MARKETAXESS HOLDINGS

MKTX
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446.95USD +0.89%

MARKETAXESS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

07/24/2020 | 05:29pm

Forward-Looking Statements




This report contains certain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
may be identified by words such as "expects," "intends," "anticipates," "plans,"
"believes," "seeks," "estimates," "will," or words of similar meaning and
include, but are not limited to, statements regarding the outlook for our future
business and financial performance. Forward-looking statements are based on
management's current expectations and assumptions, which are subject to inherent
uncertainties, risks and changes in circumstances that are difficult to predict.
It is routine for our internal projections and expectations to change as the
year or each quarter in the year progresses, and therefore it should be clearly
understood that the internal projections and beliefs upon which we base our
expectations may change prior to the end of each quarter or the year. Although
these expectations may change, we undertake no obligation to revise or update
any forward-looking statements contained in this report, except to the extent
required by applicable law. Our company policy is generally to provide our
expectations only once per quarter, and not to update that information until the
next quarter. Actual future events or results may differ, perhaps materially
from those contained in the projections or forward-looking statements. Factors
that could cause or contribute to such differences include those discussed below
and elsewhere in this report, particularly in the section captioned Part II,
Item 1A, "Risk Factors."

Executive Overview

MarketAxess operates leading electronic trading platforms delivering expanded
liquidity opportunities, improved execution quality and significant cost savings
across global fixed-income markets. Over 1,700 institutional investor and
broker-dealer firms are active users of our patented trading technology,
accessing global liquidity on our platforms in U.S. investment-grade bonds, U.S.
high-yield bonds, U.S. Treasuries, emerging market debt, Eurobonds and other
fixed income securities. Through our Open Trading protocols, we execute bond
trades between and among institutional investor and broker-dealer clients in the
leading all-to-all anonymous trading environment for corporate bonds. We also
offer a number of trading-related products and services, including: Composite+
TM pricing and other market data products to assist clients with trading
decisions; auto-execution and other execution services for clients requiring
specialized workflow solutions; connectivity solutions that facilitate
straight-through processing; and technology services to optimize trading
environments. In addition, we provide a range of pre- and post-trade services,
including trade matching, trade publication, regulatory transaction reporting
and market and reference data across a range of fixed-income and other products.



Our platforms' innovative technology solutions are designed to increase the
number of potential trading counterparties and create a menu of solutions to
address different trade sizes and bond liquidity characteristics. Our
traditional request-for-quote ("RFQ") model allows our institutional investor
clients to simultaneously request competing, executable bids or offers from our
broker-dealer clients and execute trades with the broker-dealer of their choice
from among those that choose to respond. Our Open Trading protocols complement
our RFQ model by increasing the number of potential counterparties and improving
liquidity by allowing all participants to interact anonymously in an all-to-all
trading environment. Clients can use our auto-execution technology with both our
traditional RFQ and Open Trading protocols, thereby using rules-based execution
to connect to diverse sources of liquidity while reducing trading inefficiencies
and human errors. Leveraging the benefits of our Open Trading marketplace, we
recently launched Live Markets, an order book that will create a single view of
two-way, actionable prices for the most active bonds, including newly issued
debt, benchmark issues and news-driven securities. We expect that Open Trading
participants will improve their trading capacity through the Live Markets order
book, by more efficiently trading liquid names in larger size and accessing
integrated real-time market data, such as Composite+.


We derive revenue from commissions for trades executed on our platform,
information services, post-trade services and other revenues. Our expenses
consist of employee compensation and benefits, depreciation and amortization,
technology and communication expenses, professional and consulting fees,
occupancy, marketing and advertising, clearing costs and other general and
administrative expenses.




Our objective is to provide the leading global electronic trading platform for
fixed-income securities, connecting broker-dealers and institutional investors
more easily and efficiently, while offering a broad array of trading,
information and technology services to market participants across the trading
cycle. The key elements of our strategy are:


• to use our broad network of over 1,700 active institutional investor and



broker-dealer participants to drive more clients to our leading electronic



fixed-income trading platform;



• to increase the secondary market liquidity on our trading platforms by



deploying innovative technology solutions, such as our Open Trading



protocols, to increase the number of potential trading counterparties on



our platforms and to address different trade sizes, bond liquidity
characteristics and trading preferences;




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• to continue to develop innovative next-generation technologies that will



allow our clients to further automate and improve the performance of their



trading desks through increased liquidity, enhanced trading efficiencies



and the ability to identify trends within the bond market;



• to expand and strengthen our existing service, data and analytical



offerings throughout the trading cycle so that we are more fully
integrated into the workflow of our broker-dealer and institutional
investor clients; and



• to increase and supplement our internal growth by entering into strategic



alliances, or acquiring businesses or technologies that will enable us to



enter new markets, provide new products or services, or otherwise enhance



the value of our platform to our clients.



Critical Factors Affecting Our Industry and Our Company



Recent Developments - COVID-19 Pandemic






The global economy is currently experiencing a period of significant turmoil and
deteriorating economic conditions due to the outbreak of the COVID-19 pandemic
(the "Pandemic"). The steep drop in economic activity in the first quarter had
an immediate and substantial impact on global credit markets with sharp credit
spread widening. These conditions largely continued during the second quarter.
Credit yield spreads in U.S. corporate bonds, as measured by the Credit Suisse
Liquid U.S. Corporate Index
("LUCI"), increased from 1.1% over U.S Treasuries in
December 2019 to 1.5% in March 2020 and credit spread volatility in U.S.
corporate bonds, as measured by the LUCI Index, increased from 1.1% in December
2019
to 11.6% in March 2020. During the second quarter, both credit spreads and
credit spread volatility tightened dramatically and issuance of U.S. investment
grade and high-yield corporate bonds reached record levels. As a result, U.S.
credit trading volumes reached record levels in the second quarter, and
electronic trading market share on our platforms continued to increase. The
average daily trading volume of U.S. high-grade and high-yield corporate bonds
for the three months ended June 30, 2020, as measured by Trade Reporting and
Compliance Engine ("TRACE"), increased by 35.6% and 36.9%, respectively,
compared to three months ended June 30, 2019.



As a result of the Pandemic, we have experienced significant changes in our
daily operations. In mid-March, we successfully implemented a global work from
home mandate for all of our employees and, as a result, we have continued to
provide our trading platforms and other services to our clients without
interruption. In particular, we believe that Open Trading liquidity was
increasingly essential to the functioning of credit markets during the Pandemic,
and MarketAxess played a valuable role keeping our clients connected to the
market as traders moved from their centralized trading floors to home offices.
Since the outbreak of the Pandemic, we have helped over 10,000 individual users
connect to our trading platforms from their homes. Although we have
reprioritized certain technology projects due to the changing needs of our
clients in the current market environment, we expect to continue with our hiring
plans, capital expenditures and the expansion of our trading platforms and
services into new jurisdictions.



