Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the consolidated financial statements of the Company and the notes thereto included in Item 8 of this Annual Report on Form 10-K. The following discussion contains forward-looking statements. Actual results could differ materially from the results discussed in the forward-looking statements. See “Risk Factors” and “Forward-Looking Statements” above.
A detailed comparison of the Company’s 2019 operating results to its 2018 operating results can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in the Company’s 2019 Annual Report on Form 10-K filed February 21, 2020 at www.sec.gov.
INTRODUCTION
Management’s Discussion and Analysis of Financial Condition and Results of Operations is organized as follows:
EXECUTIVE SUMMARY
Overview
Cboe Global Markets, Inc. (“Cboe” or “the Company”) is one of the world’s largest exchange holding companies, offering cutting-edge trading and investment solutions to investors around the world. The Company is committed to defining markets to benefit its participants and drive the global marketplace forward through product innovation, leading edge technology and seamless trading solutions.
Cboe offers trading across a diverse range of products in multiple asset classes and geographies, including options, futures, U.S., Canadian and European equities, exchange-traded products (“ETPs”), global foreign exchange (“FX”) and volatility products based on the VIX Index, recognized as the world’s premier gauge of U.S. equity market volatility.
Cboe’s subsidiaries include the largest options exchange and the third largest stock exchange operator in the U.S. In addition, the Company operates one of the largest stock exchanges by value traded in Europe, and owns EuroCCP, a leading pan-European equities clearinghouse, MATCHNow, a leading equities ATS in Canada, and as of December 31, 2020, BIDS Trading, the leading block-trading ATS by volume in the U.S. Cboe also is a leading market globally for ETP listings and trading.
The Company is headquartered in Chicago with offices in Kansas City, New York, London, San Francisco, Sarasota Springs, Toronto, Belfast, Amsterdam, Calgary, Singapore, Hong Kong, and Ecuador.
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Recent Developments
Acquisitions of Hanweck, FT Options and Trade Alert
On February 3, 2020, the Company purchased Hanweck Associates, LLC (“Hanweck”) and the assets of FT Providers, LLC (“FT Options”). Hanweck is a real-time risk analytics company based in New York. FT Options is a portfolio management platform provider based in Chicago. Both companies are providers of risk analytics market data and included in the Company’s Options segment. Additionally, on June 1, 2020, the Company purchased the assets of Trade Alert, LLC (“Trade Alert”), a real-time alerts and order flow analysis service provider included in the Company’s Options segment. Hanweck, FT Options, and TradeAlert are being integrated with Cboe Information Solutions’ comprehensive suite of data solutions, analytics and indices that help market participants understand and access financial markets. See Note 5 (“Acquisitions”) for more information.
Chicago Trading Floor
On March 13, 2020, the Cboe Options trading floor was temporarily closed and transitioned to all-electronic trading mode as a precautionary measure to reduce the risk of COVID-19. The Cboe Options trading floor reopened on June 15, 2020 and is accommodating open-outcry trading activity with a modified floor layout, with stringent health and safety protocols in place for the well-being of the trading floor community, which includes Cboe associates and trading permit holders.
Acquisition of EuroCCP
On July 1, 2020, the Company completed the acquisition of the remaining 80% interest in EuroCCP which is included in the Company’s European Equities segment. EuroCCP is a European equities central counterparty that provides post-trade services to stock exchanges, MTFs and for over-the-counter trades. EuroCCP clears equities from eighteen European markets and from the United States, as well as Depositary Receipts, ETFs, and exchanged traded currencies. In connection with the acquisition, EuroCCP put in place a committed revolving credit facility of up to €1.5 billion, see Note 13 (“Debt”) for more information.
Acquisition of MATCHNow
On August 4, 2020, the Company completed the acquisition of MATCHNow, one of the largest equities ATSs in Canada, which is included in the Company’s North American Equities segment. MATCHNow is a Canadian marketplace that offers execution for institutional, proprietary, and retail orders by combining frequent call matches and continuous execution opportunities in a fully confidential trading book. See Note 5 (“Acquisitions”) for more information.
Acquisition of BIDS Holdings
On December 31, 2020, the Company completed the acquisition of BIDS Holdings, which is included in the Company’s North American Equities segment. BIDS Holdings owns BIDS Trading, a registered broker-dealer and the operator of the BIDS ATS. The BIDS ATS is not a registered national securities exchange or a facility thereof. BIDS Trading’s proven block trading capability provides the Company a foothold in the off-exchange segment of the U.S. equities market. Additionally, BIDS Trading’s differentiated network of global buy-side investment managers and sell-side constituents provides the foundation for Cboe to potentially build more off-exchange products and services in non-U.S. equities or options products and in other geographies beyond the U.S.
Business Segments
The Company reports five business segments: Options, North American Equities, Futures, European Equities, and Global FX. Segment performance is primarily based on operating income (loss). The Company has aggregated all of its corporate costs and eliminations, as well as other business ventures, within Corporate Items and Eliminations; however, operating expenses that relate to activities of a specific segment have been allocated to that segment. Our management allocates resources, assesses performance and manages our business according to these segments:
Options. The Options segment includes listed options on market indices (“index options”), as well as on the stocks of individual corporations (“equity options”) and options on ETPs, such as exchange-traded funds (“ETFs”) and exchange-traded notes (“ETNs”), which are “multi-listed” options and listed on a non-exclusive basis. These options trade on Cboe Options, C2 Options, BZX Options, and EDGX Options, all U.S. national security exchanges. Cboe Options is the
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Company’s primary options market and offers trading in listed options through a single system that integrates electronic trading and traditional open outcry trading on the Cboe Options trading floor in Chicago. There was a temporary suspension of open outcry trading between March 13, 2020 and June 14, 2020 in response to the COVID-19 pandemic. C2 Options, BZX Options, and EDGX Options are all-electronic options exchanges, and typically operate with different market models and fee structures than Cboe Options. The Options segment also includes applicable market data revenue generated from the consolidated tape plans, the licensing of proprietary options market data, index licensing, and access and capacity services.
North American Equities (formerly U.S. Equities). The North American Equities segment includes listed U.S. equities and ETP transaction services that occur on fully electronic exchanges owned and operated by BZX Equities, BYX Equities, EDGX Equities, and EDGA Equities and Canadian equities and other transaction services that occur on or through the MATCHNow ATS. This segment was previously referred to as the U.S. Equities segment, but has been updated as a result of the acquisition of MATCHNow, which provides Canadian equities and other transaction services. In addition, in connection with the closing of the acquisition of BIDS Trading, starting January 1, 2021, this segment also includes equities transactions that occur on the BIDS Trading platforms. The North American Equities segment also includes ETP listings on BZX, the Cboe Global Markets, Inc. common stock listing, applicable market data revenue generated from the consolidated tape plans, the licensing of proprietary equities market data, routing services, access and capacity services and advertising activity from ETF.com.
Futures. The Futures segment includes transaction services provided by the Company’s fully electronic futures exchange, CFE, which includes offerings for trading VIX futures and other futures products, the licensing of proprietary market data, as well as access and capacity services.
European Equities. The European Equities segment includes the pan-European listed equities transaction services, ETPs, exchange traded commodities, and international depository receipts that are hosted on MTFs operated by Cboe Europe Equities. It also includes the ETP listings business on RMs and clearing activities of EuroCCP. Cboe Europe Equities operates lit and dark books, a periodic auctions book, and a Large-in-Scale (“LIS”) trading negotiation facility. Cboe NL, launched in October 2019, operates similar business functionality to that offered by Cboe Europe, and provides for trading only in European Economic Area symbols. Cboe Europe Equities also includes revenue generated from the licensing of proprietary market data and from access and capacity services.
Global FX. The Global FX segment includes institutional FX trading services that occur on the Cboe FX fully electronic trading platform, non-deliverable forward FX transactions (“NDFs”) offered for execution on Cboe SEF and Cboe Swiss, as well as revenue generated from the licensing of proprietary market data and from access and capacity services.
