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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of operations of Nasdaq should be read in conjunction with our consolidated financial statements and related notes included in this Form 10-K, as well as the discussion under “Item 1A. Risk Factors.” For further discussion of our growth strategy, products and services, and competitive strengths, see “Item 1. Business.” Unless stated otherwise, the comparisons presented in this discussion and analysis refer to the year-over-year comparison of changes in our financial condition and results of operations as of and for the fiscal years ended December 31, 2019 and December 31, 2018. Discussion of fiscal year 2017 items and the year-over-year comparison of changes in our financial condition and results of operations as of and for the fiscal years ended December 31, 2018 and December 31, 2017 can be found in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which was previously filed with the SEC on February 22, 2019.

Business Segments

We manage, operate and provide our products and services in four business segments: Market Services, Corporate Services, Information Services and Market Technology. See Note 1, “Organization and Nature of Operations,” and Note 20, “Business Segments,” to the consolidated financial statements for further discussion of our reportable segments and geographic data, as well as how management allocates resources, assesses performance and manages these businesses as four separate segments.

Sources of Revenues and Transaction-Based Expenses

See “Revenue Recognition and Transaction-Based Expenses,” of Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements for further discussion of our sources of revenues and transaction-based expenses.

Nasdaq’s Operating Results

Key Drivers

The following table includes key drivers for our Market Services, Corporate Services, Information Services and Market Technology segments. In evaluating the performance of our business, our senior management closely evaluates these key drivers.

Year Ended December 31,
201920182017
Market Services
Equity Derivative Trading and Clearing
U.S. equity options
Total industry average daily volume (in millions)17.518.214.7
Nasdaq PHLX matched market share15.9%15.7%17.3%
The Nasdaq Options Market matched market share8.8%9.4%9.2%
Nasdaq BX Options matched market share0.2%0.4%0.7%
Nasdaq ISE Options matched market share9.0%8.8%9.1%
Nasdaq GEMX Options matched market share4.2%4.5%5.2%
Nasdaq MRX Options matched market share0.2%0.1%0.1%
Total matched market share executed on Nasdaq’s exchanges38.3%38.9%41.6%
Nasdaq Nordic and Nasdaq Baltic options and futures
Total average daily volume of options and futures contracts(1)366,289339,139330,218
Cash Equity Trading
Total U.S.-listed securities
Total industry average daily share volume (in billions)7.037.326.53
Matched share volume (in billions)348.1358.5295.9
The Nasdaq Stock Market matched market share17.2%15.9%14.2%
Nasdaq BX matched market share1.7%2.8%3.1%
Nasdaq PSX matched market share0.7%0.8%0.8%
Total matched market share executed on Nasdaq’s exchanges19.6%19.5%18.1%
Market share reported to the FINRA/Nasdaq Trade Reporting Facility29.8%31.3%34.5%
Total market share(2)49.4%50.8%52.6%
Nasdaq Nordic and Nasdaq Baltic securities
Average daily number of equity trades executed on Nasdaq’s exchanges590,705618,579552,104
Total average daily value of shares traded (in billions)$4.5$5.6$5.3
Total market share executed on Nasdaq’s exchanges70.9%67.0%67.5%
FICC
Fixed Income
U.S. fixed income volume ($ billions traded)$10,465$15,983$17,800
Total average daily volume of Nasdaq Nordic and Nasdaq Baltic fixed income contracts112,738132,475116,357
Commodities
Power contracts cleared (TWh)(3)8421,0671,199
Corporate Services
IPOs
The Nasdaq Stock Market188186136
Exchanges that comprise Nasdaq Nordic and Nasdaq Baltic345388
Total new listings
The Nasdaq Stock Market(4)313303268
Exchanges that comprise Nasdaq Nordic and Nasdaq Baltic(5)5372108
Number of listed companies
The Nasdaq Stock Market(6)3,1403,0582,949
Exchanges that comprise Nasdaq Nordic and Nasdaq Baltic(7)1,0401,019984
Information Services
Number of licensed ETPs332365324
ETP AUM tracking Nasdaq indexes (in billions)$233$172$167
Market Technology
Order intake (in millions)(8)$366$223$249
Annualized recurring revenue, or ARR, (in millions)(9)$260$222$205

____________

(1)Includes Finnish option contracts traded on Eurex.
(2)Includes transactions executed on The Nasdaq Stock Market’s, Nasdaq BX’s and Nasdaq PSX’s systems plus trades reported through the FINRA/Nasdaq Trade Reporting Facility.
(3)Transactions executed on Nasdaq Commodities or OTC and reported for clearing to Nasdaq Commodities measured by Terawatt hours (TWh).
(4)New listings include IPOs, including those completed on a best efforts basis, issuers that switched from other listing venues, closed-end funds and separately listed ETPs.
(5)New listings include IPOs and represent companies listed on the Nasdaq Nordic and Nasdaq Baltic exchanges and companies on the alternative markets of Nasdaq First North.
(6)Number of total listings on The Nasdaq Stock Market at period end, including 412 ETPs as of December 31, 2019, 392 as of December 31, 2018 and 373 as of December 31, 2017.
(7)Represents companies listed on the Nasdaq Nordic and Nasdaq Baltic exchanges and companies on the alternative markets of Nasdaq First North.
(8)Total contract value of orders signed during the period.
(9)ARR is the annualized fourth quarter revenue of Market Technology support and SaaS subscription contracts. ARR is currently one of our key performance metrics to assess the health and trajectory of our business. ARR does not have any standardized definition and is therefore unlikely to be comparable to similarly titled measures presented by other companies. ARR should be viewed independently of revenue and deferred revenue and is not intended to be combined with or to replace either of those items. ARR is not a forecast and the active contracts during the reporting period used in calculating ARR may or may not be extended or renewed by our customers.

Financial Summary

The following table summarizes our financial performance for the year ended December 31, 2019 when compared with the same period in 2018 and for the year ended December 31, 2018 when compared with the same period in 2017. The comparability of our results of operations between reported periods is impacted by our acquisition of Cinnober in January 2019, the divestiture of the BWise enterprise governance, risk and compliance software platform in March 2019, the divestiture of the Public Relations Solutions and Digital Media Services businesses in April 2018, and an increase in net income from unconsolidated investees. See Note 4, “Acquisitions and Divestitures,” and “Equity Method Investments,” of Note 7, “Investments,” to the consolidated financial statements for further discussion of these transactions. For a detailed discussion of our results of operations, see “Segment Operating Results” below.

Year Ended December 31,Percentage Change
2019201820172019 vs. 20182018 vs. 2017
(in millions, except per share amounts)
Revenues less transaction-based expenses$2,535$2,526$2,4110.4%4.8%
Operating expenses1,5181,4981,4201.3%5.5%
Operating income1,0171,028991(1.1)%3.7%
Interest expense(124)(150)(143)(17.3)%4.9%
Gain on sale of investment security—118—(100.0)%N/M
Net gain on divestiture of businesses2733—(18.2)%N/M
Net income from unconsolidated investees841815366.7%20.0%
Income before income taxes1,0191,064872(4.2)%22.0%
Income tax provision245606143(59.6)%323.8%
Net income attributable to Nasdaq$774$458$72969.0%(37.2)%
Diluted earnings per share$4.63$2.73$4.3069.6%(36.5)%
Cash dividends declared per common share$1.85$1.70$1.468.8%16.4%

_______

N/M Not meaningful.

In countries with currencies other than the U.S. dollar, revenues and expenses are translated using monthly average exchange rates. Impacts on our revenues less transaction-based expenses and operating income associated with fluctuations in foreign currency are discussed in more detail under “Item 7A. Quantitative and Qualitative Disclosures about Market Risk.”

Segment Operating Results

The following table shows our revenues by segment, transaction-based expenses for our Market Services segment and total revenues less transaction-based expenses:

Year Ended December 31,Percentage Change
2019201820172019 vs. 20182018 vs. 2017
(in millions)
Market Services$2,639$2,709$2,418(2.6)%12.0%
Transaction-based expenses(1,727)(1,751)(1,537)(1.4)%13.9%
Market Services revenues less transaction-based expenses912958881(4.8)%8.7%
Corporate Services4964874591.8%6.1%
Information Services7797145889.1%21.4%
Market Technology33827024725.2%9.3%
Other revenues(1)1097236(89.7)%(58.9)%
Total revenues less transaction-based expenses$2,535$2,526$2,4110.4%4.8%

____________

(1)Includes the revenues from the BWise enterprise governance, risk and compliance software platform which was sold in March 2019 and the Public Relations Solutions and Digital Media Services businesses which were sold in April 2018. Prior to the sale dates, these revenues were included in our Corporate Solutions business within our Corporate Services segment. See “2019 Divestitures,” and “2018 Divestiture,” of Note 4, “Acquisitions and Divestitures,” to the consolidated financial statements for further discussion.