The global spread of the Pandemic is complex and rapidly-evolving, with
authorities around the world implementing numerous measures to try to contain
the coronavirus, such as travel bans and restrictions, social distancing,
quarantines, shelter in place, stay at home or lockdown orders and business
limitations and shutdowns. While we remain confident that we can continue to
maintain business continuity, serve our clients and provide efficient execution
in a virtual environment as necessary, we have re-opened our offices and have
allowed our employees to return to work where local regulations have permitted.
The re-opening of offices has created additional risks and operational
challenges. We also anticipate that the re-opening of our offices may require
investments in the design, implementation and enforcement of new workplace
safety protocols. These efforts may divert management attention, and the
protocols may create logistical challenges for our employees which could
adversely impact employee productivity and morale.



We believe that we have sufficient liquidity and flexibility to operate during
any future disruptions caused by the Pandemic. While we have experienced
increased market volumes and market share since the outbreak, we are cautious of
the damaging impact the Pandemic may have on the global economy in the
longer-term and the adverse impact that a global recession could have on
liquidity and market volumes in the global credit markets.



We expect that current cash and investment balances, in combination with cash
flows that are generated from operations, will be sufficient to meet our
liquidity needs and planned capital expenditure requirements for at least the
next twelve months. We have not drawn down on our existing line of credit
facility and we have not altered our capital management programs, including our
dividend and stock repurchase programs. We ended the quarter with a strong
balance sheet, no borrowings and with capital significantly in excess of our
regulatory requirements.



In response to the current economic conditions, the Federal Reserve Bank of New
York
has established a Secondary Market Corporate Credit Facility ("Facility")
that will lend money, on a recourse basis, to a special purpose vehicle ("SPV")
that will purchase in the secondary market corporate debt issued by eligible
issuers. The SPV will purchase in the secondary market eligible individual
corporate bonds, as well as eligible corporate bond portfolios in the form of
exchange-traded funds ("ETFs"). The



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combined size of the Facility and the related Primary Market Corporate Credit
Facility is expected to be up to $750 billion. It is not possible at this point
in time to predict the effects of the Facility on U.S. secondary credit market
volumes or our trading volumes.


Economic, Political and Market Factors




The global fixed-income securities industry is risky and volatile and is
directly affected by a number of economic, political and market factors that may
result in declining trading volume. These factors could have a material adverse
effect on our business, financial condition and results of operations. These
factors include, among others, credit market conditions, the current interest
rate environment, including the volatility of interest rates and investors'
forecasts of future interest rates, economic and political conditions in the
United States
, Europe and elsewhere, and the consolidation or contraction of our
broker-dealer and institutional investor clients.



Our results of operations are impacted by a number of factors, including market
conditions and the overall level of market volumes in our core products. In the
first half of 2020, estimated U.S. high-grade and U.S. high-yield market volume,
as reported by TRACE, increased 19.4% and 30.7%, respectively, compared to the
first half of 2019. We experienced increased trading volumes and market share in
the first half of 2020 due to the extreme market dislocation and volatility
caused by the Pandemic.


Competitive Landscape




The global fixed-income securities industry generally, and the electronic
financial services markets in which we engage in particular, are highly
competitive, and we expect competition to intensify in the future. Sources of
competition for us will continue to include, among others, bond trading
conducted directly between broker-dealers and their institutional investor
clients over the telephone or electronically and other multi-dealer or
all-to-all trading platforms. Competitors, including companies in which some of
our broker-dealer clients have invested, have developed or acquired electronic
trading platforms or have announced their intention to explore the development
of electronic platforms or information networks that may compete with us.

In general, we compete on the basis of a number of key factors, including, among
others, the liquidity provided on our platform, the magnitude and frequency of
price improvement enabled by our platform, total transaction costs and the
quality and speed of execution. We believe that our ability to grow volumes and
revenues will largely depend on our performance with respect to these factors.

Our competitive position is also enhanced by the familiarity and integration of
our broker-dealer and institutional investor clients with our electronic trading
platform and other systems. We have focused on the unique aspects of the credit
markets we serve in the development of our platform, working closely with our
clients to provide a system that is suited to their needs.


Regulatory Environment




Our business is subject to extensive regulations in the United States and
internationally, which may expose us to significant regulatory risk and cause
additional legal costs to ensure compliance. The existing legal framework that
governs the financial markets is periodically reviewed and amended, resulting in
enforcement of new laws and regulations that apply to our business. The current
regulatory environment in the United States may be subject to future legislative
changes, including those which may be driven by the current presidential
administration as it largely pursues policies of financial deregulation. In
2017, the SEC established a Fixed Income Market Structure Advisory Committee in
order to provide the SEC with diverse perspectives on the structure and
operations of the U.S. fixed-income markets, as well as advice and
recommendations on matters related to fixed-income market structure. The impact
of any reform efforts on us and our operations remains uncertain.

In addition, the U.K. ceased to be a member of the E.U. on January 31, 2020
(commonly referred to as "Brexit"), triggering a period during which the U.K.
will continue to observe applicable E.U. regulations through December 31, 2020
or any later extension date (the "Transition Period"). In preparation for
Brexit, we obtained authorizations from the Netherlands Authority for the
Financial Markets
for our subsidiaries in the Netherlands in 2019 and, during
the Transition Period, we are able to provide regulated services to our European
clients in reliance on the cross-border services passport held by our Dutch
subsidiaries. Brexit is expected to lead to legal uncertainty and potentially
divergent national laws and regulations as the U.K. determines which E.U. laws
to replace or replicate, which may impact our ability to comply with the
extensive government regulation to which we are subject. In addition, the cost
and complexity of operating across increasingly divergent regulatory regimes
could increase following Brexit.

Compliance with regulations may require us to dedicate additional financial and
operational resources, which may adversely affect our profitability. However, we
believe new regulations may also increase demand for our platforms and we
believe we are well positioned to benefit from those regulatory changes that
cause market participants to seek electronic platforms that meet the various
regulatory requirements and help them comply with their regulatory obligations.



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Technology Environment




We must continue to enhance and improve our electronic trading platform. The
electronic financial services industry is characterized by increasingly complex
systems and infrastructures and new business models. Our future success will
depend on our ability to enhance our existing products and services, develop
and/or license new products and technologies that address the increasingly
sophisticated and varied needs of our existing and prospective broker-dealer and
institutional investor clients and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
We plan to continue to focus on technology infrastructure initiatives and
continually improve our platforms to further enhance our leading market
position. We expect that our transition to agile software development processes
will help us continue to be a market leader in developing the technology
solutions for our clients' trading needs.


