contracts | 39 | — | 39 | — | 39 | ||||||||||||
| Total | $ | 18,745 | $ | — | $ | 18,745 | $ | (18,433) | $ | 312 |
| (in millions) | |||||||||||||||||
| Offsetting of financial liabilities | |||||||||||||||||
| Securities loaned | $ | 11,769 | $ | — | $ | 11,769 | $ | (10,992) | $ | 777 | |||||||
| Financial instruments sold, but not yet purchased, at fair value | |||||||||||||||||
| Options | 22 | — | 22 | (19) | 3 | ||||||||||||
| Currency forward contracts | 10 | — | 10 | — | 10 | ||||||||||||
| Total | $ | 11,801 | $ | — | $ | 11,801 | $ | (11,011) | $ | 790 |
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
| December 31, 2020 | |||||||||||||||||
| Gross | Amounts Not | ||||||||||||||||
| Amounts | Amounts | Net Amounts | Offset in the | ||||||||||||||
| of Financial | Offset in the | Presented in the | Consolidated Statement | ||||||||||||||
| Assets and | Consolidated | Consolidated | of Financial Condition | ||||||||||||||
| Liabilities | Statement of | Statement of | Cash or Financial | ||||||||||||||
| Recognized | Financial Condition | 2 | Financial Condition | Instruments | Net Amount | ||||||||||||
| (in millions) | |||||||||||||||||
| Offsetting of financial assets | |||||||||||||||||
| Securities segregated for regulatory purposes - purchased under agreements to resell | $ | 23,071 | 1 | $ | — | $ | 23,071 | $ | (23,071) | $ | — | ||||||
| Securities borrowed | 4,956 | — | 4,956 | (4,716) | 240 | ||||||||||||
| Securities purchased under agreements to resell | 792 | — | 792 | (792) | — | ||||||||||||
| Financial instruments owned, at fair value | |||||||||||||||||
| Options | 28 | — | 28 | (25) | 3 | ||||||||||||
| Currency forward contracts | 9 | — | 9 | — | 9 | ||||||||||||
| Total | $ | 28,856 | $ | — | $ | 28,856 | $ | (28,604) | $ | 252 |
| (in millions) | |||||||||||||||||
| Offsetting of financial liabilities | |||||||||||||||||
| Securities loaned | $ | 9,838 | $ | — | $ | 9,838 | $ | (9,246) | $ | 592 | |||||||
| Financial instruments sold, but not yet purchased, at fair value | |||||||||||||||||
| Options | 26 | — | 26 | (25) | 1 | ||||||||||||
| Currency forward contracts | 7 | — | 7 | — | 7 | ||||||||||||
| Total | $ | 9,871 | $ | — | $ | 9,871 | $ | (9,271) | $ | 600 |
(1)As of December 31, 2021 and 2020, the Company had $10.4 billion and $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 consolidated statements of financial condition.
(2)The Company did not have any balances eligible for netting in accordance with ASC Topic 210-20 at December 31, 2021 and 2020.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to 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.
| December 31, 2021 | |||||||||||||||
| Remaining Contractual Maturity | |||||||||||||||
| Overnight | Less than | 30 – 90 | Over 90 | ||||||||||||
| and Open | 30 days | days | days | Total | |||||||||||
| (in millions) | |||||||||||||||
| Securities loaned | |||||||||||||||
| Stocks | $ | 11,715 | $ | — | $ | — | $ | — | $ | 11,715 | |||||
| Corporate bonds | 51 | — | — | — | 51 | ||||||||||
| Foreign government securities | 3 | — | — | — | 3 | ||||||||||
| Total securities loaned | $ | 11,769 | $ | — | $ | — | $ | — | $ | 11,769 |
| 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). The 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 December 31, 2021 and 2020, approximately $54.9 billion and $39.3 billion, respectively, of customer margin loans were outstanding.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The table below presents a summary of the amounts related to collateralized transactions for the periods indicated.
| December 31, 2021 | December 31, 2020 | |||||||||||
| Permitted | Sold or | Permitted | Sold or | |||||||||
| to Repledge | Repledged | to Repledge | Repledged | |||||||||
| (in millions) | ||||||||||||
| Securities lending transactions | $ | 69,582 | $ | 6,192 | $ | 64,436 | $ | 4,859 | ||||
| Securities purchased under agreements to resell transactions 1 | 14,715 | 13,956 | 23,859 | 23,832 | ||||||||
| Customer margin assets | 65,899 | 15,936 | 47,609 | 14,182 | ||||||||
| $ | 150,196 | $ | 36,084 | $ | 135,904 | $ | 42,873 |
(1)As of December 31, 2021, $10.4 billion or 74% (as of December 31, 2020, $23.1 billion or 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 December 31, 2021 and 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.