General Factors Affecting Results of Operations
In broad terms, our business performance is impacted by a number of drivers, including macroeconomic events affecting the risk and return of financial assets, investor sentiment, the regulatory environment for capital markets, geopolitical events, tax policies, central bank policies and changing technology, particularly in the financial services industry. We believe our future revenues and net income will continue to be influenced by a number of domestic and international economic trends, including:
● consolidation and expansion of our customers and competitors in the industry;
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A number of significant structural, political and monetary issues and the COVID-19 pandemic continue to confront the global economy, and instability could continue, resulting in an increased or subdued level of market volatility, changes in trading volumes and greater uncertainty.
On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. We are closely monitoring developments around COVID-19 and following guidance provided by governmental and public health agencies. In response to COVID-19, we have provided frequent communications to employees, customers, regulators, critical vendors, technology equipment suppliers, data and disaster recovery centers, and other service providers and instructed non-essential employees to work from home on a temporary basis, implemented travel restrictions, and temporarily suspended open outcry trading between March 13, 2020 and June 14, 2020, without any known significant disruptions to our business or control processes. We expect to continue to take further actions as necessary in response to addressing COVID-19. As of the date of this report, it is too early to determine the full impact this virus may have on the global financial markets and the overall economy. Our business and operations could be materially and adversely affected by the effects of COVID-19, however, the extent to which our results could be affected by COVID-19 largely depends on future developments which cannot be accurately predicted and are uncertain. Further, changes in trading behavior, additional suspensions of open outcry trading, market disruptions and other future developments caused by the effects of COVID-19 could impact trading volumes and the demand for our products, market data, and services, which could have a material adverse effect on our business, financial condition, operating results and cash flows for fiscal year 2021 and could be material during any future period impacted either directly or indirectly by this pandemic.
Components of Revenues
Transaction and Clearing Fees
Transaction fees represent fees charged by the Company for the performance obligation of executing a trade on its markets. These fees can be variable based on trade volume tiered discounts; however, as all tiered discounts are calculated monthly, the actual discount is recorded on a monthly basis. Transaction fees are recognized across all segments. Clearing fees, which include settlement fees, are charged by the Company for transactions cleared and settled by EuroCCP. Clearing fees can be variable based on trade volume tiered discounts; however, as all tiered discounts are calculated monthly, the actual discount is recorded on a monthly basis. Clearing fees are recognized in the European Equities segment. Transaction and clearing fees, as well as any tiered volume discounts, are calculated and billed monthly in accordance with the Company’s published fee schedules.
Access and Capacity Fees
Access and capacity fees represent fees assessed for the opportunity to trade, including fees for trading-related functionality across all segments, terminal and other equipment rights, maintenance services, trading floor space and telecommunications services. Facilities, systems services and other fees are generally monthly fee-based. These fees are billed monthly in accordance with the Company’s published fee schedules and recognized on a monthly basis when the performance obligation is met. All access and capacity fees associated with the trading floor are recognized in the Options segment. There is no remaining performance obligation after revenue is recognized.
Market Data Fees
Market data fees represent the fees from the U.S. tape plans and fees from customers for proprietary market data. Fees from the U.S. tape plans are collected monthly based on published fee schedules and distributed quarterly to the U.S. Exchanges based on a known formula using trading and/or quoting activity. A contract for proprietary market data is entered into and charged on a monthly basis in accordance with the Company’s published fee schedules as the service is provided. Both types of market data are satisfied over time, and revenue is recognized on a monthly basis as the customer receives and consumes the benefit as the Company provides the data. U.S. tape plan market data is recognized in the North American Equities and Options segments. Proprietary market data fees are recognized across all segments.
Regulatory Fees
Regulatory fees primarily represent fees collected by the Company to cover the Section 31 fees charged to the Exchanges under the authority of the SEC (Cboe Options, C2, BZX, BYX, EDGX, and EDGA) and are charged by the SEC. Consistent with industry practice, the fees charged to customers are based on the fee set by the SEC per notional value of U.S. Equities exchange transactions and per round turn of Options transactions executed on the Company’s U.S.
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securities markets. These fees are calculated and billed monthly and are recognized in the North American Equities and Options segments. As the Exchanges are responsible for the ultimate payment to the SEC, the Exchanges are considered the principals in these transactions. Regulatory fees also include the options regulatory fee (“ORF”) which supports the Company’s regulatory oversight function in the Options segment, along with other miscellaneous regulatory fees, and neither can be used for non-regulatory purposes. The ORF and miscellaneous fees are recognized when the performance obligation is fulfilled.
Other Revenue
Other revenue primarily includes among other items, revenue from various licensing agreements, interest income from clearing operations, all fees related to the trade reporting facility operated in the European Equities segment, and revenue associated with advertisements through the Company’s websites.
Components of Cost of Revenues
Liquidity Payments
Liquidity payments are directly correlated to the volume of securities traded on our markets. As stated above, we record the liquidity rebates paid to market participants providing liquidity, in the case of C2, BZX, EDGX, and Cboe Europe Limited, as cost of revenue. BYX and EDGA offer a pricing model where we rebate liquidity takers for executing against an order resting on our book, which is also recorded as a cost of revenue.
Routing and Clearing
Various rules require that U.S. options and equities trade executions occur at the National Best Bid/Offer (“NBBO”) displayed by any exchange. Linkage order routing consists of the cost incurred to provide a service whereby Cboe equities and options exchanges deliver orders to other execution venues when there is a potential for obtaining a better execution price or when instructed to directly route an order to another venue by the order provider. The service affords exchange order flow providers an opportunity to obtain the best available execution price and may also result in cost benefits to those clients. Such an offering improves our competitive position and provides an opportunity to attract orders which would otherwise bypass our exchanges. We utilize third-party brokers or our broker-dealer, Cboe Trading, to facilitate such delivery. Also included within routing and clearing are settlement costs incurred for the settlement process executed by EuroCCP.
Section 31 Fees
Exchanges under the authority of the SEC (Cboe Options, C2, BZX, BYX, EDGX, and EDGA) are assessed fees pursuant to the Exchange Act designed to recover the costs to the U.S. government of supervision and regulation of securities markets and securities professionals. We treat these fees as a pass-through charge to customers executing eligible listed equities and listed equity options trades. Accordingly, we recognize the amount that we are charged under Section 31 as a cost of revenues and the corresponding amount that we charge our customers as regulatory transaction fees revenue. Since the regulatory transaction fees recorded in revenues are equal to the Section 31 fees recorded in cost of revenues, there is no impact on our operating income. CFE, Cboe Europe Limited and Cboe FX are not U.S. national securities exchanges, and accordingly are not charged Section 31 fees.
Royalty Fees
Royalty fees primarily consist of license fees paid by us for the use of underlying indices in our proprietary products usually based on contracts traded. The Company has licenses with the owners of the S&P 500 Index, S&P 100 Index and certain other S&P indices, FTSE Russell indices, the DJIA, MSCI, and certain other index products. This category also includes fees related to the dissemination of market data related to S&P indices and PULSe system terminal fees.
Components of Operating Expenses
Compensation and Benefits
Compensation and benefits represent our largest expense category and tend to be driven by our staffing requirements, financial performance, and the general dynamics of the employment market. Stock-based compensation is
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a non-cash expense related to equity awards. Stock-based compensation can vary depending on the quantity and fair value of the award on the date of grant and the related service period.
Depreciation and Amortization
Depreciation and amortization expense results from the depreciation of long-lived assets purchased, the amortization of purchased and internally developed software, and the amortization of intangible assets.
Technology Support Services
Technology support services consists primarily of costs related to the maintenance of computer equipment supporting our system architecture, circuits supporting our wide area network, support for production software, operating system license and support fees, fees paid to information vendors for displaying data and off-site system hosting fees.
Professional Fees and Outside Services
Professional fees and outside services consist primarily of consulting services, which include supplemental staff activities primarily related to systems development and maintenance, legal, regulatory and audit, and tax advisory services.
Travel and Promotional Expenses
Travel and promotional expenses primarily consist of advertising, costs for special events, sponsorship of industry conferences, options education seminars and travel-related expenses.
Facilities Costs
Facilities costs primarily consist of expenses related to owned and leased properties including rent, maintenance, utilities, real estate taxes and telecommunications costs.