We experience cyber-attacks and attempted security breaches. Cyber security
incidents could impact revenue and operating income and increase costs. We
therefore continue to make investments, which may result in increased costs, to
strengthen our cybersecurity measures.



Trends in Our Business




The majority of our revenue is derived from commissions for transactions
executed on our platforms between and among our institutional investor and
broker-dealer clients and monthly distribution fees. We believe that there are
five key variables that impact the notional value of such transactions on our
platforms and the amount of commissions and distribution fees earned by us:




• the number of participants on our platforms and their willingness to originate



transactions through the platforms;



• the frequency and competitiveness of the price responses by participants on



our platforms;



• the number of markets that are available for our clients to trade on our



platforms;



• the overall level of activity in these markets; and



• the level of commissions that we collect for trades executed through the



platforms.





We believe that overall corporate bond market trading volume is affected by
various factors including the absolute levels of interest rates, the direction
of interest rate movements, the level of new issues of corporate bonds and the
volatility of corporate bond spreads versus U.S. Treasury securities. Because a
significant percentage of our revenue is tied directly to the volume of
securities traded on our platforms, it is likely that a general decline in
trading volumes, regardless of the cause of such decline, would reduce our
revenues and have a significant negative impact on profitability.


Commission Revenue




Commissions are generally calculated as a percentage of the notional dollar
volume of bonds traded on our platforms and vary based on the type, size, yield
and maturity of the bond traded. Under our disclosed trading transaction fee
plans, bonds that are more actively traded or that have shorter maturities are
generally charged lower commissions, while bonds that are less actively traded
or that have longer maturities generally command higher commissions.

For Open Trading trades that we execute between and among institutional investor
and broker-dealer clients on a matched principal basis by serving as
counterparty to both the buyer and the seller, we earn our commission through
the difference in price between the two trades. For U.S. Treasury matched
principal trades, commissions are invoiced and recorded on a monthly basis.

U.S. High-Grade Corporate Bond Commissions. Our U.S. high-grade corporate bond
fee plans generally incorporate variable transaction fees and fixed distribution
fees billed to our broker-dealer clients on a monthly basis. Certain dealers
participate in fee programs that do not contain monthly distribution fees and
instead incorporate additional per transaction execution fees and minimum
monthly fee commitments. Under these fee plans, we electronically add the
transaction fee to the spread quoted by the broker-dealer client. The U.S.
high-grade transaction fee is generally designated in basis points in yield and,
as a result, is subject to fluctuation depending on the duration of the bond
traded. The average U.S. high-grade fees per million may vary in the future due
to changes in yield, years-to-maturity and nominal size of bonds traded on our
platforms. Distribution fees include any unused monthly fee commitments under
our variable fee plans.



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Other Credit Commissions. Other credit includes Eurobonds, emerging markets
bonds, high-yield bonds, municipal bonds and leveraged loans. Commissions for
other credit products generally vary based on the type of the instrument traded
using standard fee schedules. Our high-yield fee plan structure is similar to
our U.S. high-grade fee plans. Certain dealers participate in a high-yield fee
plan that incorporates a variable transaction fee and fixed distribution fee,
while other dealers participate in a plan that does not contain monthly
distribution fees and instead incorporates additional per transaction execution
fees and minimum monthly fee commitments. The average other credit fees per
million may vary in the future due to changes in product mix or trading
protocols.

Rates Commissions. Rates includes U.S. Treasury, U.S. agency, European
government bonds and credit derivatives. Commissions for rates products
generally vary based on the type of the instrument traded. U.S. Treasury fee
plans are typically volume tiered and can vary based on the trading protocol.
The average rates fee per million may vary in the future due to changes in
product mix or trading protocols.


We anticipate that average fees per million may change in the future.
Consequently, past trends in commissions are not necessarily indicative of
future commissions.



Information Services




We generate revenue from data licensed to our broker-dealer clients,
institutional investor clients and data-only subscribers; professional and
consulting services; technology software licenses; and maintenance and support
services. These revenues are either for subscription-based services transferred
over time, and may be net of volume-based discounts, or one-time services.
Revenues for services transferred over time are recognized ratably over the
contract period while revenues for services transferred at a point in time are
recognized in the period the services are provided. Customers are generally
billed monthly, quarterly, or annually; revenues billed in advance are deferred
and recognized ratably over the contract period.


Post-trade Services




We generate revenue from regulatory transaction reporting, trade publication and
trade matching services. Customers are generally billed monthly in arrears and
revenue is recognized in the period that the transactions are processed.
Revenues billed in advance are deferred and recognized ratably over the contract
period. We also generate one-time implementation fees for onboarding clients
which are invoiced and recognized in the period the implementation is complete.


Other Revenue



Other revenue includes revenue generated from telecommunications line charges to
broker-dealer clients.




Expenses


In the normal course of business, we incur the following expenses:




Employee Compensation and Benefits. Employee compensation and benefits is our
most significant expense and includes employee salaries, stock-based
compensation costs, other incentive compensation, employee benefits and payroll
taxes.

Depreciation and Amortization. We depreciate our computer hardware and related
software, office hardware and furniture and fixtures and amortize our
capitalized software development costs on a straight-line basis over three to
seven years. We amortize leasehold improvements on a straight-line basis over
the lesser of the life of the improvement or the remaining term of the lease.
Intangible assets with definite lives, including purchased technologies,
customer relationships and other intangible assets, are amortized over their
estimated useful lives, which range from one to 15 years, using either a
straight-line or accelerated amortization method based on the pattern of
economic benefit that we expect to realize from such assets. Intangible assets
are assessed for impairment when events or circumstances indicate a possible
impairment.

Technology and Communications. Technology and communications expense consists
primarily of costs relating to maintenance on software and hardware, our
internal network connections, data center hosting costs and data feeds provided
by outside vendors or service providers. The majority of our broker-dealer
clients have dedicated high-speed communication lines to our network in order to
provide fast data transfer. We charge our broker-dealer clients a monthly fee
for these connections, which is recovered against the relevant expenses we
incur.

Professional and Consulting Fees. Professional and consulting fees consist
primarily of accounting fees, legal fees and fees paid to information technology
and other consultants for services provided for the maintenance of our trading
platforms, information and post-trade services products and other services.



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Occupancy. Occupancy costs consist primarily of office and equipment rent,
utilities and commercial rent tax.




Marketing and Advertising. Marketing and advertising expense consists primarily
of print and other advertising expenses we incur to promote our products and
services. This expense also includes costs associated with attending or
exhibiting at industry-sponsored seminars, conferences and conventions, and
travel and entertainment expenses incurred by our sales force to promote our
trading platforms, information services and post-trade services.