| December 31, | ||||||
| 2021 | 2020 | |||||
| (in millions) | ||||||
| Stocks | $ | 60 | $ | 53 | ||
| U.S. and foreign government securities | 54 | 33 | ||||
| $ | 114 | $ | 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 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 a 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 the 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. Effective July 1, 2021, the Company eliminated minimum activity fees for most account types.
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.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to 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.
| Year-Ended December 31 | |||||||||
| 2021 | 2020 | 2019 | |||||||
| (in millions) | |||||||||
| Geographic location 1 | |||||||||
| United States | $ | 951 | $ | 806 | $ | 603 | |||
| International | 617 | 481 | 244 | ||||||
| $ | 1,568 | $ | 1,287 | $ | 847 | ||||
| Major types of services | |||||||||
| Commissions | $ | 1,350 | $ | 1,112 | $ | 706 | |||
| Market data fees 2 | 78 | 61 | 45 | ||||||
| Risk exposure fees 2 | 38 | 12 | 16 | ||||||
| Payments for order flow 2 | 40 | 27 | 21 | ||||||
| Minimum activity fees 2 | 18 | 28 | 27 | ||||||
| Other 2 | 44 | 47 | 32 | ||||||
| $ | 1,568 | $ | 1,287 | $ | 847 |
(1)Based on the location of the subsidiaries in which the revenues are recorded.
(2)Included in other fees and services in the 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 $19 million and $13 million, as of December 31, 2021 and 2020, respectively, are reported in other assets in the consolidated statements of financial condition.
Contract assets arise when the revenue associated with the contract is recognized before 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 consolidated statements of financial condition. As of December 31, 2021 and 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 consolidated statements of financial condition. As of December 31, 2021 and 2020, contract liability balances were not material.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Other Income (Loss)
The table below presents the components of other income (loss) for the periods indicated.
| Year-Ended December 31, | |||||||||
| 2021 | 2020 | 2019 | |||||||
| (in millions) | |||||||||
| Principal transactions | $ | 22 | $ | 86 | $ | 67 | |||
| Gains (losses) from currency diversification strategy, net | (37) | (19) | (60) | ||||||
| Other, net | 13 | (8) | — | ||||||
| $ | (2) | $ | 59 | $ | 7 |
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 consolidated statements of comprehensive income were $5 million, $5 million and $4 million of plan contributions for the years ended December 31, 2021, 2020, and 2019, respectively.
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 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 canceled by the Company upon the participant’s termination of employment or violation of certain applicable covenants before issuance, unless determined otherwise by the Compensation Committee.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to 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 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. In 2021, the Company’s Compensation Committee approved a change to the vesting schedule for the Stock Incentive Plan. For awards granted on December 31, 2021 onwards, restricted stock units vest and become distributable to participants 20% on each vesting date, which is on or about May 9 of each year, assuming continued employment with the Company and compliance with non-competition and other applicable covenants. The vesting and distribution of grants prior to December 31, 2021 remain in accordance with the following schedule: (a) 10% on the first vesting date, which is on or about May 9 of each year; and (b) an additional 15% on each of the following six anniversaries of the first vesting.
Awards granted to directors vest and are distributed as follows: (a) one-time award granted to external directors on December 31 of the year of appointment vests over a five-year period (20% per year) commencing one year after the date of grant, and (b) annual awards granted to all directors on December 31 of each year are fully vested and distributed immediately on grant date. A total of 32,544 restricted stock units have been granted to the 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 | |||||
| Date of Grant | |||||
| Units | ($ millions) | ||||
| Prior periods (since inception) | 25,643,893 | $ | 623 | ||
| December 31, 2019 | 1,374,217 | 65 | |||
| December 31, 2020 | 1,229,177 | 1 | 71 | ||
| December 31, 2021 | 1,077,048 | 83 | |||
| 29,324,335 | $ | 841 |
(1)Stock Incentive Plan number of granted restricted stock units related to 2020 was adjusted by 7,034 restricted stock units during the year ended December 31, 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 consolidated statements of comprehensive income was $80 million, $65 million and $60 million for the years ended December 31, 2021, 2020, and 2019, respectively. Estimated future compensation costs for unvested awards, net of credits for canceled awards, as of December 31, 2021 are $42 million.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The table below summarizes the Stock Incentive Plan activity for the periods indicated.