The following charts show our Market Services, Corporate Services, Information Services, and Market Technology segments as a percentage of our total revenues less transaction-based expenses of $2,535 million in 2019, $2,526 million in 2018 and $2,411 million in 2017:

chart-702b48313151537ebf0.jpg chart-beedee46e3525d08bbe.jpg

chart-d6fb7087e198114e0a5.jpg

MARKET SERVICES

The following table shows total revenues, transaction-based expenses, and total revenues less transaction-based expenses from our Market Services segment:

Year Ended December 31,Percentage Change
2019201820172019 vs. 20182018 vs. 2017
(in millions)
Market Services Revenues:
Equity Derivative Trading and Clearing Revenues(1)$816$849$752(3.9)%12.9%
Transaction-based expenses:
Transaction rebates(477)(506)(450)(5.7)%12.4%
Brokerage, clearance and exchange fees(1)(47)(44)(43)6.8%2.3%
Equity derivative trading and clearing revenues less transaction-based expenses292299259(2.3)%15.4%
Cash Equity Trading Revenues(2)1,4621,4761,279(0.9)%15.4%
Transaction-based expenses:
Transaction rebates(847)(830)(692)2.0%19.9%
Brokerage, clearance and exchange fees(2)(352)(361)(334)(2.5)%8.1%
Cash equity trading revenues less transaction-based expenses263285253(7.7)%12.6%
FICC Revenues709296(23.9)%(4.2)%
Transaction-based expenses:
Transaction rebates(3)(8)(16)(62.5)%(50.0)%
Brokerage, clearance and exchange fees(1)(2)(2)(50.0)%—%
FICC revenues less transaction-based expenses668278(19.5)%5.1%
Trade Management Services Revenues291292291(0.3)%0.3%
Total Market Services revenues less transaction-based expenses$912$958$881(4.8)%8.7%

____________

(1)Includes Section 31 fees of $43 million in 2019, $39 million in 2018, and $40 million in 2017. Section 31 fees are recorded as equity derivative trading and clearing revenues with a corresponding amount recorded in transaction-based expenses.
(2)Includes Section 31 fees of $337 million in 2019, $343 million in 2018, and $319 million in 2017. Section 31 fees are recorded as cash equity trading revenues with a corresponding amount recorded in transaction-based expenses.

Equity Derivative Trading and Clearing Revenues

Equity derivative trading and clearing revenues and equity derivative trading and clearing revenues less transaction-based expenses decreased in 2019 compared with 2018, reflecting in large part a significantly lower volume and volatility market environment in the U.S. as compared to 2018. The decrease in equity derivative trading and clearing revenues in 2019 was primarily due to lower U.S. industry trading volumes and lower overall U.S. matched market share executed on Nasdaq's exchanges, partially offset by a higher U.S. gross capture rate and higher Section 31 pass-through fee revenue. The decrease in equity derivative trading and clearing revenues less transaction-based expenses in 2019 was primarily due to lower U.S. industry trading volumes and lower overall U.S. matched market share executed on Nasdaq's exchanges, partially offset by a higher U.S. net capture rate. The decreases in equity derivative trading and clearing revenues and equity derivative

trading and clearing revenues less transaction-based expenses also included an unfavorable impact from foreign exchange of $3 million related to Nasdaq's Nordic exchanges.

Section 31 fees are recorded as equity derivative trading and clearing revenues with a corresponding amount recorded as transaction-based expenses. In the U.S., we are assessed these fees from the SEC and pass them through to our customers in the form of incremental fees. Pass-through fees can increase or decrease due to rate changes by the SEC, our percentage of the overall industry volumes processed on our systems, and differences in actual dollar value of shares traded. Since the amount recorded in revenues is equal to the amount recorded as transaction-based expenses, there is no impact on our revenues less transaction-based expenses. Section 31 fees increased in 2019 compared with 2018 primarily due to higher average SEC fee rates, partially offset by lower dollar value traded on Nasdaq's exchanges.

Transaction rebates, in which we credit a portion of the per share execution charge to the market participant, decreased in 2019 compared with 2018 primarily due to lower U.S. industry trading volumes, a decrease in our overall U.S. matched market share executed on Nasdaq's exchanges, and a decrease in the U.S. rebate capture rate.

Brokerage, clearance and exchange fees increased in 2019 compared with 2018 primarily due to higher Section 31 pass-through fees, as discussed above.

Cash Equity Trading Revenues

Cash equity trading revenues and cash equity trading revenues less transaction-based expenses decreased in 2019 compared with 2018 reflecting in large part the lower volume and volatility market environment in the U.S. as compared to 2018 as mentioned above in “Equity Derivative Trading and Clearing Revenues.” The decrease in cash equity trading revenues in 2019 was primarily due to lower U.S. industry trading volumes and lower Section 31 pass-through fee revenue, partially offset by a higher U.S. gross capture rate.

The decrease in cash equity trading revenues less transaction-based expenses in 2019 primarily reflects lower U.S. and European industry trading volumes and a lower U.S. net capture rate due to a particularly strong 2018 period, partially offset by a higher European net capture rate.

The decreases in cash equity trading revenues and cash equity trading revenues less transaction-based expenses also included an unfavorable impact from foreign exchange of $7 million related to Nasdaq's Nordic exchanges.

Similar to equity derivative trading and clearing, in the U.S. we record Section 31 fees as cash equity trading revenues with a corresponding amount recorded as transaction-based expenses. We are assessed these fees from the SEC and pass them through

to our customers in the form of incremental fees. Since the amount recorded as revenues is equal to the amount recorded as transaction-based expenses, there is no impact on our revenues less transaction-based expenses. Section 31 fees decreased in 2019 compared with 2018 primarily due to lower dollar value traded on Nasdaq’s exchanges, partially offset by higher average SEC fee rates.

Transaction rebates increased in 2019 compared with 2018. For The Nasdaq Stock Market, Nasdaq PSX and Nasdaq Canada CXC, we credit a portion of the per share execution charge to the market participant that provides the liquidity, and for Nasdaq BX and Nasdaq Canada CX2, we credit a portion of the per share execution charge to the market participant that takes the liquidity. The increase in 2019 was primarily due to a higher U.S. rebate capture rate, partially offset by lower U.S. industry trading volumes.

Brokerage, clearance and exchange fees decreased in 2019 compared with 2018 primarily due to lower Section 31 pass-through fees, as discussed above, and lower routing fees.

FICC Revenues

FICC revenues and FICC revenues less transaction-based expenses decreased in 2019 compared with 2018 primarily due to a decline in U.S. fixed income products revenues as well as a decrease in European commodities products revenues due to lower volumes and an unfavorable impact from foreign exchange of $4 million.

Trade Management Services Revenues

Trade management services revenues decreased slightly in 2019 compared with 2018 primarily due to an unfavorable impact from foreign exchange of $3 million, partially offset by an increase in colocation and port connectivity revenues.

CORPORATE SERVICES

The following table shows revenues from our Corporate Services segment:

Year Ended December 31,Percentage Change
2019201820172019 vs. 20182018 vs. 2017
(in millions)
Corporate Services:
Listing Services$296$290$2672.1%8.6%
Corporate Solutions2001971921.5%2.6%
Total Corporate Services$496$487$4591.8%6.1%

Listing Services Revenues

Listing services revenues increased in 2019 compared with 2018 primarily due to higher listings revenues resulting from an increase in the number of listed companies, partially offset by the run-off of fees earned from U.S. listing of additional shares and an unfavorable impact from foreign exchange of $5 million.

Corporate Solutions Revenues

Corporate solutions revenues increased in 2019 compared with 2018 primarily due to an increase in both governance solutions revenues and investor relations intelligence revenues, partially offset by an unfavorable impact from foreign exchange of $2 million.

INFORMATION SERVICES

The following table shows revenues from our Information Services segment:

Year Ended December 31,Percentage Change
2019201820172019 vs. 20182018 vs. 2017
(in millions)
Information Services:
Market Data$398$390$3692.1%5.7%
Index2232061718.3%20.5%
Investment Data & Analytics1581184833.9%145.8%
Total Information Services$779$714$5889.1%21.4%

Market Data Revenues

Market data revenues increased in 2019 compared with 2018 primarily due to new proprietary data sales, notably growth in the Asia Pacific region, and higher U.S. tape revenues from under-reported data usage. The increase was partially offset by an unfavorable impact from foreign exchange of $4 million.

Index Revenues

Index revenues increased in 2019 compared with 2018 primarily due to higher average AUM in ETPs linked to Nasdaq indexes and higher licensing revenues from futures trading linked to the Nasdaq 100 Index.

Investment Data & Analytics Revenues

Investment data & analytics revenues increased in 2019 compared with 2018 primarily due to an increase in eVestment revenues resulting from a $23 million purchase price adjustment on deferred revenue in 2018, organic growth, and the impact of our acquisition of Quandl.