Acquisition-Related Costs
Acquisition-related costs relate to acquisitions and other strategic opportunities, including the Merger. The acquisition-related costs include fees for investment banking advisors, lawyers, accountants, tax advisors, public relations firms, severance and retention costs, impairment of goodwill, capitalized software and facilities, and other external costs directly related to the mergers and acquisitions, as well as compensation-related expenses.
Other Expenses
Other expenses represent costs necessary to support our operations that are not already included in the above categories.
Non-Operating Income (Expense)
Income and expenses incurred through activities outside of our core operations are considered non-operating and are classified as other income (expense). These activities primarily include interest earned on the investing of excess cash, interest expense related to outstanding debt facilities, dividend income, income and unrealized gains and losses related to investments held in a rabbi trust for the Company’s non-qualified retirement and benefit plans, and equity earnings or losses from our investments in other business ventures.
RESULTS OF OPERATIONS
The following are summaries of changes in financial performance and include certain non-GAAP financial measures. These non-GAAP financials measures assist management in comparing our performance on a consistent basis for purposes of business decision making by removing the impact of certain items management believes do not reflect our underlying operations. Please see the footnotes below for additional information and reconciliations from our consolidated financial statements.
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Comparison of Years Ended December 31, 2020 and 2019
Overview
The following summarizes changes in financial performance for the year ended December 31, 2020, compared to the year ended December 31, 2019:
(1) These are Non-GAAP figures for which reconciliations are provided below.
Year Ended
December 31, Increase/ Percent
(in millions, except percentages, earnings per share, and as noted below)
Diluted earnings per share 4.27 3.34 0.93 27.8 %
Adjusted EBITDA margin(4) 69.7 % 69.0 % 0.7 % *
Adjusted earnings margin(5) 46.0 % 46.5 % (0.5) % *
Adjusted Diluted earnings per share(6) $ 5.27 $ 4.73 $ 0.54 11.4 %
* Not meaningful
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Year Ended
December 31,
Revenues less cost of revenues $ 1,254.3 $ 1,136.9
Recent acquisitions:
Acquisition revenues less cost of revenues (since acquisition) $ (41.4) $ —
(3) EBITDA margin represents EBITDA divided by revenues less cost of revenues.
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The following is a reconciliation of net income (loss) allocated to common stockholders to EBITDA and adjusted EBITDA:
Year Ended December 31,
(in millions)
Interest expense, net — — — 6.9 — 30.7 37.6
Acquisition-related costs 12.9 15.1 — — — 17.2 45.2
Provision for notes receivable 1.7 5.0 — — — — 6.7
Bargain purchase gain — — — (32.0) — (0.6) (32.6)
Year Ended December 31,
(in millions)
Interest expense (income), net — — — (0.4) — 36.3 35.9
Acquisition-related costs 20.5 — — 1.7 0.3 26.0 48.5
Provision for notes receivable 6.1 17.3 — — — — 23.4
The following is a reconciliation of net income allocated to common stockholders to adjusted earnings:
Year Ended December 31,
(in millions)
Net income allocated to common stockholders $ 467.0 $ 372.7
Acquisition-related costs 45.2 48.5
Provision for notes receivable 6.7 23.4
Bargain purchase gain (32.6) —
Change in redemption value of noncontrolling interest — 0.5
Tax effect of adjustments (38.0) (50.7)
Deferred tax re-measurements 4.1 —
Impairment charges attributed to noncontrolling interest — (3.6)
Net income allocated to participating securities (0.6) (0.7)
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The following summarizes changes in certain operational and financial metrics for the year ended December 31, 2020, compared to the year ended December 31, 2019. The metrics listed for Canadian Equities and EuroCCP in the table on the following page are newly added for the year ended December 31, 2020 as a result of acquisitions completed during the year. Therefore, the table does not include results from 2019 or the periods preceding each acquisition for the applicable metrics.
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Year Ended
December 31, Increase/ Percent
(in millions, except percentages, trading days, and as noted below)
Options:
Average daily volume (ADV) (in millions of contracts):
Total touched contracts 10.1 7.3 2.8 38.4 %
Index contract ADV 1.8 1.9 (0.1) (5.3) %
Multi-Listed contract ADV 8.3 5.4 2.9 53.7 %
Number of trading days 253 252 1 0.4 %
Total Options Market Share 34.3 % 37.7 % (3.4) % *
Multi-Listed Options Market Share 30.0 % 31.1 % (1.1) % *
Index Options Market Share 99.2 % 99.2 % — % *
North American Equities:
U.S. Equities:
ADV:
Total touched shares (in billions) 1.8 1.2 0.6 50.0 %
Market share 15.8 % 16.3 % (0.5) % *
U.S. ETPs: launches (number of launches) 114 57 57 100.0 %
U.S. ETPs: listings (number of listings) 437 353 84 23.8 %
Canadian Equities:
ADV (matched shares, in millions) 43.1 — 43.1 — %
Trading days 104 — 104 — %
Futures:
European Equities:
ADNV:
Matched and touched ADNV (in billions) € 6.9 € 7.7 € (0.8) (10.4) %
Market ADNV (in billions) 40.1 37.9 2.2 5.8 %
Market share 17.2 % 20.2 % (3.0) % *
EuroCCP:
Trades cleared (5) 545.5 — 545.5 — %
Fee per trade cleared (6) € 0.011 € — € 0.011 — %
Net settlement volume (7) 4.1 — 4.1 — %
Net fee per settlement (8) € 0.811 € — € 0.811 — %
Global FX:
Average Euro/U.S. dollar exchange rate $ 1.141 $ 1.119 $ 0.022 2.0 %
Average Euro/British pound exchange rate £ 0.889 £ 0.877 £ 0.012 1.4 %
* Not meaningful
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Revenues
Total revenues for the year ended December 31, 2020 increased $931.0 million, or 37.3%, compared to the prior period primarily due to a $701.8 million, or 40.9% increase in transaction and clearing fees as a result of an increase in market volumes on the U.S. Equities exchanges and in the Options segment, coupled with an increase in regulatory fees. The following summarizes changes in revenues for the year ended December 31, 2020 compared to the year ended December 31, 2019:
Year Ended
December 31, Increase/ Percent
(in millions, except percentages)
Transaction and Clearing Fees
Transaction and clearing fees increased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to a 55.7% increase in U.S. Equities exchange market ADV, a 53.7% increase in multi-listed options ADV, and additional revenue attributed to EuroCCP, which was acquired in the third quarter of 2020, partially offset by a 19.4% decrease in Futures ADV.
Access and Capacity Fees
Access and capacity fees increased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to an increase in logical port revenue in the Options, European Equities, and North American Equities segments.
Market Data Fees
Market data fees increased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to additional revenue attributed to the acquisitions of Hanweck, FT Options, and Trade Alert during 2020, partially offset by a decrease in tape plan market data revenue within the North American Equities segment resulting from a decline in market share.
Regulatory Fees
Regulatory transaction fees increased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to an increase in Section 31 fees as a result of higher volumes in the North American Equities segment, coupled with an increase in the average Section 31 fee rate for 2020.
Other Revenue
Other revenue increased for the year ended December 31, 2020 compared to the same period in 2019 primarily due to additional net interest income from EuroCCP, which the Company acquired in the third quarter of 2020.
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Cost of Revenues
Cost of revenues increased in the year ended December 31, 2020 compared to the same period in 2019 primarily due to higher liquidity payments driven by an increase in volumes traded on the U.S. Equities and Options exchanges, as well as an increase in Section 31 fees within the North American Equities and Options segments, which increased $172.1 million and $21.5 million, respectively. The following summarizes changes in cost of revenues for the year ended December 31, 2020 compared to the prior year:
Year Ended
December 31, Increase/ Percent
(in millions, except percentages)
Liquidity Payments
Liquidity payments increased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to an increase in volumes traded on the U.S. Equities and Options exchanges.
Routing and Clearing
The increase in routing and clearing fees for the year ended December 31, 2020 compared to the same period in 2019 was primarily due to an increase in routed shares on the U.S. Equities exchanges.