Clearing Costs. Clearing costs consist of fees that we are charged by
third-party clearing brokers for the clearing and settlement of matched
principal trades and regulatory reporting fees.



General and Administrative. General and administrative expense consists
primarily of general travel and entertainment, board of directors' expenses,
charitable contributions, provision for doubtful accounts and various state
franchise and U.K. value-added taxes.




Expenses may grow in the future, notably in employee compensation and benefits
as we increase headcount to support investment in new products and geographic
expansion, depreciation and amortization due to increased investment in new
products and enhancements to our trading platforms, and technology and
communication costs. Expenses may also grow due to acquisitions.


Other Income (Expense)



Investment Income. Investment income consists of income earned on our
investments.




Other, Net. Other, net consists of unrealized gains or losses on trading
security investments, realized gains or losses on investments, foreign currency
transaction gains or losses, investment advisory fees and other miscellaneous
revenues and expenses.


Critical Accounting Policies and Estimates




This Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States
, also referred to as U.S. GAAP. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the reported amounts of income
and expenses during the reporting periods. We base our estimates and judgments
on historical experience and on various other factors that we believe are
reasonable under the circumstances. Actual results may differ from these
estimates under varying assumptions or conditions. Note 2 of the Notes to our
Consolidated Financial Statements includes a summary of the significant
accounting policies and methods used in the preparation of our Consolidated
Financial Statements. There were no significant changes to our critical
accounting policies and estimates during the six months ended June 30, 2020, as
compared to those we disclosed in Management's Discussion and Analysis of
Financial Condition and Results of Operations included in our Annual Report on
Form 10-K for the year ended December 31, 2019.


Recent Accounting Pronouncements




See Note 2 to the Consolidated Financial Statements for a discussion on recent
accounting pronouncements, including but not limited to the Company's adoption
of the new U.S. GAAP cloud computing arrangements standard on a prospective
basis effective July 1, 2019.


Segment Results




We operate electronic platforms for the trading of fixed-income securities and
provide related data, analytics, compliance tools and post-trade services. We
consider our operations to constitute a single business segment because of the
highly integrated nature of these product and services, the financial markets in
which we compete and our worldwide business activities. We believe that results
by geographic region or client sector are not necessarily meaningful in
understanding our business. See Note 14 to the Consolidated Financial Statements
for certain geographic information about our business required by U.S. GAAP.


Results of Operations



Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019



On November 1, 2019, we completed our acquisition of LiquidityEdge, now
operating as MarketAxess Rates, which enabled us to expand our trading
capabilities to include U.S. Treasuries. For additional information regarding
this acquisition, see Note 5 to the Consolidated Financial Statements.



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The following table summarizes our financial results for the three months ended
June 30, 2020 and 2019. Results for the three months ended June 30, 2020 include
MarketAxess Rates related revenue of $3.2 million and expenses of $3.8 million,
including amortization of acquired intangibles expense of $0.6 million:

Three Months Ended June 30,
2020 2019 $ Change % Change
($ in thousands, except per share amounts)
Revenues $ 184,795 $ 125,490 $ 59,305 47.3 %
Expenses 80,660 64,613 16,047 24.8
Operating income 104,135 60,877 43,258 71.1
Other income 268 2,032 (1,764 ) (86.8 )
Income before income taxes 104,403 62,909 41,494 66.0
Provision for income taxes 20,549 14,804 5,745 38.8
Net income $ 83,854 $ 48,105 $ 35,749 74.3 %


Net income per common share - Diluted $ 2.20 $ 1.27 $ 0.93


73.2 %




A 3.4% change in the average foreign currency exchange rates of the British
pound sterling compared to the U.S. dollar from the three months ended June 30,
2019
had the effect of decreasing revenues and expenses by $0.7 million and $0.6
million
, respectively, for the three months ended June 30, 2020.







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Revenues



Our revenues for the three months ended June 30, 2020 and 2019, and the
resulting dollar and percentage changes, were as follows:






Three Months Ended June 30,
2020 2019
($ in thousands)
% of % of $ %
$ Revenues $ Revenues Change Change
Commissions $ 172,092 93.1 % $ 114,124 90.9 % $ 57,968 50.8 %
Information services 8,427 4.6 7,156 5.7 1,271 17.8
Post-trade services 4,054 2.2 3,956 3.2 98 2.5
Other 222 0.1 254 0.2


(32 ) (12.6 )
Total revenues $ 184,795 100.0 % $ 125,490 100.0 % $ 59,305 47.3 %



Commissions. Our commission revenues for the three months ended June 30, 2020
and 2019, and the resulting dollar and percentage changes, were as follows:






Three Months Ended June 30,
$ %
2020 2019 Change Change
($ in thousands)
Variable transaction fees
U.S. high-grade $ 75,208 $ 42,914 $ 32,294 75.3 %
Other credit 66,977 47,233 19,744 41.8
Total credit 142,185 90,147 52,038 57.7
Rates 3,846 615 3,231 525.4
Total variable transaction fees 146,031 90,762 55,269 60.9
Distribution fees
U.S. high-grade 19,635 17,483 2,152 12.3
Other credit 6,329 5,774 555 9.6
Total credit 25,964 23,257 2,707 11.6
Rates 97 105 (8 ) (7.6 )
Total distribution fees 26,061 23,362 2,699 11.6
Total commissions $ 172,092 $ 114,124 $ 57,968 50.8 %



U.S. high-grade variable transaction fees increased $32.3 million due to a 56.2%
increase in trading volume and a 12.2% increase in average variable transaction
fee per million. Other credit variable transaction fees increased $19.7 million
due to a 31.7% increase in trading volume and a 7.7% increase in the average
variable transaction fee per million. Open Trading volume totaled $243.8 billion
during the three months ended June 30, 2020, up 86.5%, and represented 27.5% and
20.6% of commission revenue for the three months ended June 30, 2020 and 2019,
respectively. The 525.4% increase in variable transaction fees for rates was
attributable to the inclusion of U.S. Treasuries trading volume and commissions
from LiquidityEdge, which was acquired in November 2019.



U.S. high-grade and other credit distribution fees increased $2.2 million and
$0.6 million, respectively, mainly due to the migration of certain dealers from
all-variable fee plans to plans that incorporate a monthly distribution fee.