MARKET TECHNOLOGY

The following table shows revenues from our Market Technology segment:

Year Ended December 31,Percentage Change
2019201820172019 vs. 20182018 vs. 2017
(in millions)
Market Technology$338$270$24725.2%9.3%

Market Technology Revenues

Market technology revenues increased in 2019 compared with 2018 primarily due to the inclusion of revenues associated with the acquisition of Cinnober, an increase in the size and number of software delivery projects, an increase in SaaS surveillance revenues, and higher change request revenues, partially offset by an unfavorable impact from foreign exchange of $6 million.

OTHER REVENUES

Other revenues include the revenues from the BWise enterprise governance, risk and compliance software platform, which was sold in March 2019 and the revenues from the Public Relations Solutions and Digital Media Services businesses which were sold in April 2018. Prior to the sale dates, these revenues were included in our Corporate Solutions business. See “2019 Divestitures,” and “2018 Divestiture,” of Note 4, “Acquisitions and Divestitures,” to the consolidated financial statements for further discussion of these divestitures.

Expenses

Operating Expenses

The following table shows our operating expenses:

Year Ended December 31,Percentage Change
2019201820172019 vs. 20182018 vs. 2017
(in millions)
Compensation and benefits$707$712$670(0.7)%6.3%
Professional and contract services127144153(11.8)%(5.9)%
Computer operations and data communications1331271254.7%1.6%
Occupancy9795942.1%1.1%
General, administrative and other125120824.2%46.3%
Marketing and advertising3937315.4%19.4%
Depreciation and amortization190210188(9.5)%11.7%
Regulatory313233(3.1)%(3.0)%
Merger and strategic initiatives30214442.9%(52.3)%
Restructuring charges39——N/M—%
Total operating expenses$1,518$1,498$1,4201.3%5.5%

_______

N/MNot meaningful.

Compensation and benefits expense decreased in 2019 compared with 2018 primarily due to lower compensation costs resulting from our 2019 and 2018 divestitures, lower performance incentives, and a favorable impact from foreign exchange of $17 million, partially offset by higher salary costs and higher compensation expense from our 2019 and 2018 acquisitions.

Headcount increased to 4,361 employees as of December 31, 2019 from 4,099 as of December 31, 2018 primarily due to our 2019 acquisitions and growth in our Market Technology and Investment Data & Analytics businesses, partially offset by our 2019 divestitures.

Professional and contract services expense decreased in 2019 compared with 2018 primarily due to our 2019 and 2018 divestitures, lower consulting costs, and a favorable impact from foreign exchange of $3 million, partially offset by higher litigation costs.

Computer operations and data communications expense increased in 2019 compared with 2018 primarily due to higher market data feed costs, partially offset by lower costs resulting from our 2018 divestiture and a favorable impact from foreign exchange of $2 million.

Occupancy expense increased in 2019 compared with 2018 mainly due to higher costs associated with additional facility and rent costs resulting from expansion of our new U.S. headquarters in New York and our 2019 and 2018 acquisitions, partially offset by lower costs due to our 2018 divestiture and a favorable impact from foreign exchange of $3 million.

General, administrative and other expense increased in 2019 compared with 2018 primarily due to a provision recorded for notes receivable associated with the funding of technology development for the CAT, a charge related to a tax reserve for

certain prior year examinations, and a charge for a make-whole redemption price premium paid on the early extinguishment of our 2020 Notes, partially offset by charges associated with the clearing default which occurred in 2018, lower costs resulting from our 2019 and 2018 divestitures, and a favorable impact from foreign exchange of $2 million. The provision for notes receivable is a consequence of changes to the CAT project, and particularly the decision by Nasdaq and the other exchanges to impair the value of the technology built by the original vendor, who has been replaced. For further discussion of the clearing default, see “Nasdaq Commodities Clearing Default,” of Note 16, “Clearing Operations,” to the consolidated financial statements.

Marketing and advertising expense increased in 2019 compared with 2018 primarily due to an increase in advertising spend.

Depreciation and amortization expense decreased in 2019 compared with 2018 primarily due to a decrease in amortization expense recorded on capitalized software as a result of our 2019 restructuring plan, a decrease in amortization expense recorded on intangible assets which became fully amortized, a decrease in depreciation expense related to the divestiture of BWise, and a favorable impact from foreign exchange of $3 million. Partially offsetting these decreases was additional amortization expense associated with acquired intangible assets. See Note 21, “Restructuring Charges,” to the consolidated financial statements for further discussion of our 2019 restructuring plan and charges associated with this plan.

Merger and strategic initiatives expense increased in 2019 compared with 2018. We have pursued various strategic initiatives and completed acquisitions and divestitures in recent years which have resulted in expenses which would not have otherwise been incurred. These expenses generally include integration costs, as well as legal, due diligence and other third

party transaction costs and will vary based on the size and frequency of the activities described above.

Restructuring charges were $39 million in 2019. See Note 21, “Restructuring Charges,” to the consolidated financial

statements for further discussion of our 2019 restructuring plan and charges associated with this plan.

Non-operating Income and Expenses

The following table shows our non-operating income and expenses:

Year Ended December 31,Percentage Change
2019201820172019 vs. 20182018 vs. 2017
(in millions)
Interest income$10$10$7—%42.9%
Interest expense(124)(150)(143)(17.3)%4.9%
Net interest expense(114)(140)(136)(18.6)%2.9%
Gain on sale of investment security—118—(100.0)%N/M
Net gain on divestiture of businesses2733—(18.2)%N/M
Other income572(28.6)%250.0%
Net income from unconsolidated investees841815366.7%20.0%
Total non-operating income (expenses)$2$36$(119)(94.4)%(130.3)%

_______

N/M Not meaningful.

Interest Expense

Interest expense decreased in 2019 compared with 2018 primarily due to the refinancing of the 2020 Notes with the 2029 Notes at a lower interest rate and lower outstanding debt obligations. See Note 10, “Debt Obligations,” to the consolidated financial statements for further discussion of our debt obligations.

The following table shows our interest expense:

Year Ended December 31,Percentage Change
2019201820172019 vs. 20182018 vs. 2017
(in millions)
Interest expense on debt$115$140$135(17.9)%3.7%
Accretion of debt issuance costs and debt discount676(14.3)%16.7%
Other fees332—%50.0%
Interest expense$124$150$143(17.3)%4.9%

Gain on Sale of Investment Security

In December 2018, we recorded a pre-tax gain of $118 million ($93 million after tax) on the sale of an investment security. See “Equity Securities,” of Note 7, “Investments,” to the consolidated financial statements for further discussion.

Net Gain on Divestiture of Businesses

The net gain on divestiture of businesses in 2019 primarily relates to our divestiture of BWise. See “2019 Divestitures,” of Note 4, “Acquisitions and Divestitures,” to the consolidated financial statements for further discussion.

The net gain on divestiture of businesses in 2018 relates to our 2018 divestiture. See “2018 Divestiture,” of Note 4, “Acquisitions and Divestitures,” to the consolidated financial statements for further discussion.

Net Income from Unconsolidated Investees

Net income from unconsolidated investees increased in 2019 compared with 2018 primarily due to income recognized from our equity method investment in OCC. See “Equity Method Investments,” of Note 7, “Investments,” to the consolidated financial statements for further discussion.

Tax Matters

The following table shows our income tax provision and effective tax rate:

Year Ended December 31,Percentage Change
2019201820172019 vs. 20182018 vs. 2017
($ in millions)
Income tax provision$245$606$143(59.6)%323.8%
Effective tax rate24.0%57.0%16.4%

For further discussion of our tax matters, see Note 18, “Income Taxes,” to the consolidated financial statements.

Non-GAAP Financial Measures

In addition to disclosing results determined in accordance with U.S. GAAP, we also have provided non-GAAP net income attributable to Nasdaq and non-GAAP diluted earnings per share. Management uses this non-GAAP information internally, along with U.S. GAAP information, in evaluating our performance and in making financial and operational decisions. We believe our presentation of these measures provides investors with greater transparency and supplemental data relating to our financial condition and results of operations. In addition, we believe the presentation of these measures is useful to investors for period-to-period comparisons of our ongoing operating performance.

These measures are not in accordance with, or an alternative to, U.S. GAAP, and may be different from non-GAAP measures used by other companies. In addition, other companies, including companies in our industry, may calculate such measures differently, which reduces their usefulness as comparative measures. Investors should not rely on any single financial measure when evaluating our business. This non-GAAP information should be considered as supplemental in nature and is not meant as a substitute for our operating results in accordance with U.S. GAAP. We recommend investors review the U.S. GAAP financial measures included in this Annual Report on Form 10-K, including our consolidated financial statements and the notes thereto. When viewed in conjunction with our U.S. GAAP results and the accompanying reconciliation, we believe these non-GAAP measures provide greater transparency and a more complete understanding of factors affecting our business than U.S. GAAP measures alone.