Section 31 Fees
Section 31 fees increased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to higher volumes in the North American Equities segment, coupled with an increase in the average Section 31 fee rate for 2020.
Royalty Fees
Royalty fees decreased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to a decline in trading volume in licensed products.
Revenues Less Cost of Revenues
Revenues less cost of revenues increased $117.4 million, or 10.3%, in the year ended December 31, 2020 compared to the same period in 2019, primarily due to a $77.8 million, or 10.9%, increase in transaction and clearing fees less liquidity payments and routing and clearing costs, coupled with increases in market data fees and access and capacity fees.
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The following summarizes the components of revenues less cost of revenues for the year ended December 31, 2020, presented as a percentage of revenues less cost of revenues and compared to the prior year:
Percentage of
Revenues Less
Cost of
Revenues
Year Ended Year Ended
December 31, Percent December 31,
(in millions, except percentages)
Regulatory fees, less Section 31 fees 35.2 40.3 (12.7) % 2.8 % 3.5 %
Transaction and Clearing Fees Less Liquidity Payments and Routing and Clearing Costs
Transaction and clearing fees less liquidity payments and routing and clearing costs (“Net Transaction and Clearing Fees”) increased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to a 53.7% increase in multi-listed options ADV, a 55.7% increase in U.S. Equities exchange market ADV, and additional revenues attributed to EuroCCP, which was acquired in the third quarter of 2020.
Access and Capacity Fees
Access and fees increased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to an increase in logical port revenue in the Options, European Equities, and North American Equities segments.
Market Data Fees
Market data fees increased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to additional revenue attributed to the acquisitions of Hanweck, FT Options, and Trade Alert during 2020, partially offset by a decrease in tape plan market data revenue within the North American Equities segment resulting from a decline in market share.
Regulatory Fees, Less Section 31 Fees
Regulatory fees, less Section 31 Fees, decreased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to a decrease in fines and assessment fees.
Royalty Fees
Royalty fees decreased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to lower trading volumes in licensed products in 2020.
Other
Other revenue increased for the year ended December 31, 2020 compared to the same period in 2019 primarily due to additional net interest income from EuroCCP, which the Company acquired in the third quarter of 2020.
Operating Expenses
For the year ended December 31, 2020 compared to the year ended December 31, 2019, total operating expenses decreased primarily due to declines in depreciation and amortization and other expenses, partially offset by an increase in
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compensation and benefits. The following summarizes changes in operating expenses for the year ended December 31, 2020 compared to the prior year:
Year Ended
December 31, Increase/ Percent
(in millions, except percentages)
Operating Expenses:
Technology support services 54.5 46.2 8.3 18.0 %
Professional fees and outside services 60.6 68.3 (7.7) (11.3) %
Travel and promotional expenses 6.6 11.9 (5.3) (44.5) %
Acquisition-related costs 45.2 48.5 (3.3) (6.8) %
Total operating expenses $ 592.1 $ 599.7 $ (7.6) (1.3) %
Compensation and Benefits
Compensation and benefits increased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to an increase in compensation expense related to acquisitions of $16.3 million and a decline in capitalized wages of $8.7 million due to a decrease in software projects eligible for capitalization, partially offset by a $2.2 million decline in benefits primarily due to healthcare rebates received.
Depreciation and Amortization
Depreciation and amortization decreased for the year ended December 31, 2020 compared to the same period in 2019, due to a decline in amortization under the discounted cash flow method for the intangibles acquired in the Bats acquisition, coupled with the write-off of the Cboe Command software in the fourth quarter of 2019.
Technology Support Services
Technology support services costs increased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to increases in purchased hardware and market data support services fees related to the acquisitions in 2020.
Professional Fees and Outside Services
Professional and outside services fees decreased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to declines in regulatory service fees of $5.3 million, legal fees of $3.9 million, and accounting fees of $1.2 million, partially offset by a $2.7 million increase in contract services due to the acquisition of EuroCCP.
Travel and Promotional Expenses
Travel and promotional expenses decreased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to travel restrictions implemented in March 2020 in response to the COVID-19 pandemic coupled with a decline in marketing expenses also driven by lack of sponsored events due to the COVID-19 pandemic.
Facilities Costs
Facilities costs increased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to additional rent expense incurred for the new headquarters location beginning in January 2020 and for the new trading
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floor location beginning in May 2020, coupled with a reversal of deferred rent expense of $1.3 million in the first quarter of 2019 that did not recur in 2020.
Acquisition-Related Costs
Acquisition-related costs decreased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to severance costs incurred in the third quarter of 2019 that did not recur in 2020, coupled with the write down of goodwill attributed to a 2016 acquisition recorded in the second quarter of 2019, offset by the costs related to the six acquisitions closed in 2020. Acquisition-related costs include fees for investment banking advisors, lawyers, accountants, tax advisors, public relations firms, severance and retention costs, impairment of goodwill, capitalized software and facilities, and other external costs directly related to the mergers and acquisitions, as well as compensation-related expenses.
Other Expenses
Other expenses decreased for the year ended December 31, 2020 compared to the same period in 2019, primarily due to a $23.4 million provision for the notes receivable recorded in the fourth quarter of 2019 as a result of circumstances associated with the development of the CAT, partially offset by a $6.7 million provision recorded in the third quarter of 2020, also related to the CAT.
Operating Income
As a result of the items above, operating income for the year ended December 31, 2020 was $662.2 million, compared to $537.2 million for the year ended December 31, 2019, an increase of $125 million, or 23.3%.
Interest Expense, Net
Net interest expense increased in the year ended December 31, 2020 primarily due to the commitment fees related to the EuroCCP Credit Facility and fees related to the amended Revolving Credit Agreement, partially offset by the decrease in the variable interest rate on the term loan agreement.
Other Income, Net
Net other income increased in the year ended December 31, 2020 compared to the same period in 2019 primarily due to a $32.6 million bargain purchase gain related to the EuroCCP acquisition recorded in the third quarter of 2020.
Income Before Income Tax Provision
As a result of the above, income before income tax provision for the year ended December 31, 2020 was $660.4million compared to $501.4 million for the year ended December 31, 2019, an increase of $159.0million, or 31.7%.
Income Tax Provision
For the year ended December 31, 2020, the income tax provision was $192.2 million compared with $130.6 million for the year ended December 31, 2019, an increase of $61.6 million, primarily due to the increase in income before income tax provision and a higher tax rate for the year ended December 31, 2020. The effective tax rate for the year ended December 31, 2020 was 29.1%, compared to a rate of 26.0% for the year ended December 31, 2019.
Net Income
As a result of the items above, net income for the year ended December 31, 2020 was $468.2 million, or 37.3% of revenues less cost of revenues, compared to $370.8million, or 32.6% of revenues less cost of revenues, for the year ended December 31, 2019, an increase of $97.4 million, or 26.3%.
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Segment Operating Results
We report results from our five segments: Options, North American Equities, Futures, European Equities, and Global FX. Segment performance is primarily based on operating income (loss). We have aggregated all corporate costs, as well as other business ventures, within the Corporate Items and Eliminations as those activities should not be used to evaluate a segment's operating performance. All operating expenses that relate to activities of a specific segment have been allocated to that segment.
The following summarizes our total revenues by segment:
Percentage of
Total
Revenues
Year Ended Year Ended
December 31, Percent December 31,
(in millions, except percentages)
Corporate — 0.2 (100.0) % — % — %
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The following summarizes our revenues less cost of revenues by segment:
Percentage of
Total Revenues
less Cost of Revenues
Year Ended Year Ended
December 31, Percent December 31,
(in millions, except percentages)
Corporate — 0.2 (100.0) % — % — %
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Options
The following summarizes revenues less cost of revenues, operating expenses, operating income, EBITDA and EBITDA margin for our Options segment:
Percentage
of Total
Revenues
Year Ended Year Ended
December 31, Percent December 31,
(in millions, except percentages)
EBITDA margin(2) 71.0 % 64.9 % * * *
* Not meaningful
(2) EBITDA margin represents EBITDA divided by revenues less cost of revenues.