| Intrinsic Value | |||||
| of SIP Shares | |||||
| Stock | which Vested and | ||||
| Incentive Plan | were Distributed | ||||
| Units | ($ millions) 1 | ||||
| Balance, December 31, 2018 | 5,472,706 | ||||
| Granted | 1,374,217 | ||||
| Canceled | (91,443) | ||||
| Distributed | (1,627,565) | $ | 91 | ||
| Balance, December 31, 2019 | 5,127,915 | ||||
| Granted | 1,229,177 | 2 | |||
| Canceled | (82,496) | ||||
| Distributed | (1,300,241) | $ | 53 | ||
| Balance, December 31, 2020 | 4,974,355 | ||||
| Granted | 1,077,048 | ||||
| Canceled | (55,177) | ||||
| Distributed | (1,220,141) | $ | 85 | ||
| Balance, December 31, 2021 | 4,776,085 |
(1)Intrinsic value of SIP units distributed represents the compensation value reported to the participants.
(2)Stock Incentive Plan number of granted restricted stock units related to 2020 was adjusted by 7,034 restricted stock units during the year ended December 31, 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 December 31, 2021, a total of 1,153,839 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 years ended December 31, 2021, 2020, and 2019 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 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 periods for accounting and income tax return purposes.
Under U.S. GAAP, the Company is allowed to make an accounting policy election of either (1) treating taxes due on future U.S. inclusions in taxable income related to global intangible low tax income as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company has elected the period cost method.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The table below presents the components of the provision for income taxes for the periods indicated.
| Year-Ended December 31, | ||||||||||
| 2021 | 2020 | 2019 | ||||||||
| (in millions) | ||||||||||
| Current | ||||||||||
| Federal | $ | 62 | $ | 21 | $ | 19 | ||||
| State and local | 8 | 4 | 3 | |||||||
| Foreign | 58 | 43 | 22 | |||||||
| Total current | 128 | 68 | 44 | |||||||
| Deferred | ||||||||||
| Federal | 15 | 21 | 24 | |||||||
| State and local | 4 | (7) | — | |||||||
| Foreign | 4 | (5) | — | |||||||
| Total deferred | 23 | 9 | 24 | |||||||
| $ | 151 | $ | 77 | $ | 68 |
The table below presents a reconciliation of the statutory U.S. Federal income tax rate of 21% to the Company’s effective tax rate for the periods indicated.
| Year-Ended December 31, | |||||||||
| 2021 | 2020 | 2019 | |||||||
| U.S. Statutory Tax Rate | 21.0% | 21.0% | 21.0% | ||||||
| State, local and foreign taxes, net of federal benefit | 3.0% | 1.5% | 1.7% | ||||||
| Subtotal | 24.0% | 22.5% | 22.7% | ||||||
| Less: rate attributable to noncontrolling interests | (15.6%) | (16.4%) | (16.8%) | ||||||
| Total | 8.4% | 6.1% | 5.9% |
The table below presents significant components of the Company’s deferred tax assets and liabilities, which are reported in other assets and in accounts payable, accrued expenses and other liabilities, respectively, in the consolidated statements of financial condition for the periods indicated.