We understand that analysts and investors regularly rely on non-GAAP financial measures, such as non-GAAP net income attributable to Nasdaq and non-GAAP diluted earnings per share, to assess operating performance. We use non-GAAP net income attributable to Nasdaq and non-GAAP diluted earnings per share because they highlight trends more clearly in our business that may not otherwise be apparent when relying solely on U.S. GAAP financial measures, since these measures eliminate from our results specific financial items that have less bearing on our ongoing operating performance. Non-GAAP net income attributable to Nasdaq for the periods presented below is calculated by adjusting for the following items:

Amortization expense of acquired intangible assets: We amortize intangible assets acquired in connection with various

acquisitions. Intangible asset amortization expense can vary from period to period due to episodic acquisitions completed, rather than from our ongoing business operations. As such, if intangible asset amortization is included in performance measures, it is more difficult to assess the day-to-day operating performance of the businesses, the relative operating performance of the businesses between periods, and the earnings power of Nasdaq. Performance measures excluding intangible asset amortization therefore provide investors with a useful representation of our businesses’ ongoing activity in each period.

Merger and strategic initiatives expense: We have pursued various strategic initiatives and completed acquisitions and divestitures in recent years that have resulted in expenses which would not have otherwise been incurred. These expenses generally include integration costs, as well as legal, due diligence and other third party transaction costs. The frequency and the amount of such expenses vary significantly based on the size, timing and complexity of the transaction. Accordingly, we exclude these costs for purposes of calculating non-GAAP measures which provide a more meaningful analysis of Nasdaq’s ongoing operating performance or comparisons in Nasdaq’s performance between periods.

Restructuring charges: We initiated the transition of certain technology platforms to advance our strategic opportunities as a technology and analytics provider and continue the re-alignment of certain business areas. See Note 21, “Restructuring Charges,” to the consolidated financial statements for further discussion of our 2019 restructuring plan. Charges associated with this plan represent a fundamental shift in our strategy and technology as well as executive re-alignment and will be excluded for purposes of calculating non-GAAP measures as they are not reflective of ongoing operating performance or comparisons in Nasdaq's performance between periods.

Net income from unconsolidated investee: See “OCC Capital Plan,” of Note 7, “Investments,” to the consolidated financial statements for further discussion. Our income on our investment in OCC may vary significantly compared to prior years due to the disapproval of the OCC's capital plan. Accordingly, we will exclude this income from current and prior periods for purposes of calculating non-GAAP measures which provide a more meaningful analysis of Nasdaq’s ongoing operating performance or comparisons in Nasdaq’s performance between periods.

Clearing default loss: In 2018, we recorded a $31 million charge related to a default of a Nasdaq Clearing commodities member that occurred in September 2018. See “Nasdaq Commodities Clearing Default,” of Note 16, “Clearing Operations,” to the consolidated financial statements for further discussion of the default. We have excluded the charge related to the default as we believe it is non-recurring, as there has never been another loss due to member default in our clearinghouse, and should be excluded when evaluating the ongoing operating performance of Nasdaq. Any expenses associated with the evaluation and enhancement of processes and procedures will not be excluded from our GAAP results.

Other significant items: We have excluded certain other charges or gains, including certain tax items, that are the result of other non-comparable events to measure operating performance. We believe the exclusion of such amounts allows management and investors to better understand the ongoing financial results of Nasdaq.

For 2019, other significant items primarily included:

•a provision for notes receivable associated with the funding of technology development for the CAT which is recorded in general, administrative and other expense in the Consolidated Statements of Income;
•a loss on extinguishment of debt which is recorded in general, administrative and other expense in the Consolidated Statements of Income; and
•a net gain on divestiture of businesses which primarily represents our pre-tax net gain of $27 million on the sale of BWise;
•other items:
◦a tax reserve for certain prior year examinations which is recorded in general, administrative and other expense in the Consolidated Statements of Income;
◦certain litigation costs which are recorded in professional and contract services expense in the Consolidated Statements of Income.

For 2018, other significant items primarily included:

•a net gain on divestiture of businesses which represents our pre-tax net gain of $33 million on the sale of the Public Relations Solutions and Digital Media Services businesses;
•a gain on the sale of an investment security which represents our pre-tax gain of $118 million on the sale of our 5.0% ownership interest in LCH Group Holdings Limited, or LCH;
•other items:
◦charges related to uncertain positions pertaining to sales and use tax and VAT which are recorded in

general, administrative and other expense in the Consolidated Statements of Income; and

◦certain litigation costs which are recorded in professional and contract services expense in the Consolidated Statements of Income.

Significant tax items:

The non-GAAP adjustment to the income tax provision included the tax impact of each non-GAAP adjustment and:

•for 2019, a tax benefit of $10 million primarily related to an adjustment to the 2018 federal and state tax returns and a tax benefit of $10 million related to capital distributions from the OCC. See “OCC Capital Plan,” of Note 7, “Investments,” to the consolidated financial statements for further discussion of our OCC investment.
•for 2018, a net $7 million increase to tax expense due to a remeasurement of unrecognized tax benefits (excluding the reversal of certain Swedish tax benefits discussed below) and the impact of state tax rate changes.

Additional adjustments included the following items:

•for 2019 and 2018, excess tax benefits related to employee share-based compensation to reflect the recognition of the income tax effects of share-based awards when awards vest or are settled. This item is subject to volatility and will vary based on the timing of the vesting of employee share-based compensation arrangements and fluctuation in our stock price.
•for 2018:
◦the impact of enacted U.S. tax legislation, which related to the Tax Cuts and Jobs Act that was enacted in December 2017. We recorded an increase to tax expense of $290 million and a reduction to deferred tax assets related to foreign currency translation as a result of the finalization of the provisional estimate related to this act; and
◦a reversal of certain Swedish tax benefits. See Note 18, “Income Taxes,” to the consolidated financial statements for further discussion.

The following table shows reconciliations between U.S. GAAP net income attributable to Nasdaq and diluted earnings per share and non-GAAP net income attributable to Nasdaq and diluted earnings per share:

Year Ended December 31, 2019Year Ended December 31, 2018Year Ended December 31, 2017
(in millions, except share and per share amounts)
Net IncomeDiluted Earnings Per ShareNet IncomeDiluted Earnings Per ShareNet IncomeDiluted Earnings Per Share
U.S. GAAP net income attributable to Nasdaq and diluted earnings per share$774$4.63$458$2.73$729$4.30
Non-GAAP adjustments:
Amortization expense of acquired intangible assets1010.601090.65920.54
Merger and strategic initiatives expense300.18210.13440.26
Restructuring charges390.23————
Net income from unconsolidated investee(82)(0.49)(16)(0.10)(13)(0.08)
Clearing default loss——310.18——
Provision for notes receivable200.12————
Extinguishment of debt110.07——100.06
Net gain on divestiture of businesses(27)(0.16)(33)(0.20)——
Gain on sale of investment security——(118)(0.69)——
Other170.11170.1030.02
Total non-GAAP adjustments1090.66110.071360.80
Adjustment to the income tax provision to reflect non-GAAP adjustments and other tax items(43)(0.26)60.03(66)(0.39)
Excess tax benefits related to employee share-based compensation(5)(0.03)(9)(0.05)(40)(0.24)
Impact of enacted U.S. tax legislation——2901.73(89)(0.52)
Reversal of certain Swedish tax benefits——410.24——
Total non-GAAP tax adjustments(48)(0.29)3281.95(195)(1.15)
Total non-GAAP adjustments, net of tax610.373392.02(59)(0.35)
Non-GAAP net income attributable to Nasdaq and diluted earnings per share$835$5.00$797$4.75$670$3.95
Weighted-average common shares outstanding for diluted earnings per share166,970,161167,691,299169,585,031

Liquidity and Capital Resources

Historically, we have funded our operating activities and met our commitments through cash generated by operations, augmented by the periodic issuance of our common stock and debt. Currently, our cost and availability of funding remain healthy.

In March 2019, we used net proceeds from the sale of commercial paper and cash on hand to redeem all of our 2019 Notes. In April 2019, we issued the 2029 Notes and in May

2019, we primarily used the net proceeds from the 2029 Notes to repay in full and terminate our 2020 Notes. In addition, in June 2019, we used proceeds from issuances of commercial paper to repay in full and terminate our 2016 Credit Facility, and in February 2020, we issued the 2030 Notes. We will primarily use the net proceeds from the 2030 Notes to redeem the 2021 Notes and for other general corporate purposes. See “1.75% Senior Unsecured Notes Due 2029,” “Early Extinguishment of 5.55% Senior Unsecured Notes Due 2020,” “Early Extinguishment of 2016 Credit Facility,” “0.875%

Senior Unsecured Notes Due 2030,” and “3.875% Senior Unsecured Notes Due 2021,” of Note 10, “Debt Obligations,” to the consolidated financial statements for further discussion.

We have the 2017 Credit Facility and a commercial paper program, which enable us to borrow efficiently at reasonable short-term interest rates. The commercial paper program is supported by our 2017 Credit Facility. See “Commercial Paper Program,” and “2017 Credit Facility,” of Note 10, “Debt Obligations,” to the consolidated financial statements for further discussion.