Revenues less cost of revenues increased $85.6 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to a 53.7% increase in multi-listed options ADV, coupled with a 9.8% increase in index options RPC and an increase in proprietary market data revenue as a result of the acquisitions of Hanweck, FT Options, and Trade Alert. For the year ended December 31, 2020, operating income increased $96.1 million compared to the year ended December 31, 2019 primarily due to higher revenues less cost of revenues. Operating expenses decreased $10.5 million for the year ended December 31, 2020 compared to the prior period, primarily due to decreases in professional fees and outside services, acquisition-related costs, and depreciation and amortization, partially offset by an increase in compensation and benefits, facilities costs, and technology support services.
North American Equities
The following summarizes revenues less cost of revenues, operating expenses, operating income, EBITDA and EBITDA margin for our North American Equities segment:
Percentage
of Total
Revenues
Year Ended Year Ended
December 31, Percent December 31,
(in millions, except percentages)
EBITDA margin(2) 69.8 % 69.1 % * * *
* Not meaningful
(2) EBITDA margin represents EBITDA divided by revenues less cost of revenues.
Revenues less cost of revenues increased $25.8 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to a 50.0% increase in volumes traded and shares routed on our U.S. Equities exchanges. For the year ended December 31, 2020, the North American Equities segment's operating income increased $27.0 million compared to the year ended December 31, 2019 as a result of higher revenues less cost of revenues. Operating expenses decreased slightly for the year ended December 31, 2020 compared to the year ended December
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31, 2019, primarily due to a decrease in other expenses and depreciation and amortization, offset by an increase in acquisition-related costs.
Futures
The following summarizes revenues less cost of revenues, operating expenses, operating income, EBITDA, and EBITDA margin for our Futures segment:
Percentage
of Total
Revenues
Year Ended Year Ended
December 31, Percent December 31,
(in millions, except percentages)
EBITDA margin(2) 53.8 % 65.0 % * * *
* Not meaningful
(2) EBITDA margin represents EBITDA divided by revenues less cost of revenues.
Revenues less cost of revenues decreased $25.5 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to a 19.4% decline in Futures ADV, coupled with a 5.2% decrease in revenue per contract. For the year ended December 31, 2020, the Futures segment's operating income decreased $29.3 million compared to the year ended December 31, 2019 due to lower revenues less cost of revenues. Operating expenses increased $3.8 for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to an increase in compensation and benefits.
European Equities
The following summarizes revenues less cost of revenues, operating expenses, operating income, EBITDA and EBITDA margin for our European Equities segment:
Percentage
of Total
Revenues
Year Ended Year Ended
December 31, Percent December 31,
(in millions, except percentages)
EBITDA margin(2) 83.1 % 56.9 % * * *
* Not meaningful
(2) EBITDA margin represents EBITDA divided by revenues less cost of revenues.
Revenues less cost of revenues increased $26.9 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to additional revenue attributable to the acquisition of EuroCCP, as well as a 9.7% increase in net capture and a 5.8% increase in market ADNV. For the year ended December 31, 2020, operating income increased $13.2 million compared to the year ended December 31, 2019 as a result of higher revenues less cost
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of revenues. Operating expenses increased $13.7 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to an increase in compensation and benefits, professional fees and outside services, and technology support services as a result of the EuroCCP acquisition, partially offset by a decrease in other expenses and acquisition-related costs.
Global FX
The following summarizes revenues less cost of revenues, operating expenses, operating income, EBITDA and EBITDA margin for our Global FX segment:
Percentage
of Total
Revenues
Year Ended Year Ended
December 31, Percent December 31,
(in millions, except percentages)
Operating income (loss) $ 6.0 $ (4.9) 222.4 % 10.4 % (9.2) %
EBITDA margin(2) 56.1 % 47.2 % * * *
* Not meaningful
(2) EBITDA margin represents EBITDA divided by revenues less cost of revenues.
Revenues less cost of revenues increased $4.8 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to a 7.4% increase in Global FX ADNV during 2020. For the year ended December 31, 2020, the Global FX segment's operating income increased $10.9 million compared to the year ended December 31, 2019 due to a decline in operating expenses, coupled with higher revenues less costs of revenues. Operating expenses decreased $6.1 million for the year ended December 31, 2020 compared to the year ended December 31, 2019, primarily due to decreases in depreciation and amortization, professional fees and outside services, and travel and promotional expenses.
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LIQUIDITY AND CAPITAL RESOURCES
Below are charts that reflect our capital allocation:
We expect our cash on hand at December 31, 2020 and other available resources, including cash generated from operations, to be sufficient to continue to meet our cash requirements for the foreseeable future. In the near term, we expect that our cash from operations and availability under the Revolving Credit Facility will meet our cash needs to fund our operations, capital expenditures, interest payments on debt, debt repayments, any dividends, potential strategic acquisitions, and opportunities for common stock repurchases under the previously announced program. We may also utilize excess cash on hand to pay down amounts outstanding under the Term Loan Agreement. See Note 13 (“Debt”) of the consolidated financial statements for further information.
On July 1, 2020, in connection with the Company’s acquisition of EuroCCP, EuroCCP as borrower and the Company as guarantor of scheduled interest and fees on borrowings (but not the principal amount of any borrowings), entered into a €1.5 billion committed syndicated multicurrency revolving and swingline credit facility agreement (the “Facility”). The Facility is available to be drawn by EuroCCP towards (a) financing unsettled amounts in connection with the settlement of transactions in securities and other items processed through EuroCCP’s clearing system and (b) financing any other liability or liquidity requirement of EuroCCP incurred in the operation of its clearing system. Borrowings under the Facility are secured by cash, eligible government bonds and eligible equity assets deposited by EuroCCP into secured accounts. As a result, should the Facility be drawn by EuroCCP it could potentially impact EuroCCP’s liquidity, and we can give no assurance that this Facility will be sufficient to meet all of such obligations or sufficiently mitigate EuroCCP’s liquidity risk to meet its payment obligations when due. Additionally, a default of the Facility may allow lenders, under certain circumstances, to accelerate any related drawn amounts and may result in the acceleration of the Company’s other outstanding debt to which a cross-acceleration or cross-default provision applies, which may limit the Company’s liquidity, business and financing activities. The Facility is expected to terminate on July 1, 2021 and we may not be able to enter into a replacement facility on commercially reasonable terms, or at all.
Our long-term cash needs will depend on many factors, including an introduction of new products, enhancements of current products, the geographic mix of our business and any potential acquisitions. We believe our cash from operations and the availability under our Revolving Credit Facility will meet any long-term needs unless a significant acquisition is identified, in which case we expect that we would be able to borrow the necessary funds and/or issue additional shares of our common stock to complete such an acquisition. In addition, we do not expect COVID-19 to have a material impact on our liquidity or capital resources, including cash from operations or uses of cash, or change our ability to access capital markets in the near term or the foreseeable future.
Cash and cash equivalents include cash in banks and all non-restricted, highly liquid investments with original maturities of three months or less at the time of purchase. Cash and cash equivalents as of December 31, 2020 increased
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$16.1 million from December 31, 2019 primarily due to proceeds from long-term debt and net income, partially offset by acquisitions net of cash of acquired of $351.5 million and share repurchases of $349.1 million. See “Cash Flow” below for further discussion.
Our cash and cash equivalents held outside of the United States in various foreign subsidiaries totaled $128.2 million and $85.1 million as of December 31, 2020 and December 31, 2019, respectively. The remaining balance was held in the United States and totaled $117.2 million and $144.1 million as of December 31, 2020 and December 31, 2019, respectively. Any offshore cash repatriated to the United States could subject us to additional United States income taxes, less applicable foreign tax credits.
Our financial investments include deferred compensation plan assets, as well as investments with original or acquired maturities longer than three months but that mature in less than one year from the balance sheet date and are recorded at fair value. As of December 31, 2020, financial investments consisted of U.S. Treasury securities and deferred compensation plan assets.