| December 31, | |||||||||
| 2021 | 2020 | 2019 | |||||||
| (in millions) | |||||||||
| Deferred tax assets | |||||||||
| Arising from the acquisition of interests in IBG LLC | $ | 209 | $ | 190 | $ | 116 | |||
| Deferred compensation | 11 | 9 | 5 | ||||||
| Other | 22 | 16 | 11 | ||||||
| Total deferred tax assets | 242 | 215 | 132 | ||||||
| Deferred tax liabilities | |||||||||
| Foreign | 1 | 2 | 1 | ||||||
| Other | 11 | 8 | 3 | ||||||
| Total deferred tax liabilities | 12 | 10 | 4 | ||||||
| Net deferred tax assets | $ | 230 | $ | 205 | $ | 128 |
As of and for the years ended December 31, 2021 and 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 December 31, 2021, the Company is no longer subject to U.S. Federal and State income tax examinations for tax years before 2015, and to non-U.S. income tax examinations for tax years before 2011.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2021, accumulated earnings held by non-U.S. subsidiaries totaled $1.6 billion (as of December 31, 2020 $1.5 billion), of which $1.5 billion of such earnings are indefinitely reinvested abroad due to regulatory and other capital requirements in foreign jurisdictions. As a result, the Company has not provided for its proportionate share of additional foreign taxes or deferred U.S. tax on Internal Revenue Code (“IRC”) Section 986 gains/losses on previously taxed earnings and any local foreign withholding taxes associated with the repatriation of such earnings. If the Company were to record a deferred tax liability due to a hypothetical repatriation of such earnings, the estimated amount of such taxes would be up to $16 million as of December 31, 2021.
Under U.S. GAAP, a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Based upon the Company’s review of its federal, state, local and foreign income tax returns and tax filing positions, the Company has recorded a $12 million tax liability for an uncertain tax position for an IRS audit primarily related to the IRC Section 965 Transition Tax. The Company expects to settle approximately $12 million of such uncertain tax position within the next twelve months.
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 December 31, 2021, the weighted-average remaining lease term on these leases is approximately 7 years and the weighted-average discount rate used to measure the lease liabilities is approximately 4.03%. For the year ended December 31, 2021, right-of-use assets obtained under new operating leases were $25 million. The Company’s lease agreements do not contain any residual value guarantees, restrictions, or covenants.
The table below presents balances reported in the consolidated statements of financial condition related to the Company’s leases for the periods indicated.
| December 31, | ||||||
| 2021 | 2020 | |||||
| (in millions) | ||||||
| Right-of-use assets1 | $ | 101 | 101 | |||
| Lease liabilities1 | $ | 123 | 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 consolidated statements of financial condition.
The table below presents balances reported in the consolidated statements of comprehensive income related to the Company’s leases for the periods indicated.
| Year-Ended December 31, | |||||||||
| 2021 | 2020 | 2019 | |||||||
| (in millions) | |||||||||
| Operating lease cost | $ | 28 | $ | 26 | $ | 25 | |||
| Variable lease cost | 5 | 4 | 4 | ||||||
| Total lease cost | $ | 33 | $ | 30 | $ | 29 |
The table below reconciles the undiscounted cash flows of the Company’s leases to the present value of its operating lease payments for the period indicated.
| December 31, 2021 | |||
| (in millions) | |||
| 2022 | $ | 25 | |
| 2023 | 24 | ||
| 2024 | 19 | ||
| 2025 | 16 | ||
| 2026 | 15 | ||
| Thereafter | 43 | ||
| Total undiscounted operating lease payments | 142 | ||
| Less: imputed interest | (19) | ||
| Present value of operating lease liabilities | $ | 123 |
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
13. Property, Equipment and Intangible Assets
Property, equipment and intangible assets, which are included in other assets in the consolidated statements of financial condition, consist of leasehold improvements, computer equipment, software developed for the Company’s internal use, office furniture and equipment. The table below presents balances related to property, equipment and intangible assets for the periods indicated.
| December 31, | ||||||
| 2021 | 2020 | |||||
| (in millions) | ||||||
| Leasehold improvements | $ | 43 | $ | 42 | ||
| Computer equipment | 67 | 41 | ||||
| Office furniture and equipment | 15 | 14 | ||||
| 125 | 97 | |||||
| Less - accumulated depreciation and amortization | (40) | (30) | ||||
| Property and equipment, net | 85 | 67 | ||||
| Internally developed software | 77 | 73 | ||||
| Other intangible assets | 4 | — | ||||
| Less - accumulated amortization | (35) | (36) | ||||
| Intangible assets, net | 46 | 37 | ||||
| Total property, equipment, and intangible assets, net | $ | 131 | $ | 104 |
Depreciation and amortization of $50 million, $42 million and $31 million, for the three years ended December 31, 2021, 2020, and 2019, respectively, is included in occupancy, depreciation and amortization expenses in the consolidated statements of comprehensive income. Amortization expense related to the Company’s intangible assets as of December 31, 2021 is expected to be approximately $24 million, $15 million, $6 million and $1 million, for years ended December 31, 2022, 2023, 2024, and 2025, respectively.