As of December 31, 2019, no amounts were outstanding on the 2017 Credit Facility. The $2 million balance represents unamortized debt issuance costs. Of the $1 billion that is available for borrowing, $392 million provides liquidity support for the commercial paper program and for a letter of credit. As such, as of December 31, 2019, the total remaining amount available under the 2017 Credit Facility was $608 million, excluding the amounts that support the commercial paper program and letter of credit.

As part of the purchase price consideration of a prior acquisition, Nasdaq has contingent future obligations to issue 992,247 shares of Nasdaq common stock annually through 2027. See “Non-Cash Contingent Consideration,” of Note 19, “Commitments, Contingencies and Guarantees,” to the consolidated financial statements for further discussion.

In the near term, we expect that our operations and the availability under our revolving credit commitment and commercial paper program will provide sufficient cash to fund our operating expenses, capital expenditures, debt repayments, any share repurchases, and any dividends.

The value of various assets and liabilities, including cash and cash equivalents, receivables, accounts payable and accrued expenses, the current portion of long-term debt, and commercial paper, can fluctuate from month to month. Working capital (calculated as current assets less current liabilities) was $63 million as of December 31, 2019, compared with $(200) million as of December 31, 2018, an increase of $263 million. Current asset balance changes decreased working capital by $2,080 million, with decreases in default funds and margin deposits, cash and cash equivalents, other current assets, and restricted cash, partially offset by increases in receivables, net and financial investments. Current liability balance changes increased working capital by $2,343 million, due to decreases in default funds and margin deposits, short-term debt, other current liabilities, accounts payable and accrued expenses, and accrued personnel costs, partially offset by increases in Section 31 fees payable to the SEC and deferred revenue.

Principal factors that could affect the availability of our internally-generated funds include:

•deterioration of our revenues in any of our business segments;
•changes in regulatory and working capital requirements; and
•an increase in our expenses.

Principal factors that could affect our ability to obtain cash from external sources include:

•operating covenants contained in our credit facilities that limit our total borrowing capacity;
•increases in interest rates under our credit facilities;
•credit rating downgrades, which could limit our access to additional debt;
•a decrease in the market price of our common stock; and
•volatility or disruption in the public debt and equity markets.

The following sections discuss the effects of changes in our financial assets, debt obligations, regulatory capital requirements, and cash flows on our liquidity and capital resources.

Financial Assets

The following table summarizes our financial assets:

December 31, 2019December 31, 2018
(in millions)
Cash and cash equivalents$332$545
Restricted cash3041
Financial investments291268
Total financial assets$653$854

Cash and Cash Equivalents and Restricted Cash

Cash and cash equivalents includes all non-restricted cash in banks and highly liquid investments with original maturities of 90 days or less at the time of purchase. The balance retained in cash and cash equivalents is a function of anticipated or possible short-term cash needs, prevailing interest rates, our investment policy, and alternative investment choices. As of December 31, 2019, our cash and cash equivalents of $332 million were primarily invested in bank deposits, money market funds and commercial paper. In the long-term, we may use both internally generated funds and external sources to satisfy our debt obligations and other long-term liabilities. Cash and cash equivalents as of December 31, 2019 decreased $213 million from December 31, 2018, primarily due to:

•repayments of debt obligations;
•cash dividends paid on our common stock;
•cash paid for acquisitions, net of cash and cash equivalents acquired;
•repurchases of our common stock; and
•purchases of property and equipment, partially offset by;
•net cash provided by operating activities;
•proceeds from issuances of long-term debt, net of issuance costs;
•proceeds from the divestiture of a business; and
•proceeds from commercial paper, net.

See “Cash Flow Analysis” below for further discussion.

Restricted cash is restricted from withdrawal due to contractual or regulatory requirements or is not available for general use. Restricted cash was $30 million as of December 31, 2019 and $41 million as of December 31, 2018, a decrease of $11 million. The decrease primarily relates to a decrease in cash pledged as collateral. Restricted cash is classified as restricted cash in the Consolidated Balance Sheets.

Repatriation of Cash

Our cash and cash equivalents held outside of the U.S. in various foreign subsidiaries totaled $160 million as of December 31, 2019 and $367 million as of December 31, 2018. The remaining balance held in the U.S. totaled $172 million as of December 31, 2019 and $178 million as of December 31, 2018.

Unremitted earnings of subsidiaries outside of the U.S. are used to finance our international operations and are considered to be indefinitely reinvested.

Share Repurchase Program

See “Share Repurchase Program,” of Note 13, “Nasdaq Stockholders’ Equity,” to the consolidated financial statements for further discussion of our share repurchase program.

Cash Dividends on Common Stock

The following table shows quarterly cash dividends paid per common share on our outstanding common stock:

20192018
First quarter$0.44$0.38
Second quarter0.470.44
Third quarter0.470.44
Fourth quarter0.470.44
Total$1.85$1.70

See “Cash Dividends on Common Stock,” of Note 13, “Nasdaq Stockholders’ Equity,” to the consolidated financial statements for further discussion of the dividends.

Financial Investments

Our financial investments totaled $291 million as of December 31, 2019 and $268 million as of December 31, 2018 and are primarily comprised of highly rated European government debt securities. Of these securities, $169 million as of December 31, 2019 and $166 million as of December 31, 2018 are assets primarily utilized to meet regulatory capital requirements, mainly for our clearing operations at Nasdaq Clearing. See Note 7, “Investments,” to the consolidated financial statements for further discussion.

Debt Obligations

The following table summarizes our debt obligations by contractual maturity:

Maturity DateDecember 31, 2019December 31, 2018
(in millions)
Short-term debt:
Commercial paperWeighted-average maturity of 13 days$391$275
Senior unsecured floating rate notesRepaid March 2019—500
5.55% senior unsecured notes(1)Repaid May 2019—599
$400 million senior unsecured term loan facilityRepaid June 2019—100
Total short-term debt3911,474
Long-term debt:
3.875% senior unsecured notesJune 2021671686
$1 billion senior unsecured revolving credit facilityApril 2022(2)(4)
1.75% senior unsecured notesMay 2023668682
4.25% senior unsecured notesJune 2024497497
3.85% senior unsecured notesJune 2026497496
1.75% senior unsecured notesMarch 2029665—
Total long-term debt2,9962,357
Total debt obligations$3,387$3,831

____________

(1)Balance was reclassified to short-term debt as of March 31, 2019.

In addition to the $1 billion senior unsecured revolving credit facility, we also have other credit facilities primarily related to our Nasdaq Clearing operations in order to provide further liquidity. Other credit facilities, which are available in multiple currencies,

totaled $203 million as of December 31, 2019 and $234 million as of December 31, 2018, in available liquidity, of which $15 million was utilized as of December 31, 2019 and none of which was utilized as of December 31, 2018.

As of December 31, 2019, we were in compliance with the covenants of all of our debt obligations.

See Note 10, “Debt Obligations,” to the consolidated financial statements for further discussion of our debt obligations.

Regulatory Capital Requirements

Clearing Operations Regulatory Capital Requirements

We are required to maintain minimum levels of regulatory capital for the clearing operations of Nasdaq Clearing. The level of regulatory capital required to be maintained is dependent upon many factors, including market conditions and creditworthiness of the counterparty. As of December 31, 2019, our required regulatory capital of $147 million is comprised of highly rated European government debt securities that are included in financial investments in the Consolidated Balance Sheets.

Broker-Dealer Net Capital Requirements

Our broker-dealer subsidiaries, Nasdaq Execution Services, Execution Access, NPM Securities, SMTX, and Nasdaq Capital Markets Advisory, are subject to regulatory requirements intended to ensure their general financial soundness and liquidity. These requirements obligate these subsidiaries to comply with minimum net capital requirements. As of December 31, 2019, the combined required minimum net capital totaled $1 million and the combined excess capital totaled $48 million, substantially all of which is held in cash

and cash equivalents in the Consolidated Balance Sheets. The required minimum net capital is included in restricted cash in the Consolidated Balance Sheets.

Nordic and Baltic Exchange Regulatory Capital Requirements

The entities that operate trading venues in the Nordic and Baltic countries are each subject to local regulations and are required to maintain regulatory capital intended to ensure their general financial soundness and liquidity. As of December 31, 2019, our required regulatory capital of $33 million is invested in European government debt securities that are included in financial investments and restricted cash in the Consolidated Balance Sheets.

Other Capital Requirements

We operate several other businesses which are subject to local regulation and are required to maintain certain levels of regulatory capital. As of December 31, 2019, other required regulatory capital was $11 million and was primarily included in restricted cash and financial investments in the Consolidated Balance Sheets.