Cash Flow
The following table summarizes our cash flow data for the years ended December 31, 2020, 2019 and 2018:
For the Year Ended
December 31,
(in millions)
Net cash provided by operating activities $ 1,458.8 $ 632.8 $ 534.7
Net cash used in investing activities (430.5) (15.9) (25.6)
Net cash used in financing activities (201.7) (662.9) (371.6)
As of December 31,
(in millions)
Net Cash Flows Provided by Operating Activities
During the year ended December 31, 2020, net cash provided by operating activities was $990.6 million higher than net income. The variance is primarily attributed to the addition of $812.1 million of restricted cash and cash equivalents (margin deposits and clearing funds) resulting from the EuroCCP acquisition, the adjustment for depreciation and amortization expense of $158.5 million, the change in accounts payable and accrued liabilities of $59.4 million, and the change in Section 31 fees payable of $53.9 million, partially offset by the change in accounts receivable of $90.0 million.
Net cash provided by operating activities was $1,458.8 million and $632.8 million for the years ended December 31, 2020 and 2019, respectively. The increase in net cash flows provided by operating activities was primarily due to the addition of margin deposits and clearing funds resulting from the EuroCCP acquisition and the increase in net income.
Net cash provided by operating activities was $262.0 million higher than net income for the fiscal year ended December 31, 2019. The variance is primarily attributed to the adjustment for depreciation expense of $176.6 million and the change in accounts receivable of $50.3 million, partially offset by the adjustment for provision of deferred taxes of $37.2 million, the change in accounts payable and accrued liabilities of $25.7 million, and other prepaid expenses of $16.9 million.
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Net cash provided by operating activities was $632.8 million and $534.7 million for the years ended December 31, 2019 and 2018, respectively. The increase in net cash flows provided by operating activities was primarily due to higher net income.
Net Cash Flows Used in Investing Activities
Net cash flows used in investing activities was $430.5 million and $15.9 million for the years ended December 31, 2020 and 2019, respectively. The variance is primarily due to acquisitions, net of cash acquired in 2020 and the return of capital from investments in 2019.
Net cash flows used in investing activities totaled $15.9 million and $25.6 million for the years ended December 31, 2019 and 2018, respectively. Expenditures for capital and other assets totaled $35.1 million and $36.3 million for the years ended December 31, 2019 and 2018, respectively, primarily representing purchases of systems hardware and development of software to develop and enhance our trading platform and operations. In 2019 and 2018, investing activities primarily represented purchases of property and equipment.
Capital expenditures are expected to be in the range of $60 to $65 million, reflecting expenditures associated with the Company’s planned trading floor relocation in 2021 and ongoing capacity and technology-related investments.
Net Cash Flows Used in Financing Activities
For the year ended December 31, 2020, the Company received proceeds from long-term debt of $493.7 million, of which $70.0 million was used to pay down the revolving credit facility draw taken in the third quarter of 2020, repurchased $349.1 million of common stock, paid dividends totaling $170.6 million, and paid down $155.0 million of long-term debt.
Net cash flows used in financing activities totaled $662.9 million for the year ended December 31, 2019. The Company paid down $350.0 million of long-term debt, repurchased $156.9 million of common stock, and paid dividends of $150.0 million. Net cash flows used in financing activities totaled $371.6 million for the year ended December 31, 2018. The $291.3 million decrease in net cash flows provided by financing activities resulted primarily from the long-term debt repayment in 2019.
Financial Assets
The following summarizes our financial assets excluding margin deposits and clearing funds as of December 31, 2020, 2019 and 2018:
As of December 31,
(in millions)
Less deferred compensation plan assets (24.5) (23.4) —
Less cash collected for Section 31 Fees (103.0) (69.0) (53.1)
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Debt
The following summarizes our debt obligations as of December 31, 2020, 2019 and 2018:
As of December 31,
(in millions)
Debt:
1.950% Senior Notes — — 300.0
1.625% Senior Notes 500.0 — —
Revolving Credit Agreement — — —
EuroCCP Credit Facility — — —
Less unamortized discount and debt issuance costs (16.1) (7.4) (9.6)
At December 31, 2020, we were in compliance with the covenants of our debt agreements.
In addition to the debt outstanding, as of December 31, 2020 we had an additional $250.0 million available through our revolving credit facility, with the ability to borrow another $100.0 million by increasing the commitments under the facility. Together with Adjusted Cash, we had $460.3 million available to fund our operations, capital expenditures, potential acquisitions, debt repayments and any dividends as of December 31, 2020.
Dividends
The Company’s expectation is to continue to pay dividends. The decision to pay a dividend, however, remains within the discretion of the Company's board of directors and may be affected by various factors, including our earnings, financial condition, capital requirements, level of indebtedness and other considerations our board of directors deems relevant. Future debt obligations and statutory provisions, among other things, may limit, or in some cases prohibit, our ability to pay dividends.
Share Repurchase Program
In 2011, the board of directors approved an initial authorization for the Company to repurchase shares of its outstanding common stock of $100 million and approved additional authorizations of $100 million in each of 2012, 2013, 2014, 2015 and 2016, $150 million in February 2018, $100 million in August 2018, $250 million in October 2019, and $250 million in June 2020, for a total authorization of $1.4 billion. The program permits the Company to purchase shares through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. It does not obligate the Company to make any repurchases at any specific time or situation.
Under the program, for the year ended December 31, 2020, the Company repurchased 3,534,115 shares of common stock at an average cost per share of $98.78, totaling $349.1 million. Since inception of the program through December 31, 2020, the Company has repurchased 17,250,124 shares of common stock at an average cost per share of $66.66, totaling $1.1 billion.
As of December 31, 2020, the Company had $200.1 million of availability remaining under its existing share repurchase authorizations.
OCC Capital Management Policy
The Company’s contributed capital to OCC has been recorded under investments in the consolidated balance sheets as of December 31, 2020. Under OCC’s current capital management policy, which was approved by the SEC on January 24, 2020, if OCC’s equity capital falls below certain defined thresholds, OCC can access additional capital through an operational loss fee charged to clearing members. None of OCC’s shareholders (including Cboe Options) has any obligation to contribute capital to OCC under the capital management policy, nor does any shareholder have the right to receive dividends from OCC under such policy. OCC did not pay its shareholders any dividend or other return on the retained portion of their capital contributions. As such, the Company reversed the $8.8 million OCC dividend declared in
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2018, which was to be paid in 2019, in other expense, net in the consolidated statement of income for the year ended December 31, 2019.
Lease and Obligations
The Company currently leases additional office space, data centers and remote network operations center, with lease terms remaining from 4 months to 180 months as of December 31, 2020. In September 2019, we entered into two leases that commenced in 2020 for a new principal office space and trading floor space, both located in Chicago, Illinois.
Total rent expense related to current and former lease obligations for the years ended December 31, 2020, 2019 and 2018 totaled $20.2 million, $12.4 million and $10.1 million, respectively. In addition to our lease obligations, we have contractual obligations related to certain operating leases, data and telecommunications agreements, and our long-term debt outstanding.
Purchase obligations include our estimate of the minimum outstanding obligations under agreements to purchase goods or services that we believe are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed or minimum and maximum amounts to be paid; and the approximate timing of the transaction. Purchase obligations include licensing agreements with various licensors which contain annual minimum fee requirements that total $361.6 million for the next five years. Purchase obligations exclude agreements that are cancellable at any time without penalty.
We have excluded from the contractual obligations listed below $812.1 million in cash margin deposits and clearing funds. Clearing participants of EuroCCP are required to make deposits to a clearing fund. The cash deposits made by clearing participants are recorded in the consolidated balance sheet as current assets with equal and offsetting current liabilities. See Note 15 (“Clearing Operations”) to our consolidated financial statements for additional information on EuroCCP and the margin deposits and clearing funds.
Future minimum payments under these leases and agreements were as follows as of December 31, 2020:
Payments Due by Period
Less than More than
Total 1 year 1-3 years 4-5 years 5 years
Contractual Obligations (in millions)
Commercial Commitments and Contractual Obligations
As of December 31, 2020, our commercial commitments and contractual obligations included operating leases, data and telecommunications agreements, equipment leases, our long-term debt outstanding, contingent considerations and other obligations. See Note 24 (“Commitments, Contingencies, and Guarantees”) to the consolidated financial statements for a discussion of commitments and contingencies, Note 13 (“Debt”) for a discussion of the outstanding debt, Note 15 (“Clearing Operations”) for information on EuroCCP’s clearinghouse exposure guarantee, and Note 25 (“Leases”) for discussion on operating leases and equipment leases.