14. Commitments, Contingencies and Guarantees
Legal, 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. 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, the Company is generally not 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 matters will not have a material effect, if any, on the Company’s business or financial condition, but may have a material impact on the results of operations for a given period.
The Company accounts for potential losses related to litigation in accordance with FASB ASC Topic 450, “Contingencies.” As of December 31, 2021 and 2020, accruals for potential losses related to legal, regulatory and governmental actions and proceedings matters were not material.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 (the “Defendants”). The complaint, as amended, alleged that the Defendants infringed twelve U.S. patents held by Trading Technologies. Trading Technologies sought damages and injunctive relief. The Defendants asserted numerous defenses to Trading Technologies’ claims.
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 the Defendants or Trading Technologies on all PTAB determinations.
The United States Court of Appeals for the Federal Circuit affirmed the PTAB’s CBM Review determinations that eight patents were invalid and vacated the CBM Review determinations of invalidity for four patents, concluding that these patents were not eligible for CBM Review. The District Court proceedings on the four patents where the CBM Review determinations had been vacated thereafter resumed in March 2019. All four patents have since expired.
In June 2021, the District Court granted summary judgment in favor of the Defendants, finding that two of the remaining four patents were invalid. The District Court trial with respect to the two remaining patents began on August 6, 2021. At trial, Trading Technologies sought damages of $962.4 million and a finding of willful infringement to support a later request for an award of enhanced damages. The Defendants believed and continue to believe that Trading Technologies’ damages request was unrealistic and without merit, and was inconsistent with license agreements involving the same patents and with prior settlement agreements with unrelated third parties.
On September 7, 2021, the jury rendered its verdict finding that the Defendants infringed the two patents, but did not willfully infringe either patent, finding that the two patents were not invalid and awarding $6.6 million in damages to Trading Technologies.
On October 5, 2021, Trading Technologies filed motions for a new trial on damages and willfulness, and to amend the judgment to include pre-judgment and post-judgment interest. On October 7, 2021, Trading Technologies filed a Bill of Costs seeking to recover certain litigation costs. The defendants opposed each of these motions. On January 11, 2022, the District Court granted in part and denied in part Trading Technologies’ motion seeking pre-judgment and post-judgment interest, denying the amount Trading Technologies was seeking, but awarding Trading Technologies pre-judgment interest in the amount of $2.1 million and post-judgment interest in an amount to be calculated pursuant to the Court’s orders. On February 22, 2022, the District Court denied in its entirety Trading Technologies’ motion seeking a new trial on damages and willfulness. Trading Technologies’ Bill of Costs motion is still pending. The Defendants continue to believe in the invalidity of the two patents that were the subject of the jury verdict, and which have expired, and are considering their options, including appropriate forums, for proving the ultimate invalidity of such patents.
While it is difficult to predict the ultimate outcome of the matter and litigation is inherently uncertain, the Company believes in the merits of its positions and will defend them vigorously.
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, 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 Court denied the Company’s motion to certify on May 15, 2020. Currently, Plaintiff’s motion for class certification is due on March 18, 2022. The Company does not believe that a purported class action is appropriate given the great differences in portfolios,
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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
Beginning in late January 2021, more than three dozen federal class-action lawsuits were 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 several of these class action lawsuits. The cases were consolidated into a multidistrict litigation (“MDL”) and were transferred to the Southern District of Florida on April 1, 2021 for pre-trial proceedings. By the Order dated May 18, 2021, the Court divided the cases into four tranches: (1) antitrust claims (“Antitrust Tranche”); (2) state-law claims against Robinhood entities (“Robinhood Tranche”); (3) state-law claims against other defendants (“Other Broker Tranche”); and (4) federal securities law claims (“Federal Securities Tranche”). The same Order appointed lead plaintiffs’ counsel for the Antitrust, Robinhood, and Other Broker Tranches. On July 13, 2021, the plaintiffs voluntarily dismissed the Robinhood Tranche case. Master complaints for the Antitrust and Other Broker Tranche cases were filed on July 26, 2021. IB LLC was named as a defendant in the antitrust complaint and in two of the initial Federal Securities Tranche complaints, but not in the Other Broker Tranche complaint. On August 30, 2021, IB LLC and the other defendants named in the antitrust consolidated complaint filed a motion to dismiss the case. On September 21, 2021, the antitrust plaintiffs filed a “corrected” complaint and an opposition to defendants’ motion to dismiss. The defendants filed a reply brief on October 5, 2021. By order dated November 17, 2021, the Court granted the defendants’ motion to dismiss but allowed plaintiffs to file a final amended complaint. On January 20, 2022, plaintiffs filed an amended consolidated complaint that did not name IB LLC as a defendant. Lead plaintiffs’ counsel in the Federal Securities Tranche filed a consolidated complaint on November 30, 2021. That complaint also did not include IB LLC as a defendant. As a result, IB LLC is no longer a party to any of these “short squeeze” class action lawsuits.