Cash Flow Analysis

The following table summarizes the changes in cash flows:

Year Ended December 31,Percentage Change
2019201820172019 vs. 20182018 vs. 2017
Net cash provided by (used in):(in millions)
Operating activities$963$1,028$909(6.3)%13.1%
Investing activities(240)196(890)(222.4)%(122.0)%
Financing activities(937)(1,027)(53)(8.8)%1,837.7%
Effect of exchange rate changes on cash and cash equivalents and restricted cash(10)(10)15—%(166.7)%
Net increase (decrease) in cash and cash equivalents and restricted cash(224)187(19)(219.8)%(1,084.2)%
Cash and cash equivalents and restricted cash at beginning of period58639941846.9%(4.5)%
Cash and cash equivalents and restricted cash at end of period$362$586$399(38.2)%46.9%

Net Cash Provided by Operating Activities

Net cash provided by operating activities primarily consists of net income adjusted for certain non-cash items such as: depreciation and amortization expense of property and equipment; amortization expense of acquired finite-lived intangible assets which can be episodic, depending on the timing and size of a related business combination; expense

associated with share-based compensation; and net income from unconsolidated investees.

Net cash provided by operating activities is also impacted by the effects of changes in operating assets and liabilities such as: accounts receivable which is impacted by the timing of customer billings and related collections from our customers; accounts payable and accrued expenses due to timing of payments; accrued personnel costs which are impacted by employee performance targets and the timing of payments

related to employee bonus incentives; and Section 31 fees payable to the SEC, which is impacted by the timing of collections from customers and payments to the SEC.

Net cash provided by operating activities decreased $65 million in 2019 compared with 2018. The decrease was primarily driven by higher performance incentive payments made in 2019 compared with 2018 primarily due to prior year performance, a decline in cash flows related to our 2019 and 2018 divestitures, and payments made in 2019 associated with the capital relief program, partially offset by cash flows from our 2019 acquisitions and growth in net income.

Net Cash Used in (Provided by) Investing Activities

Net cash used in investing activities for 2019 primarily relates to $206 million of cash used for acquisitions, net of cash and cash equivalents acquired, $127 million of purchases of property and equipment, and $36 million of net purchases of securities, partially offset by receipt of cash of $132 million related to our 2019 divestitures.

Net cash provided by investing activities for 2018 primarily relates to $286 million of cash received from our 2018 divestiture and $169 million of proceeds from the sale of an investment security, partially offset by $111 million of purchases of property and equipment, $101 million of cash used for our 2018 acquisition, and $47 million of net purchases of securities.

Net Cash Used in Financing Activities

Net cash used in financing activities for 2019 primarily relates to $1,215 million in repayments of debt obligations, $305 million of dividend payments to our shareholders, and $200 million in repurchases of common stock, partially offset by $680 million from proceeds related to long-term debt issuances and $116 million in net borrowings of commercial paper.

Net cash used in financing activities for 2018 primarily relates to $394 million in repurchases of common stock, $280 million of dividend payments to our shareholders, $205 million of net repayments of commercial paper, and $115 million of repayments of debt obligations.

See Note 4, “Acquisitions and Divestitures,” to the consolidated financial statements for further discussion of our acquisitions and divestitures.

See Note 10, “Debt Obligations,” to the consolidated financial statements for further discussion of our debt obligations.

See “Share Repurchase Program,” and “Cash Dividends on Common Stock,” of Note 13, “Nasdaq Stockholders’ Equity,” to the consolidated financial statements for further discussion of our share repurchase program and cash dividends paid on our common stock.

Contractual Obligations and Contingent Commitments

Nasdaq has contractual obligations to make future payments under debt obligations by contract maturity, operating lease payments, and other obligations. The following table shows these contractual obligations as of December 31, 2019.

Payments Due by Period
Contractual ObligationsTotalLess than 1 year1-3 years3-5 yearsMore than 5 years
(in millions)
Debt obligations by contract maturity(1)$3,847$481$827$1,278$1,261
Operating lease obligations(2)5087711378240
Real estate obligations(3)128—122789
Purchase obligations(4)542628——
Other obligations(5)99———
Total$4,546$593$980$1,383$1,590

____________

(1)Our debt obligations include both principal and interest obligations. As of December 31, 2019, an interest rate of 2.73% was used to compute the amount of the contractual obligations for interest on the 2017 Credit Facility. All other debt obligations were primarily calculated on a 360-day basis at the contractual fixed rate multiplied by the aggregate principal amount as of December 31, 2019. See Note 10, “Debt Obligations,” to the consolidated financial statements for further discussion.
(2)Operating lease obligations represent our undiscounted operating lease liabilities as of December 31, 2019. See Note 17, “Leases,” to the consolidated financial statements for further discussion of our leases.
(3)Real estate obligations include legally binding minimum lease payments for leases signed but not yet commenced.
(4)Purchase obligations primarily represent minimum outstanding obligations due under software license agreements.
(5)Other obligations primarily consist of potential future escrow agreement payments related to prior acquisitions.

No****n-Cash Contingent Consideration

See “Non-Cash Contingent Consideration,” of Note 19, “Commitments, Contingencies and Guarantees,” to the consolidated financial statements for further discussion.

Off-Balance Sheet Arrangements

For discussion of off-balance sheet arrangements see:

•Note 16, “Clearing Operations,” to the consolidated financial statements for further discussion of our non-cash default fund contributions and margin deposits received for clearing operations; and
•Note 19, “Commitments, Contingencies and Guarantees,” to the consolidated financial statements for further discussion of:
•Guarantees issued and credit facilities available;
•Other guarantees;
•Non-cash contingent consideration;
•Escrow agreements;
•Routing brokerage activities;
•Legal and regulatory matters; and
•Tax audits.

Quantitative and Qualitative Disclosures About Market Risk

As a result of our operating, investing and financing activities, we are exposed to market risks such as interest rate risk and foreign currency exchange rate risk. We are also exposed to credit risk as a result of our normal business activities.

We have implemented policies and procedures to measure, manage, monitor and report risk exposures, which are reviewed regularly by management and the board of directors. We identify risk exposures and monitor and manage such risks on a daily basis.

We perform sensitivity analyses to determine the effects of market risk exposures. We may use derivative instruments solely to hedge financial risks related to our financial positions or risks that are incurred during the normal course of business. We do not use derivative instruments for speculative purposes.

Interest Rate Risk

We are subject to the risk of fluctuating interest rates in the normal course of business. Our exposure to market risk for changes in interest rates relates primarily to our financial investments and debt obligations which are discussed below.

Financial Investments

As of December 31, 2019, our investment portfolio was primarily comprised of highly rated European government debt securities, which pay a fixed rate of interest. These securities are subject to interest rate risk and the fair value of these securities will decrease if market interest rates increase. If market interest rates were to increase immediately and uniformly by 100 basis points from levels as of December 31, 2019, the fair value of this portfolio would have declined by $7 million.

Debt Obligations

As of December 31, 2019, substantially all of our debt obligations are fixed-rate obligations. While changes in interest rates will have no impact on the interest we pay on fixed-rate obligations, we are exposed to changes in interest rates as a result of the amounts outstanding from the sale of commercial paper under our commercial paper program, which have variable interest rates. As of December 31, 2019, we had principal amounts outstanding of $391 million of commercial paper. A hypothetical 100 basis points increase in interest rates on our outstanding commercial paper would increase annual interest expense by approximately $4 million based on borrowings as of December 31, 2019.

Foreign Currency Exchange Rate Risk

We are subject to foreign currency exchange rate risk. Our primary transactional exposure to foreign currency denominated revenues less transaction-based expenses and operating income for the years ended December 31, 2019 and 2018 are presented in the following tables:

EuroSwedish KronaOther Foreign CurrenciesU.S. DollarTotal
(in millions, except currency rate)
Year Ended December 31, 2019
Average foreign currency rate to the U.S. dollar1.11930.1057#N/AN/A
Percentage of revenues less transaction-based expenses7.7%7.6%5.0%79.7%100.0%
Percentage of operating income(1)13.9%(4.3)%(5.8)%96.2%100.0%
Impact of a 10% adverse currency fluctuation on revenues less transaction-based expenses$(19)$(19)$(13)$—$(51)
Impact of a 10% adverse currency fluctuation on operating income$(14)$(4)$(6)$—$(24)
EuroSwedish KronaOther Foreign CurrenciesU.S. DollarTotal
(in millions, except currency rate)
Year Ended December 31, 2018
Average foreign currency rate to the U.S. dollar1.18000.1150#N/AN/A
Percentage of revenues less transaction-based expenses8.9%7.3%5.2%78.6%100.0%
Percentage of operating income11.3%0.1%(7.0)%95.6%100.0%
Impact of a 10% adverse currency fluctuation on revenues less transaction-based expenses$(23)$(18)$(13)$—$(54)
Impact of a 10% adverse currency fluctuation on operating income$(12)$—$(7)$—$(19)

____________

(1)The decrease in 2019 percentage of operating income in Swedish Krona is primarily driven by costs associated with our 2019 restructuring plan. See Note 21, “Restructuring Charges,” to the consolidated financial statements for further discussion of our 2019 restructuring plan.
#Represents multiple foreign currency rates.
N/ANot applicable.