Off-Balance Sheet Arrangements
See Note 15 (“Clearing Operations”) for discussion of contingent assets and liabilities related to clearing operations in connection with the Company’s acquisition of EuroCCP.
Guarantees
We use Wedbush and Morgan Stanley to clear our routed equities transactions for our U.S. Equities exchanges. Wedbush and Morgan Stanley guarantee the trade until one day after the trade date, after which time the NSCC provides a guarantee. In the case of failure to perform on the part of one of our clearing firms, Wedbush or Morgan Stanley, we provide the guarantee to the counterparty to the trade. OCC acts as a central counterparty on all transactions in listed equity options in our Options segment, and as such, guarantees clearance and settlement of all of our options transactions. We believe that any potential requirement for us to make payments under these guarantees is remote and
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accordingly, have not recorded any liability in the consolidated financial statements for these guarantees. Similarly, with respect to U.S. listed equity options and futures, we deliver matched trades of our customers to the OCC, which acts as a central counterparty on all transactions occurring on Cboe Options, C2, BZX, EDGX, and CFE and, as such, guarantees clearance and settlement of all of our matched options and futures trades. With respect to Canadian equities, we deliver matched trades of our customers to The Canadian Depository for Securities, which acts as a central counterparty on all transactions occurring on MATCHNow and, as such, guarantees clearance and settlement of all of our matched Canadian equities trades. The BIDS Trading ATS platform delivers matched trades to BofA Securities, Inc., which delivers the matched trades to the NSCC.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of the amounts of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. On an ongoing basis, the Company evaluates its estimates, including those related to areas that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. The Company bases its estimates on historical experience, observance of trends in particular areas, information available from outside sources and various other assumptions that are believed to be reasonable under the circumstances. Information from these sources form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources.
We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact of, and any associated risks related to, these policies on our business operations is discussed throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations." For a detailed discussion on the application of these and other accounting policies, see Note 2 (“Summary of Significant Accounting Policies”) to our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.
Revenue Recognition
For further discussion related to revenue recognition of fees, such as transaction and clearing fees, access and capacity fees, market data fees, and regulation transaction and Section 31 fees, see Note 4 (“Revenue Recognition”).
Goodwill and Other Intangible Assets
Our acquisitions of Bats, Cboe Vest Financial Group Inc. (“Vest”), Silexx Financial Systems, LLC (“Silexx”), LiveVol, Hanweck, FT Options, Trade Alert, MATCHNow, and BIDS Holdings resulted in the recording of goodwill and other intangible assets, while our acquisition of EuroCCP, resulted in a bargain purchase gain and other intangible assets. In accordance with ASC 350—Intangibles—Goodwill and Other, we test the carrying values of goodwill and indefinite-lived intangible assets for impairment at least annually, or more frequently when events or changes in circumstances signal indicators of impairment are present. We perform our annual impairment test of goodwill and other indefinite-lived intangible assets during the fourth quarter of our fiscal year, using the October 1 carrying values. Goodwill is tested for impairment at the reporting unit level in accordance with ASC 350-20. If the carrying value of the reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to the excess. If the fair value of indefinite-lived intangible assets is less than their carrying value, an impairment loss will be recognized in an amount equal to the difference. We performed our annual goodwill impairment test as of October 1, 2020 and determined that no impairment existed.
The estimated fair values of our reporting units are based on the market approach and the income approach (using discounted estimated future cash flows). The estimated fair values of indefinite-lived intangibles used the income approach. The discounted cash flow analysis requires significant judgment, including judgments about the discount rate, forecasted revenue growth rate, and operating expenses, that are inherent in these fair value estimates over the estimated remaining operating period. As such, actual results may differ from these estimates and lead to a revaluation of our goodwill and indefinite-lived intangible assets. If updated estimates indicate that the fair value of goodwill or any indefinite-lived intangibles is less than the carrying value of the asset, an impairment charge is expected to be recorded in the consolidated statements of income in the period of the change in estimate.
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Purchase Accounting
Tangible and intangible assets acquired and liabilities assumed in an acquired business are recorded at their estimated fair values on the date of acquisition. The difference between the purchase price amount and the net fair value of assets acquired and liabilities assumed is recognized as goodwill on the balance sheet if the purchase price exceeds the estimated net fair value or as a bargain purchase gain on the income statement if the purchase price is less than the estimated net fair value. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment, often utilizes independent valuation experts and involves the use of significant estimates and assumptions with respect to the timing and amounts of future cash inflows and outflows, discount rates, market prices and asset lives, among other items. The judgments made in the determination of the estimated fair value assigned to the assets acquired and liabilities assumed, as well as the estimated useful life of each asset and the duration of each liability, could significantly impact the financial statements in periods after acquisition, such as through depreciation and amortization expense. When available, the estimated fair values of these assets and liabilities are determined based on observable inputs, such as quoted market prices, information from comparable transactions, offers made by other prospective acquirers, in such cases where we may have certain rights to acquire additional interests in existing investments, and the replacement cost of assets in the same condition or stage of usefulness (Level 1 and 2). Unobservable inputs, such as expected future cash flows or internally developed estimates of value (Level 3), are used if observable inputs are not available. As noted in ASC 805—Business Combinations, the allocation of the purchase price may be modified up to twelve months after the acquisition date as more information is obtained about the fair value of assets acquired and liabilities assumed.See Note 5 (“Acquisitions”) for additional information.
Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in our opinion, it is more likely than not that all or some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based upon the technical merits of the position. The tax benefit recognized in the consolidated financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Also, interest and penalties expense is recognized on the full amount of deferred benefits for uncertain tax positions. The Company’s policy is to include interest and penalties related to unrecognized tax benefits in the income tax provision within the consolidated statements of income.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 3 (“Recent Accounting Pronouncements”) to the consolidated financial statements for further discussion of recently adopted and recently issued accounting pronouncements that are applicable to the Company.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
As a result of our operating activities, we are exposed to market risks such as foreign currency exchange rate risk, equity risk, credit risk, and interest rate risk. We have implemented policies and procedures to measure, manage and monitor and report risk exposures, which are reviewed regularly by management and our board of directors.
Foreign Currency Exchange Rate Risk
Our operations in Europe, Canada and Asia are subject to increased currency translation risk as revenues and expenses are denominated in foreign currencies, primarily the British pound, Canadian dollar, Singapore dollar, Hong Kong dollar, and the Euro. We also have de minimis exposure to other foreign currencies, including the Swiss Franc, Norwegian Kroner, Swedish Krona and Danish Kroner.
For the year ended December 31, 2020, our exposure to foreign-denominated revenues and expenses is presented by primary foreign currency in the following table:
Year Ended
British Canadian
Pound (1) Euro (1) Dollar (1)
(in millions, except
percentages)
Foreign denominated % of:
Revenues 1.8 % 0.9 % 0.1 %
Cost of revenues 0.6 % 0.3 % — %
Operating expenses 4.9 % 2.9 % 0.4 %
Impact of 10% adverse currency fluctuation on:
Revenues $ 5.4 $ 4.0 $ 0.3
Cost of revenues 1.3 0.9 —
Operating expenses 2.8 2.2 0.2
Equity Risk
Our investment in European and Canadian operations is exposed to volatility in currency exchange rates through translation of our net assets or equity to U.S. dollars. The assets and liabilities of our European business are denominated in British pounds or Euros. The assets and liabilities of our Canadian business are denominated in Canadian dollars. Fluctuations in currency exchange rates may create volatility in our reported results as we are required to translate foreign currency reported statements of financial condition and operational results into U.S. dollars for consolidated reporting. The translation of these non-U.S. dollar statements of financial condition into U.S. dollars for consolidated reporting results in a cumulative translation adjustment, which is recorded in accumulated other comprehensive income (loss) within stockholders' equity on our consolidated balance sheet.