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Our trading volumes for the three months ended June 30, 2020 and 2019 were as
follows:



Three Months Ended June 30,
$ %
2020 2019 Change Change
($ in millions)
Trading volume data
U.S. high-grade - fixed rate $ 398,006 $ 249,025 $ 148,981 59.8 %
U.S. high-grade - floating rate 16,574 16,335 239 1.5
Total U.S. high grade 414,580 265,360 149,220 56.2
Other credit 327,266 248,503 78,763 31.7
Total credit $ 741,846 $ 513,863 $ 227,983 44.4 %

Rates 955,594 13,174 942,420 N/M

Number of U.S. Trading Days 63 63
Number of U.K. Trading Days 61 61



For volume reporting purposes, transactions in foreign currencies are converted
to U.S. dollars at average monthly rates. The 56.2% increase in our U.S.
high-grade volume was principally due to an increase in our estimated market
share coupled with growth in overall market volume. Our estimated market share
of total U.S. high-grade corporate bond volume increased to 21.5% for the three
months ended June 30, 2020 from 18.7% for the three months ended June 30, 2019.
Estimated U.S. high-grade TRACE volume increased by 35.6% to $1.9 trillion for
the three months ended June 30, 2020.

Other credit volumes increased by 31.7% due to increases of 84.9% in high-yield
bond volume, 17.3% in Eurobonds volume, and 14.4% in emerging markets bond
volume as a result of increases in estimated market share and estimated market
volumes. Estimated high-yield, TRACE and Trax® reported emerging markets market
volumes and Eurobonds were up 36.9%, 3.3% and 3.1%, respectively.


Our average variable transaction fee per million for the three months ended June
30, 2020
and 2019 was as follows:






Three Months Ended June 30,
2020 2019 $ Change % Change
Average variable transaction fee
per million
U.S. high-grade - fixed rate $ 186.67 $ 168.05 $ 18.62 11.1 %
U.S. high-grade - floating rate 55.06 65.22 (10.16 ) (15.6 )
Total U.S. high-grade 181.41 161.72 19.69 12.2
Other credit 204.66 190.07 14.59 7.7
Total credit 191.66 175.43 16.23 9.3

Rates 4.02 46.69 (42.67 ) (91.4 )



Total U.S. high-grade average variable transaction fee per million increased
12.2% to $181 per million for the three months ended June 30, 2020 mainly due to
an increase in the duration of bonds traded on our platforms. Other credit
average variable transaction fee per million increased 7.7% to $205 per million
for the three months ended June 30, 2020 mainly due to a larger percentage of
trading volume in high-yield bonds that command higher fees per million. The
significant decrease in the average variable transaction fee per million for
rates products was primarily attributable to the inclusion of U.S. Treasuries
trading volumes that command lower fees per million.


Information Services. Information services revenue increased $1.3 million for
the three months ended June 30, 2020 principally due to new data contracts.



Post-Trade Services. Post-trade services revenue increased $0.1 million for the
three months ended June 30, 2020.



30

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Expenses




The following table summarizes our expenses for the three months ended June 30,
2020
and 2019. Expenses for the three months ended June 30, 2020 include $3.8
million
of expenses related to MarketAxess Rates, including amortization of
acquired intangibles expense of $0.6 million.



Three Months Ended June 30,
$ %
2020 2019 Change Change
($ in thousands)
Expenses



Employee compensation and benefits $ 41,636 $ 32,623 $ 9,013



27.6 %
Depreciation and amortization 8,305 6,345 1,960 30.9
Technology and communications 8,592 6,474 2,118 32.7



Professional and consulting fees 8,065 6,296 1,769



28.1
Occupancy 3,286 2,798 488 17.4
Marketing and advertising 1,810 3,667 (1,857 ) (50.6 )
Clearing costs 5,713 2,610 3,103 118.9
General and administrative 3,253 3,800 (547 ) (14.4 )
Total expenses $ 80,660 $ 64,613 $ 16,047 24.8 %



Employee compensation and benefits increased by $9.0 million, primarily due to
higher employee incentive compensation of $5.8 million, which is tied to
operating performance, and an increase of $3.5 million in salaries, taxes and
benefits on higher employee headcount.

Depreciation and amortization increased by $2.0 million primarily due to higher
amortization of software development costs of $1.1 million and amortization of
acquired intangibles expense of $0.6 million. For the three months ended June
30, 2020
and 2019, $5.0 million and $5.5 million, respectively, of equipment
purchases and leasehold improvements and $6.2 million and $4.1 million,
respectively, of software development costs were capitalized.

Technology and communications expenses increased by $2.1 million primarily due
to higher cloud hosting costs of $0.9 million, IT license and support costs of
$0.7 million and U.S. Treasury platform licensing costs of $0.7 million.


Professional and consulting fees increased $1.8 million mainly due to higher
recruiting fees of $1.3 million.



Marketing and advertising expense decreased $1.9 million due to reduced sales
related travel and entertainment activities as a result of the pandemic.




Clearing costs increased by $3.1 million primarily due to $2.1 million of
additional clearing expenses associated with higher Open Trading volume and $1.0
million
of clearing expenses associated with U.S. Treasuries matched principal
transactions. Clearing costs as a percentage of Open Trading matched principal
trading revenue from credit products decreased from 11.1% to 9.9%.


General and administrative expenses decreased $0.5 million as a result of lower
general travel and entertainment expense.



Other Income (Expense)



Our other income for the three months ended June 30, 2020 and 2019, and the
resulting dollar and percentage changes, were as follows:






Three Months Ended June 30,
$ %
2020 2019 Change Change
($ in thousands)
Investment income $ 714 $ 2,096 $ (1,382 ) (65.9 ) %
Other, net (446 ) (64 ) (382 ) 596.9
Total other income $ 268 $ 2,032 $ (1,764 ) (86.8 ) %





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Investment income decreased by $1.4 million primarily due to lower investment
balances, due in part to the $103.9 million of cash paid for the LiquidityEdge
acquisition in November 2019, and a decrease in interest rates.


Other, net decreased by $0.4 million primarily due to changes in unrealized and
realized gains (losses) on trading securities.



Provision for Income Taxes



The provision for income taxes and effective tax rate for the three months ended
June 30, 2020 and 2019 were as follows:






Three Months Ended June 30,
$ %
2020 2019 Change Change
($ in thousands)



Provision for income taxes $ 20,549 $ 14,804 $ 5,745 38.8 %




Effective tax rate 19.7 % 23.5 %



The income tax provision reflected $5.7 million and $0.4 million of excess tax
benefits related to share-based compensation awards that vested or were
exercised during the three months ended June 30, 2020 and 2019, respectively.
Our consolidated effective tax rate can vary from period to period depending on
geographic mix of our earnings, changes in tax legislation and tax rates and the
amount and timing of excess tax benefits related to share-based payments, among
other factors.




Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019




The following table summarizes our financial results for the six months ended
June 30, 2020 and 2019. Results for the six months ended June 30, 2020 include
MarketAxess Rates related revenue of $8.0 million and expenses of $8.8 million,
including amortization of acquired intangibles expense of $1.2 million:



Six Months Ended June 30,
2020 2019 $ Change % Change
($ in thousands, except per share amounts)

Revenues $ 353,773 $ 249,981 $ 103,792 41.5 %
Expenses 158,549 125,915 32,634 25.9
Operating income 195,224 124,066 71,158 57.4
Other income 881 4,063 (3,182 ) -78.3
Income before income taxes 196,105 128,129 67,976 53.1
Provision for income taxes 37,435 27,502 9,933 36.1
Net income $ 158,670 $ 100,627 $ 58,043 57.7 %


Net income per common share - Diluted $ 4.16 $ 2.66 $ 1.50


56.4 %




A 2.9% change in the average foreign currency exchange rates of the British
pound sterling compared to the U.S. dollar from the six months ended June 30,
2019
had the effect of decreasing revenues and expenses by $1.3 million and $0.9
million
, respectively, for the six months ended June 30, 2020.



32

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Revenues



Our revenues for the six months ended June 30, 2020 and 2019, and the resulting
dollar and percentage changes, were as follows:






Six Months Ended June 30,
2020 2019
($ in thousands)
% of % of $ %
$ Revenues $ Revenues Change Change
Commissions $ 328,046 92.7 % $ 226,884 90.8 % $ 101,162 44.6 %
Information services 17,069 4.8 14,522 5.8 2,547 17.5
Post-trade services 8,207 2.3 8,056 3.1 151 1.9
Other 451 0.2 519 0.3


(68 ) (13.1 )
Total revenues $ 353,773 100.0 % $ 249,981 100.0 % $ 103,792 41.5 %



Commissions. Our commission revenues for the six months ended June 30, 2020 and
2019, and the resulting dollar and percentage changes, were as follows:






Six Months Ended June 30,
$ %
2020 2019 Change Change
($ in thousands)
Variable transaction fees
U.S. high-grade $ 133,178 $ 85,415 $ 47,763 55.9 %
Other credit 132,587 93,267 39,320 42.2
Total credit 265,765 178,682 87,083 48.7
Rates 9,432 1,172 8,260 704.8



Total variable transaction fees 275,197 179,854 95,343



53.0
Distribution fees
U.S. high-grade 39,609 35,461 4,148 11.7
Other credit 12,987 11,332 1,655 14.6
Total credit 52,596 46,793 5,803 12.4
Rates 253 237 16 6.8
Total distribution fees 52,849 47,030 5,819 12.4
Total commissions $ 328,046 $ 226,884 $ 101,162 44.6 %




U.S. high-grade variable transaction fees increased $47.8 million due to a 37.2%
increase in trading volume and a 13.7% increase in average variable transaction
fee per million. Other credit variable transaction fees increased $39.3 million
due to a 36.0% increase in trading volume and a 4.5% increase in the average
variable transaction fee per million. Open Trading volume totaled $452.4 billion
during the six months ended June 30, 2020, up 70.7%, and represented 26.7% and
20.5% of commission revenue for the six months ended June 30, 2020 and 2019,
respectively. The 704.8% increase in variable transaction fees for rates was
attributable to the inclusion of U.S. Treasuries trading volume and commissions
from LiquidityEdge, which was acquired in November 2019.

U.S. high-grade and other credit distribution fees increased $4.1 million and
$1.7 million, respectively, mainly due to the migration of certain dealers from
all-variable fee plans to plans that incorporate a monthly distribution fee.











33



--------------------------------------------------------------------------------


Our trading volumes for the six months ended June 30, 2020 and 2019 were as
follows:



Six Months Ended June 30,
$ %
2020 2019 Change Change
($ in millions)
Trading volume data
U.S. high-grade - fixed rate $ 710,194 $ 508,858 $ 201,336 39.6 %
U.S. high-grade - floating rate 34,380 33,912 468 1.4
Total U.S. high grade 744,574 542,770 201,804 37.2
Other credit 657,019 482,994 174,025 36.0
Total credit $ 1,401,593 $ 1,025,764 $ 375,829 36.6 %

Rates 2,400,472 27,450 2,373,022 N/M

Number of U.S. Trading Days 125 124
Number of U.K. Trading Days 125 124





For volume reporting purposes, transactions in foreign currencies are converted
to U.S. dollars at average monthly rates. The 37.2% increase in our U.S.
high-grade volume was principally due to an increase in our estimated market
share coupled with growth in overall market volume. Our estimated market share
of total U.S. high-grade corporate bond volume increased to 20.8% for the six
months ended June 30, 2020 from 18.1% for the six months ended June 30, 2019.
Estimated U.S. high-grade TRACE volume increased by 19.4% to $3.6 trillion for
the six months ended June 30, 2020.

Other credit volumes increased by 36.0% due to increases of 77.8% in high-yield
bond volume, 24.8% in Eurobonds volume, and 21.9% in emerging markets bond
volume as a result of increases in estimated market share and estimated market
volumes. Estimated high-yield, Eurobonds and TRACE and Trax® reported emerging
markets market volumes were up 30.7%, 18.3% and 11.7%, respectively.


Our average variable transaction fee per million for the six months ended June
30, 2020
and 2019 was as follows:






Six Months Ended June 30,
2020 2019 $ Change % Change
Average variable transaction fee
per million
U.S. high-grade - fixed rate $ 185.04 $ 163.15 $ 21.89 13.4 %
U.S. high-grade - floating rate 51.38 70.65 (19.27 ) (27.3 )
Total U.S. high-grade 178.86 157.37 21.49 13.7
Other credit 201.80 193.10 8.70 4.5
Total credit 189.62 174.19 15.42 8.9

Rates 3.93 42.69 (38.76 ) (90.8 )


Total U.S. high-grade average variable transaction fee per million increased
13.7% to $179 per million for the six months ended June 30, 2020 mainly due to
an increase in the duration of bonds traded on our platforms. Other credit
average variable transaction fee per million increased 4.5% to $202 per million
for the six months ended June 30, 2020 mainly due to a larger percentage of
trading volume in high-yield bonds that command higher fees per million. The
significant decrease in the average variable transaction fee per million for
rates products was primarily attributable to the inclusion of U.S. Treasuries
trading volumes that command lower fees per million.


Information Services. Information services revenue increased $2.5 million for
the six months ended June 30, 2020 principally due to new data contracts.



34

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Post-Trade Services. Post-trade services revenue increased $0.2 million for the
six months ended June 30, 2020.



Expenses



The following table summarizes our expenses for the six months ended June 30,
2020
and 2019. Expenses for the six months ended June 30, 2020 include $8.8
million
of expenses related to MarketAxess Rates, including amortization of
acquired intangibles expense of $1.2 million.