Our investments in foreign subsidiaries are exposed to volatility in currency exchange rates through translation of the foreign subsidiaries’ net assets or equity to U.S. dollars. Substantially all of our foreign subsidiaries operate in functional currencies other than the U.S. dollar. The financial statements of these subsidiaries are translated into U.S. dollars for consolidated reporting using a current rate of exchange, with net gains or losses recorded in accumulated other comprehensive loss within stockholders’ equity in the Consolidated Balance Sheets.

Our primary exposure to net assets in foreign currencies as of December 31, 2019 is presented in the following table:

Net AssetsImpact of a 10% Adverse Currency Fluctuation
(in millions)
Swedish Krona(1)$3,247$(325)
Norwegian Krone174(17)
Canadian Dollar120(12)
British Pound222(22)
Euro33(3)
Australian Dollar105(11)

____________

(1)Includes goodwill of $2,397 million and intangible assets, net of $600 million.

Credit Risk

Credit risk is the potential loss due to the default or deterioration in credit quality of customers or counterparties. We are exposed to credit risk from third parties, including customers,

counterparties and clearing agents. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. We limit our exposure to credit risk by evaluating the counterparties with which we make investments and execute agreements. For our investment portfolio, our objective is to invest in securities to preserve principal while maximizing yields, without significantly increasing risk. Credit risk associated with investments is minimized substantially by ensuring that these financial assets are placed with governments which have investment grade ratings, well-capitalized financial institutions and other creditworthy counterparties.

Our subsidiary, Nasdaq Execution Services, may be exposed to credit risk due to the default of trading counterparties in connection with the routing services it provides for our trading customers. System trades in cash equities routed to other market centers for members of our cash equity exchanges are routed by Nasdaq Execution Services for clearing to the NSCC. In this function, Nasdaq Execution Services is to be neutral by the end of the trading day, but may be exposed to intraday risk if a trade extends beyond the trading day and into the next day, thereby leaving Nasdaq Execution Services susceptible to counterparty risk in the period between accepting the trade and routing it to the clearinghouse. In this interim period, Nasdaq Execution Services is not novating like a clearing broker but instead is subject to the short-term risk of counterparty failure before the clearinghouse enters the transaction. Once the clearinghouse officially accepts the trade for novation, Nasdaq Execution Services is legally removed from trade execution risk. However, Nasdaq has membership obligations to NSCC independent of Nasdaq Execution Services’ arrangements.

Pursuant to the rules of the NSCC and Nasdaq Execution Services’ clearing agreement, Nasdaq Execution Services is liable for any losses incurred due to a counterparty or a clearing agent’s failure to satisfy its contractual obligations, either by making payment or delivering securities. Adverse movements in the prices of securities that are subject to these transactions can increase our credit risk. However, we believe that the risk of material loss is limited, as Nasdaq Execution Services’ customers are not permitted to trade on margin and NSCC rules limit counterparty risk on self-cleared transactions by establishing credit limits and capital deposit requirements for all brokers that clear with NSCC. Historically, Nasdaq Execution Services has never incurred a liability due to a customer’s failure to satisfy its contractual obligations as counterparty to a system trade. Credit difficulties or insolvency, or the perceived possibility of credit difficulties or insolvency, of one or more larger or visible market participants could also result in market-wide credit difficulties or other market disruptions.

Execution Access is an introducing broker which operates the trading platform for our Fixed Income business to trade in U.S. Treasury securities. Execution Access has a clearing arrangement with Industrial and Commercial Bank of China Financial Services LLC, or ICBC. As of December 31, 2019, we have contributed $15 million of clearing deposits to ICBC in connection with this clearing arrangement. These deposits

are recorded in other current assets in our Consolidated Balance Sheets. Some of the trading activity in Execution Access is cleared by ICBC through the Fixed Income Clearing Corporation, with ICBC acting as agent. Execution Access assumes the counterparty risk of clients that do not clear through the Fixed Income Clearing Corporation. Counterparty risk of clients exists for Execution Access between the trade date and settlement date of the individual transactions, which is at least one business day (or more, if specified by the U.S. Treasury issuance calendar). Counterparties that do not clear through the Fixed Income Clearing Corporation are subject to a credit due diligence process and may be required to post collateral, provide principal letters, or provide other forms of credit enhancement to Execution Access for the purpose of mitigating counterparty risk. Daily position trading limits are also enforced for such counterparties.

We have credit risk related to transaction and subscription-based revenues that are billed to customers on a monthly or quarterly basis, in arrears. Our potential exposure to credit losses on these transactions is represented by the receivable balances in our Consolidated Balance Sheets. We review and evaluate changes in the status of our counterparties’ creditworthiness. Credit losses such as those described above could adversely affect our consolidated financial position and results of operations.

On January 1, 2020, we adopted ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” See “Financial Instruments - Credit Losses,” of “Recent Accounting Pronouncements,” of Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements for further discussion. This ASU changes the impairment model for certain financial instruments. The new model is a forward looking expected loss model and applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures. This includes loans, held-to-maturity debt securities, loan commitments, financial guarantees and trade receivables.

We also are exposed to credit risk through our clearing operations with Nasdaq Clearing. See Note 16, “Clearing Operations,” to the consolidated financial statements for further discussion. Our clearinghouse holds material amounts of clearing member cash deposits which are held or invested primarily to provide security of capital while minimizing credit, market and liquidity risks. While we seek to achieve a reasonable rate of return, we are primarily concerned with preservation of capital and managing the risks associated with these deposits. As the clearinghouse may pass on interest revenues (minus costs) to the members, this could include negative or reduced yield due to market conditions. The following is a summary of the risks associated with these deposits and how these risks are mitigated.

•Credit Risk. When the clearinghouse has the ability to hold cash collateral at a central bank, the clearinghouse utilizes its access to the central bank system to minimize credit risk exposures. When funds are not held at a central bank, we seek to substantially mitigate credit risk by ensuring that

investments are primarily placed in highly rated government and supranational debt instruments.

•Liquidity Risk. Liquidity risk is the risk a clearinghouse may not be able to meet its payment obligations in the right currency, in the right place and the right time. To mitigate this risk, the clearinghouse monitors liquidity requirements closely and maintains funds and assets in a manner which minimizes the risk of loss or delay in the access by the clearinghouse to such funds and assets. For example, holding funds with a central bank where possible or investing in highly liquid government or supranational debt instruments serves to reduce liquidity risks.
•Interest Rate Risk. Interest rate risk is the risk that interest rates rise causing the value of purchased securities to decline. If we were required to sell securities prior to maturity, and interest rates had risen, the sale of the securities might be made at a loss relative to the latest market price. Our clearinghouse seeks to manage this risk by making short term investments of members' cash deposits. In addition, the clearinghouse investment guidelines allow for direct purchases or repurchase agreements of high quality sovereign debt (for example, European government and U.S. Treasury securities), central bank certificates and supranational debt instruments with short dated maturities.
•Security Issuer Risk. Security issuer risk is the risk that an issuer of a security defaults on its payment when the security matures. This risk is mitigated by limiting allowable investments and collateral under reverse repurchase agreements to high quality sovereign, government agency or supranational debt instruments.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. The accounting policies described below are significantly affected by critical accounting estimates. Such accounting policies require significant judgments, assumptions, and estimates used in the preparation of the consolidated financial statements, and actual results could differ materially from the amounts reported based on these policies.

Revenue Recognition

Corporate Services Revenues

Listing Services Revenues

Listing services revenues primarily include annual renewal fees and initial listing fees. Annual renewal fees do not require any judgments or assumptions by management as these amounts are recognized ratably over the following 12-month period. However, the initial listing fee is allocated to multiple

performance obligations including initial and subsequent listing services and corporate solutions services (when a company qualifies to receive these services under the applicable Nasdaq rule), as well as a customer's material right to renew the option to list on our exchanges.

In performing this allocation, the standalone selling price of the performance obligations is based on the initial and annual listing fees and the standalone selling price of the corporate solutions services is based on its market value. All listing fees are billed upfront and the identified performance obligations are satisfied over time since the customer receives and consumes the benefit as Nasdaq provides the listing service. The amount of revenue related to the corporate solutions services performance obligation is recognized ratably over a two-year period, which is based on contract terms, with the remaining revenue recognized ratably over six years which is based on our historical listing experience and projected future listing duration.

Market Technology Revenues

We enter into long-term contracts with customers to develop customized technology solutions, license the right to use software and provide support and other services to our customers which results in these contracts containing multiple performance obligations. We allocate the contract transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. In instances where standalone selling price is not directly observable, such as when we do not sell the product or service separately, we determine the standalone selling price predominantly through an expected cost plus a margin approach.

We generally recognize revenue over time as our customers simultaneously receive and consume the benefits provided by our performance because our customer controls the asset for which we are creating, our performance does not create an asset with alternative use, and we have a right to payment for performance completed to date. For these services, we recognize revenue over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligation. Incurred costs represent work performed, which corresponds with, and thereby depicts, the transfer of control to the customer.