Our primary exposure to this equity risk as of December 31, 2020 is presented by foreign currency in the following table:
British Canadian
Pound (1) Euro (1) Dollars (1)
(in millions) (in millions) (in millions)
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Credit Risk
We are exposed to credit risk from third parties, including customers, counterparties and clearing agents. These parties may default on their obligations due to bankruptcy, lack of liquidity, operational failure or other reasons. We limit our exposure to credit risk by considering such risk when selecting the counterparties with which we make investments and execute agreements.
We do not have counterparty credit risk with respect to trades matched on our exchanges in the U.S., Canada, and Europe. With respect to listed equities, we deliver matched trades of our customers to the National Security Clearing Corporation (“NSCC”) without taking on counterparty risk for those trades. NSCC acts as a central counterparty on all equity transactions occurring on BZX, BYX, EDGX and EDGA and, as such, guarantees clearance and settlement of all of our matched equity trades. Similarly, with respect to U.S. listed equity options and futures, we deliver matched trades of our customers to the OCC, which acts as a central counterparty on all transactions occurring on Cboe Options, C2, BZX, EDGX and CFE and, as such, guarantees clearance and settlement of all of our matched options and futures trades. With respect to Canadian equities, we deliver matched trades of our customers to The Canadian Depository for Securities, which acts as a central counterparty on all transactions occurring on MATCHNow and, as such, guarantees clearance and settlement of all of our matched Canadian equities trades. The BIDS Trading ATS platform delivers matched trades to BofA Securities, Inc., which delivers the matched trades to the NSCC.
With respect to orders Cboe Trading routes to other markets for execution on behalf of our customers, Cboe Trading is exposed to some counterparty credit risk in the case of failure to perform on the part of our clearing firms, Morgan Stanley or Wedbush. Morgan Stanley and Wedbush guarantee trades until one day after the trade date, after which time NSCC provides a guarantee. Thus, Cboe Trading is potentially exposed to credit risk to the counterparty to a trade routed to another market center between the trade date and one day after the trade date in the event that Morgan Stanley or Wedbush fails. We believe that any potential requirement for us to make payments under these guarantees is remote and accordingly, have not recorded any liability in the consolidated financial statements for these guarantees.
Historically, we have not incurred any liability due to a customer’s failure to satisfy its contractual obligations as counterparty to a system trade. Credit difficulties or insolvency, or the perceived possibility of credit difficulties or insolvency, of one or more larger or more visible market participants could also result in market-wide credit difficulties or other market disruptions.
We do not have counterparty credit risk with respect to institutional spot FX trades occurring on our platform because Cboe FX is not a counterparty to any FX transactions. All transactions occurring on our platform occur bilaterally between two banks or prime brokers as counterparties to the trade. While Cboe FX does not have direct counterparty risk, Cboe FX may suffer a decrease in transaction volume if a bank or prime broker experiences an event that causes other prime brokers to decrease or revoke the credit available to the prime broker experiencing the event. Therefore, Cboe FX may have risk that is related to the credit of the banks and prime brokers that trade FX on the Cboe FX platform.
We also have credit risk related to transaction fees that are billed in arrears to customers on a monthly basis. Our potential exposure to credit losses on these transactions is represented by the receivable balances in our balance sheet. Our customers are financial institutions whose ability to satisfy their contractual obligations may be impacted by volatile securities markets.
As a result of the acquisition of EuroCCP on July 1, 2020, the Company is exposed to further credit risk through our clearing operations. EuroCCP holds material amounts of clearing participant collateral, both cash and non-cash deposits, which are held or invested primarily to provide security of capital while minimizing credit risk as well as liquidity and market risks. The following is a summary of the risks associated with these deposits and how these risks are mitigated:
•Credit Risk - The credit risk is predominantly in the event a clearing participant fails to meet a financial or contractual obligation. EuroCCP attempts to mitigate this risk through minimum participant requirements for clearing participants and monitoring their financial health. To cover potential loss to EuroCCP in the event of a clearing participant default, collateral is required from clearing participants. Besides potential defaults of clearing participants, the main credit risk faced by the clearinghouse is exposure to clearing participants when a trade fails to settle. To help mitigate this risk, a fail fee is charged to discourage late settlements. This fee covers EuroCCP’s costs but also acts as a deterrent as required by Regulation (EU) No 236/2012 on short selling, together with certain aspects of credit default swaps.
•Liquidity Risk - Liquidity risk is the risk EuroCCP may not be able to meet its payment obligations in the right currency, in the right place and at the right time. To help mitigate this risk, EuroCCP monitors its liquidity requirements
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closely and maintains funds and assets in a manner which attempt to minimize 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 making only short-term investments serves to help reduce liquidity risks. Liquidity is mainly required for securities settlement. The payment and settlement obligations generally stem from the function of EuroCCP as a cash equity clearinghouse: shares are bought and sold by clearing participants on a trading platform or OTC, and netted to settle two days later. During the settlement the actual payment for and delivery of the shares take place, this process requires intraday liquidity. If counterparties, which receive shares against payment, are unable to settle, an overnight liquidity need arises. The overnight liquidity is typically very short term, and is usually limited to a few days.
•Market Risk - EuroCCP is also exposed to market risk in the event that a clearing participant defaults and the market prices of the securities in its open positions have moved adversely so the clearinghouse can only close out the participant’s obligations at a loss. To help mitigate market risk, EuroCCP collects collateral from clearing participants to cover for the probable loss during normal market conditions, together with contributions to the clearing fund to cover losses if a default occurred during extreme but plausible market conditions. Adverse movements in exchange rates affecting the value of obligations and collateral are factored into the calculation of the amount of collateral to be collected.
On a regular basis, 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. Any such effects to date have been minimal.
Interest Rate Risk
We have exposure to market risk for changes in interest rates relating to our cash and cash equivalents, financial investments, and indebtedness. As of December 31, 2020 and 2019, our cash and cash equivalents and financial investments were $337.8 million and $300.3 million, respectively, of which $128.0 million and $85.1 million is held outside of the United States in various foreign subsidiaries in 2020 and 2019, respectively. The remaining cash and cash equivalents and financial investments are denominated in U.S. dollars. We do not use our investment portfolio for trading or other speculative purposes. Due to the nature of these investments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates, assuming no change in the amount or composition of our cash and cash equivalents and financial investments.
As of December 31, 2020, we had $1,203.9 million in outstanding debt, of which $1,135.2 million relates to our Senior Notes, which bear interest at fixed interest rates. Changes in interest rates will have no impact on the interest we pay on fixed-rate obligations. The remaining amounts outstanding of $68.7 million relates to the Term Loan Agreement, which bears interest at fluctuating rates and, therefore, subjects us to interest rate risk. A hypothetical 100 basis point increase in interest rates relating to the amounts outstanding under the Term Loan Agreement as of December 31, 2020 would decrease annual pre-tax earnings by $0.7 million, assuming no change in the composition of our outstanding indebtedness. We are also exposed to changes in interest rates as a result of borrowings under our Revolving Credit Agreement and the EuroCCP Credit Facility, as these facilities bear interest at fluctuating rates. As of December 31, 2020, there were no outstanding borrowings under our Revolving Credit agreement and no outstanding borrowings under the EuroCCP Credit Facility. See Note 13 (“Debt”) to the consolidated financial statements for a discussion of debt agreements.
Liquidity Risk
We are exposed to liquidity risk under certain circumstances in relation to the cross-acceleration and cross-default provisions within the Term Loan Agreement and the Revolving Credit Agreement as a result of the Company, as guarantor, entering into the EuroCCP Credit Facility. A default of the Facility may allow lenders to accelerate any related drawn amounts and may result in the acceleration of the Company’s other outstanding debt to which a cross-acceleration or cross-default provision applies, which may limit the Company’s liquidity, business and financing activities. See Note 13 (“Debt”) to the consolidated financial statements and “Liquidity and Capital Resources” within Item 7 (“Management’s Discussion and Analysis”) for a discussion of debt agreements.
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Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Cboe Global Markets, Inc. and Subsidiaries
Reports of Independent Registered Public Accounting Firms 89
Consolidated Financial Statements:
Consolidated Balance Sheets 94
Consolidated Statements of Income 95
Consolidated Statements of Comprehensive Income 96