Regulatory Matters
The Company is subject to regulatory oversight and examination by numerous governmental and self-regulatory authorities. As announced on August 10, 2020, the Company agreed to settle certain matters related to its historical anti-money laundering and Bank Secrecy Act practices and procedures with FINRA, the SEC and the CFTC. As part of the settlements, the Company agreed 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 its enhanced compliance practices and procedures. 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 its 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, no contingent liability is carried in the consolidated statements of financial condition for these arrangements.
In connection with its retail brokerage business, IB LLC or other electronic brokerage operating 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. No contingent liability is carried on the consolidated statements of financial condition for such customer obligations.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to 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.
15. Geographic Information
The Company operates its automated global business in the U.S. and international markets on more than 150 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.
| Year-Ended December 31, | |||||||||
| 2021 | 2020 | 2019 | |||||||
| (in millions) | |||||||||
| Net revenues | |||||||||
| United States | $ | 1,881 | $ | 1,584 | $ | 1,524 | |||
| International | 833 | 634 | 413 | ||||||
| Total net revenues | $ | 2,714 | $ | 2,218 | $ | 1,937 | |||
| Income before income taxes | |||||||||
| United States | $ | 1,474 | $ | 1,032 | $ | 997 | |||
| International | 313 | 224 | 160 | ||||||
| Total income before income taxes | $ | 1,787 | $ | 1,256 | $ | 1,157 |
16. Regulatory Requirements
As of December 31, 2021, aggregate excess regulatory capital for all operating subsidiaries was $7.0 billion.
IB LLC, IBKRSS and Interactive 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). IBC is subject to the Investment Industry Regulatory Organization of Canada risk-adjusted capital requirement. IBKRFS is subject to the Swiss Financial Market Supervisory Authority eligible equity 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, IBCE is subject to the Hungarian 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.
The table below summarizes capital, capital requirements and excess regulatory capital as of December 31. 2021.
| Net Capital/ | |||||||||
| Eligible Equity | Requirement | Excess | |||||||
| (in millions) | |||||||||
| IB LLC | $ | 5,581 | $ | 1,001 | $ | 4,580 | |||
| IBKRFS | 598 | 12 | 586 | ||||||
| IBHK | 860 | 278 | 582 | ||||||
| Other regulated operating subsidiaries | 1,553 | 276 | 1,277 | ||||||
| $ | 8,592 | $ | 1,567 | $ | 7,025 |
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 December 31, 2021, all regulated operating subsidiaries were in compliance with their respective regulatory capital requirements.
17. Related Party Transactions
Receivable from affiliate, reported in other assets in the consolidated statements 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 consolidated statements of financial condition as of December 31, 2021 and 2020 were accounts receivable from directors, officers and their affiliates of $28 million and $283 million, respectively, and payables of $1,197 million and $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 December 31, 2021 and 2020 are senior notes purchased by directors, officers and their affiliates of $0 and $16 million, respectively.
18. 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 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 interest. 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 approximates fair value since the notes are short-term in nature. During the year ended December 31, 2021 IBG LLC issued senior notes of $1,428 million and redeemed senior notes of $1,524 million, respectively. The senior notes carried a weighted average interest rate of 1%. As of December 31, 2021 and 2020, IBG LLC had senior notes outstanding of $0 and $96 million, respectively, all of which carried a 1% per annum interest rate, and are included in short-term borrowings in the consolidated statements of financial condition. Interest expense on the senior notes for the year ended December 31, 2021 and 2020 was $1 million and $0 million, respectively.
19. Subsequent Events
The Company has evaluated subsequent events for adjustment to or disclosure in its consolidated financial statements through the date the consolidated financial statements were issued.
Except as disclosed in Note 4 and Note 14, no other recordable or disclosable events occurred.
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