Accounting for our long-term contracts requires judgment relative to assessing risks and their impact on the estimate of revenues and costs. Our estimates are impacted by factors such as the potential for schedule and technical issues, productivity, and the complexity of work performed. When adjustments in estimated total contract costs are required, any changes in the estimated revenues from prior estimates are recognized in the current period for the effect of such change. If estimates of total costs to be incurred on a contract exceed estimates of total revenues, a provision for the entire estimated loss on the contract is recorded in the period in which the loss is determined.

For further discussion related to recognition of these fees, see “Revenue From Contracts with Customers - Revenue Recognition - Corporate Services - Listing Services,” and

“Revenue From Contracts with Customers - Revenue Recognition - Market Technology,” of Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements.

Goodwill and Related Impairment

Goodwill represents the excess of purchase price over the value assigned to the net assets, including identifiable intangible assets, of a business acquired. Goodwill is allocated to our reporting units based on the assignment of the fair values of each reporting unit of the acquired company. We test goodwill for impairment at the reporting unit level annually, or in interim periods if certain events occur indicating that the carrying amount may be impaired, such as changes in the business climate, poor indicators of operating performance or the sale or disposition of a significant portion of a reporting unit. For purposes of performing our goodwill impairment test, our five reporting units are the Market Services segment, the two businesses comprising the Corporate Services segment: Listing Services and Corporate Solutions, the Information Services segment, and the Market Technology segment. We test for impairment during the fourth quarter of our fiscal year using an October 1 measurement date. When testing goodwill for impairment, we have the option of first performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as the basis to determine if it is necessary to perform a quantitative goodwill impairment test. In performing a qualitative assessment, we consider the extent to which unfavorable events or circumstances identified, such as changes in economic conditions, industry and market conditions or company specific events, could affect the comparison of the reporting unit’s fair value with its carrying amount. If we choose not to complete a qualitative assessment for a given reporting unit, or if the initial assessment indicates that it is more likely than not that the carrying amount of a reporting unit exceeds its estimated fair value, a quantitative test is required.

When assessing goodwill for impairment, our decision to perform a qualitative impairment assessment for a reporting unit in a given year is influenced by a number of factors, including but not limited to, the size of the reporting unit’s goodwill, the significance of the excess of the reporting unit’s estimated fair value over its carrying amount at the last quantitative assessment date, and the amount of time in between quantitative fair value assessments.

The quantitative goodwill impairment test consists of two steps performed at the reporting unit level.

•The first step compares the estimated fair value of each reporting unit to its corresponding carrying amount, including goodwill. The fair value of each reporting unit is estimated using a combination of discounted cash flow valuation, which incorporates assumptions regarding future growth rates, terminal values, and discount rates, as well as guideline public company valuations, incorporating relevant trading multiples of comparable companies and other factors. The estimates and assumptions used consider historical performance and are consistent with the

assumptions used in determining future profit plans for each reporting unit, which are approved by our board of directors. If the reporting unit’s estimated fair value exceeds its estimated carrying amount, goodwill is not impaired.

•If the first step results in the carrying amount exceeding the fair value of the reporting unit, then a second step must be completed in order to determine the amount of goodwill impairment that should be recorded, if any. In the second step, the implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill in a manner similar to a purchase price allocation. The implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the goodwill and an impairment charge is recorded for any difference.

On January 1, 2020, we adopted ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” or ASU 2017-04. See “Goodwill,” of “Recent Accounting Pronouncements,” of Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements for further discussion.

The following table presents the balances of goodwill for our reportable segments at the time of our 2019 annual impairment test:

October 1, 2019
(in millions)
Market Services$3,292
Corporate Services439
Information Services2,238
Market Technology263
$6,232

In 2019, we performed a qualitative goodwill impairment test for all reporting units, as the excesses of their fair values over their respective carrying amounts at the time of the last quantitative test in 2017 were significant. In conducting the qualitative assessment, we evaluated the performance of each of these reporting units since the last quantitative test, as well as future financial projections to determine if there were any changes in the key inputs used to determine the fair values of each reporting unit. We also considered the qualitative factors in FASB Accounting Standards Codification Topic 350, “Intangibles–Goodwill and Other,” as well as other relevant events and circumstances. Based on the results of the qualitative assessment for each reporting unit, we concluded based on a predominance of positive indicators and the weight of such indicators that the fair values of our reporting units are more likely than not greater than their respective carrying amounts and as a result, quantitative analyses were not needed. No goodwill impairment was recorded in 2019, 2018 and 2017.

Although we believe our estimates of fair value are reasonable, the determination of certain valuation inputs is subject to management’s judgment. Changes in these inputs could materially affect the results of our impairment review. If our

forecasts of cash flows or other key inputs are negatively revised in the future, the estimated fair value of each reporting unit would be adversely impacted, potentially leading to an impairment in the future that could materially affect our operating results.

Subsequent to our annual impairment test, no indications of impairment were identified.

Indefinite-Lived Intangible Assets and Related Impairment

Intangible assets deemed to have indefinite useful lives, primarily exchange and clearing registrations, are not amortized but instead are tested for impairment at least annually and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than its carrying amount. Similar to goodwill impairment testing, we test for impairment of indefinite-lived intangible assets during the fourth quarter of our fiscal year using an October 1 measurement date and may first perform a qualitative assessment, considering similar factors as discussed above in the goodwill impairment discussion, to determine if it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount. If we elect to perform or are required to perform a quantitative assessment, the test consists of a comparison of the fair value of the indefinite-lived intangible asset to its carrying amount as of the impairment testing date. If the carrying amount of the indefinite-lived intangible asset exceeds its fair value, an impairment charge is recorded for the difference. The fair value of indefinite-lived intangible assets is primarily determined on the basis of estimated discounted value, using the Greenfield Approach for exchange and clearing registrations and licenses and the relief from royalty approach or excess earnings approach for trade names, both of which incorporate assumptions regarding future revenue projections and discount rates. During our annual indefinite-lived intangible asset impairment test during the fourth quarter of 2019, we performed a qualitative test as the excess fair value of each individual indefinite-lived intangible asset over its respective carrying amount at the time of the last quantitative test in 2017 was significant. Based on the results of the qualitative assessment, we concluded based on a predominance of positive indicators and the weight of such indicators that the fair values of our indefinite-lived intangible assets are more likely than not greater than their respective carrying amounts and as a result, quantitative analyses were not needed. There were no indefinite-lived intangible asset impairment charges in 2019, 2018 and 2017.

Subsequent to our annual indefinite-lived impairment test, no indications of impairment were identified.

Other Long-Lived Assets and Related Impairment

We review our other long-lived assets, such as finite-lived intangible assets, equity method investments and equity securities, as well as property and equipment, for potential impairment when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of an asset is not

recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Fair value of finite-lived intangible assets and property and equipment is based on various valuation techniques. We evaluate our equity method investments for other-than-temporary declines in value by considering a variety of factors such as the earnings capacity of the investment and the fair value of the investment compared to its carrying amount. In addition, for investments where the market value is readily determinable, we consider the underlying stock price as an additional factor. For equity securities, when assessing investments in private companies for impairment, we consider such factors as, among others, the share price from the investee's latest financing round, the performance of the investee in relation to its own operating targets, the investee's liquidity and cash position, and general market conditions. Any required impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value and is recorded as a reduction in the carrying amount of the related asset and a charge to operating results.

No material impairments were recorded to reduce the carrying value of our finite-lived intangible assets, equity method investments or equity securities during 2019, 2018 or 2017.

We recorded pre-tax, non-cash property and equipment asset impairment charges of $24 million in 2019. The asset impairment charge in 2019 primarily related to capitalized software that was retired and is included in restructuring charges in the Consolidated Statements of Income for 2019. See Note 21, “Restructuring Charges,” to the consolidated financial statements for a discussion of our 2019 restructuring plan. There were no other material impairments of property and equipment recorded in 2019, 2018 or 2017.

Income Taxes

Estimates and judgments are required in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred tax assets, which arise from net operating loss carryforwards, tax credit carryforwards and temporary differences between the tax and financial statement recognition of revenue and expense. Our deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. Management is required to determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the recognition thresholds, the position is measured to determine the amount of benefit to be recognized in the consolidated financial statements.

In assessing the need for a valuation allowance, we consider all available evidence including past operating results, the existence of cumulative losses in the most recent fiscal years, estimates of future taxable income and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a

corresponding impact to the provision for income taxes in the period in which such determination is made.

In addition, the calculation of our tax liabilities involves uncertainties in the application of tax regulations in the U.S. and other tax jurisdictions. We recognize potential liabilities for anticipated tax audit issues in such jurisdictions based on our estimate of whether, and the extent to which, additional taxes and interest may be due. While we believe that our tax liabilities reflect the probable outcome of identified tax uncertainties, it is reasonably possible that the ultimate resolution of any tax matter may be greater or less than the amount accrued. If events occur and the payment of these amounts ultimately proves unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.

Recent Accounting Pronouncements

See “Recent Accounting Pronouncements,” of Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements for further discussion of recently adopted accounting pronouncements that are applicable to Nasdaq.

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