Six Months Ended June 30,
$ %
2020 2019 Change Change
($ in thousands)
Expenses



Employee compensation and benefits $ 82,830 $ 65,281 $ 17,549



26.9 %
Depreciation and amortization 16,372 12,427 3,945 31.7
Technology and communications 16,753 12,256 4,497 36.7



Professional and consulting fees 13,740 12,127 1,613



13.3
Occupancy 6,760 5,747 1,013 17.6
Marketing and advertising 4,485 5,966 (1,481 ) (24.8 )
Clearing costs 11,223 5,187 6,036 116.4
General and administrative 6,386 6,924 (538 ) (7.8 )
Total expenses $ 158,549 $ 125,915 $ 32,634 25.9 %




Employee compensation and benefits increased by $17.5 million, primarily due to
higher employee incentive compensation of $8.9 million, which is tied to
operating performance, an increase of $7.5 million in salaries, taxes and
benefits on higher employee headcount, and a $1.1 million increase in
stock-based compensation.




Depreciation and amortization increased by $3.9 million primarily due to higher
amortization of software development costs of $2.1 million and amortization of
acquired intangibles expense of $1.2 million. For the six months ended June 30,
2020
and 2019, $9.3 million and $6.1 million, respectively, of equipment
purchases and leasehold improvements and $13.0 million and $7.3 million,
respectively, of software development costs were capitalized.

Technology and communications expenses increased by $4.5 million primarily due
to higher cloud hosting costs of $1.4 million, IT license and support costs of
$1.4 million and U.S. Treasury platform licensing costs of $1.8 million.

Professional and consulting fees increased $1.6 million mainly due to higher
recruiting fees of $1.0 million and consulting expense of $0.4 million related
to our self-clearing initiative.


Marketing and advertising expense decreased $1.5 million due to reduced sales
related travel and entertainment activities as a result of the pandemic.




Clearing costs increased by $6.0 million primarily due to $3.4 million of
clearing expenses associated with higher Open Trading volume and $2.6 million of
clearing expenses associated with U.S. Treasuries matched principal
transactions. Clearing costs as a percentage of Open Trading matched principal
trading revenue from credit products decreased from 11.2% to 9.8%.


General and administrative expenses decreased $0.5 million as a result of lower
general travel and entertainment expense.



Other Income (Expense)



Our other income for the six months ended June 30, 2020 and 2019, and the
resulting dollar and percentage changes, were as follows:



35

--------------------------------------------------------------------------------





Six Months Ended June 30,
$ %
2020 2019 Change Change
($ in thousands)



Investment income $ 1,983 $ 4,085 $ (2,102 ) (51.5 ) %
Other income, net (1,102 ) (22 ) (1,080 ) 4,909.1
Total other income $ 881 $ 4,063 $ (3,182 ) (78.3 ) %






Investment income decreased by $2.1 million primarily due to lower investment
balances, due in part to the $103.9 million of cash paid for the LiquidityEdge
acquisition in November 2019, and a decrease in interest rates.


Other, net decreased by $1.1 million primarily due to changes in unrealized and
realized gains (losses) on trading securities.



Provision for Income Taxes



The provision for income taxes and effective tax rate for the six months ended
June 30, 2020 and 2019 were as follows:






Six Months Ended June 30,
$ %
2020 2019 Change Change
($ in thousands)



Provision for income taxes $ 37,435 $ 27,502 $ 9,933 36.1 %




Effective tax rate 19.1 % 21.5 %



The income tax provision reflected $12.0 million and $3.5 million of excess tax
benefits related to share-based compensation awards that vested or were
exercised during the six months ended June 30, 2020 and 2019, respectively. Our
consolidated effective tax rate can vary from period to period depending on
geographic mix of our earnings, changes in tax legislation and tax rates and the
amount and timing of excess tax benefits related to share-based payments, among
other factors.



36



--------------------------------------------------------------------------------



Liquidity and Capital Resources




During the past three years, we have met our funding requirements through cash
on hand and internally generated funds. Cash and cash equivalents and
investments totaled $535.5 million at June 30, 2020. Our investments are
invested in investment grade securities. We limit the amounts that can be
invested in any single issuer and invest in short- to intermediate-term
instruments whose fair values are less sensitive to interest rate changes. We
believe our investments as of June 30, 2020 that were in an unrealized loss
position were not other-than-temporarily impaired, nor has any event occurred
subsequent to that date, including the recent developments related to the
Pandemic, that would indicate any other-than-temporary impairment.

We are party to an amended and restated Credit Agreement that provides for
revolving loans and letters of credit up to an aggregate of $100.0 million. The
Credit Agreement matures in October 2020. Subject to satisfaction of certain
specified conditions, we are permitted to upsize the borrowing capacity under
the Credit Agreement by an additional $50.0 million. As of June 30, 2020, we had
$1.0 million in letters of credit outstanding and $99.0 million in available
borrowing capacity under the Credit Agreement.


Our cash flows were as follows:






Six Months Ended June 30,
$ %
2020 2019 Change Change
($ in thousands)



Net cash provided by operating activities $ 225,222 $ 109,102 $ 116,120


106.4 %
Net cash provided by (used in) investing
activities 12,931 (10,736 ) 23,667 (220.4 )
Net cash (used in) financing activities (83,995 ) (58,532 ) (25,463 ) 43.5
Effect of exchange rate changes on cash and
cash equivalents (3,678 ) 21 (3,699 ) (17,614.3 )
Net increase for the period $ 150,480 $ 39,855 $ 110,625 277.6 %




The $116.1 million increase in net cash provided by operating activities was
primarily due to increases in net income of $58.0 million, net sales and
maturities of trading investments of $54.4 million and depreciation and
amortization of $3.9 million.



The $23.7 million increase in net cash provided by investing activities was
primarily due to a decrease in net purchases of available-for-sale investments
of $33.0 million, offset by an increase in capital expenditures of $8.8 million.



The $25.5 million increase in net cash (used in) financing activities was
principally due to increases in withholding tax payments on restricted stock
vesting and stock option exercises of $15.7 million, cash dividends paid on
common stock of $7.3 million and repurchases of common stock of $2.6 million.



Past trends of cash flows are not necessarily indicative of future cash flow
levels. A decrease in cash flows may have a material adverse effect on our
liquidity, business and financial condition.



Non-GAAP Financial Measures




In addition to reporting financial results in accordance with GAAP, we use
certain non-GAAP financial measures: earnings before interest, taxes,
depreciation and amortization ("EBITDA") and free cash flow ("FCF"). We define
FCF as cash flow from operating activities excluding the net change in trading
investments less expenditures for furniture, equipment and leasehold
improvements and capitalized software development costs. We believe these
non-GAAP financial measures, when taken into consideration with the
corresponding GAAP financial measures, are important in understanding our
operating results. EBITDA and FCF are not measures of financial performance or
liquidity under GAAP and therefore should not be considered an alternative to
net income or cash flow from operating activities as an indicator of operating
performance or liquidity. We believe that EBITDA and FCF provide useful
additional information concerning profitability of our operations and business
trends and the cash flow available to pay dividends, repurchase stock and meet
working capital requirements.











37



--------------------------------------------------------------------------------


The table set forth below presents a reconciliation of our net income to EBITDA:

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
($ in thousands)
Net income $ 83,854 $ 48,105 $ 158,670 $ 100,627
Add back:
Interest expense - - - -
Provision for income taxes 20,549 14,804 37,435 27,502
Depreciation and amortization 8,305 6,345 16,372 12,427
Earnings before interest, taxes,
depreciation and amortization $ 112,708 $ 69,254 $ 212,477 $ 140,556




The table set forth below presents a reconciliation of our cash flow from
operating activities to FCF:



Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
($ in thousands)
Net cash provided by operating
activities $ 104,853 $ 69,733 $ 225,222 $ 109,102
Exclude: Net change in trading
investments (6,880 ) (2,839 ) (63,274 ) (8,854 )
Less: Purchases of furniture,
equipment and leasehold improvements (4,973 ) (5,465 ) (9,264 ) (6,114 )
Less: Capitalization of software
development costs (6,225 ) (4,126 ) (13,003 ) (7,310 )
Free Cash Flow $ 86,775 $ 57,303 $ 139,681 $ 86,824




Other Factors Influencing Liquidity and Capital Resources




We believe that our current resources are adequate to meet our liquidity needs
and capital expenditure requirements for at least the next 12 months. However,
our future liquidity and capital requirements will depend on a number of
factors, including expenses associated with product development and expansion
and new business opportunities that are intended to further diversify our
revenue stream. We may also acquire or invest in technologies, business ventures
or products that are complementary to our business. In the event we require any
additional financing, it will take the form of equity or debt financing. Any
additional equity offerings may result in dilution to our stockholders. Any debt
financings, if available at all, may involve restrictive covenants with respect
to dividends, issuances of additional capital and other financial and
operational matters related to our business.

Certain of our U.S. subsidiaries are registered as a broker-dealer or a SEF and
therefore are subject to the applicable rules and regulations of the SEC, FINRA
and the CFTC. These rules contain minimum net capital requirements, as defined
in the applicable regulations, and also may require that a significant part of
the registrants' assets be kept in relatively liquid form. Certain of our
foreign subsidiaries are regulated by the FCA in the U.K. or other foreign
regulators and must maintain financial resources, as defined in the applicable
regulations, in excess of the applicable financial resources requirement. As of
June 30, 2020, each of our subsidiaries that are subject to these regulations
had net capital or financial resources in excess of their minimum requirements.
As of June 30, 2020, our subsidiaries maintained aggregate net capital and
financial resources that were $287.5 million in excess of the required levels of
$19.6 million.

Each of our U.S. and foreign regulated subsidiaries are subject to local
regulations which generally prohibit repayment of borrowings from our
affiliates, paying cash dividends, making loans to our affiliates or otherwise
entering into transactions that result in a significant reduction in regulatory
net capital or financial resources without prior notification to or approval
from such regulated entity's principal regulator. As of June 30, 2020, the
amount of unrestricted cash held by our non-U.S. subsidiaries was $159.9
million
.



38



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We execute certain bond transactions between and among institutional investor
and broker-dealer clients on a matched principal basis by serving as
counterparty to both the buyer and the seller in trades which settle through
third-party clearing brokers. Settlement typically occurs within one to two
trading days after the trade date. Cash settlement of the transaction occurs
upon receipt or delivery of the underlying instrument that was traded. Under
securities clearing agreements with third party clearing brokers, we maintain
collateral deposits with each clearing broker in the form of cash. As of June
30, 2020
and December 31, 2019, the amount of the collateral deposits, which are
disclosed in the Consolidated Statements of Cash Flows as restricted cash, and
included in prepaid expenses and other assets in the Consolidated Statements of
Financial Condition was $20.6 million and $4.1 million, respectively. During
April 2020, we increased the amount of the collateral deposits with clearing
brokers to support increased trading volume in our matched principal business.
We may be exposed to credit risk in the event a counterparty does not fulfill
its obligation to complete a transaction or if there is a trade dispute or error
relating to a matched principal transaction. Pursuant to the terms of the
securities clearing agreements, each third-party clearing broker has the right
to charge us for any losses they suffer resulting from a counterparty's failure
on any of our trades. We did not record any liabilities or losses with regard to
this right for the six months ended June 30, 2020 and 2019.

In the normal course of business, we enter into contracts that contain a variety
of representations, warranties and indemnification provisions. Our maximum
exposure from any claims under these arrangements is unknown, as this would
involve claims that have not yet occurred. However, based on past experience, we
expect the risk of material loss to be remote.


In January 2019, the Board of Directors authorized a two-year share repurchase
program for up to $100.0 million that commenced in April 2019. Shares
repurchased under the program will be held in treasury for future use.




In July 2020, our Board of Directors approved a quarterly cash dividend of $0.60
per share payable on August 19, 2020 to stockholders of record as of the close
of business on August 5, 2020. Any future declaration and payment of dividends
will be at the sole discretion of our Board of Directors. Our Board of Directors
may take into account such matters as general business conditions, our financial
results, capital requirements, contractual obligations, legal, and regulatory
restrictions on the payment of dividends to our stockholders or by our
subsidiaries to their respective parent entities, and any such other factors as
the Board of Directors may deem relevant.


Effects of Inflation




Because the majority of our assets are short-term in nature, they are not
significantly affected by inflation. However, the rate of inflation may affect
our expenses, such as employee compensation, office leasing costs and
communications expenses, which may not be readily recoverable in the prices of
our services. To the extent inflation results in rising interest rates and has
other adverse effects on the securities markets, it may adversely affect our
financial condition and results of operations.


Contractual Obligations and Commitments




As of June 30, 2020, we had the following contractual obligations and
commitments:



Payments due by period
Less than More than 5
Total 1 year 1 - 3 years 3 - 5 years years
($ in thousands)



Operating leases $ 137,384 $ 5,308 $ 22,120 $


20,630 $ 89,326
Foreign currency forward
contract 177,713 177,713 - - -
$ 315,097 $ 183,021 $ 22,120 $ 20,630 $ 89,326



We enter into foreign currency forward contracts to hedge our exposure to
variability in certain foreign currency cash flows resulting from the net
investment in our U.K. subsidiaries. As of June 30, 2020, the notional value of
the only foreign currency forward contract outstanding was $179.1 million and
the fair value of the asset was $1.4 million.



39



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