As filed with
the Securities and Exchange Commission on September 3,
2010.
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
FXCM Inc.
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
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6220
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27-3268672
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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32 Old Slip
New York, NY 10005
Telephone:
(646) 432-2986
(Address, including zip code,
and telephone number, including area code, of Registrants
principal executive offices)
David S. Sassoon
General Counsel
FXCM Inc.
32 Old Slip
New York, NY 10005
Telephone: (646) 432-2241
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Joshua Ford Bonnie
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017-3954
Telephone: (212) 455-2000
Facsimile: (212) 455-2502
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Robert Evans III
Shearman & Sterling LLP
599 Lexington Avenue
New York, NY 10022
Telephone: (212) 848-8830
Facsimile: (646) 848-8830
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Approximate date of commencement of the proposed sale of the
securities to the public: As soon as practicable
after the Registration Statement is declared effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check
the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Amount of
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Title of Each Class of
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Aggregate
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Registration
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Securities to be Registered
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Offering Price(1)(2)
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Fee
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Class A Common Stock, par value $.01 per share
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$200,000,000
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$14,260
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(1)
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Estimated solely for the purpose of
determining the amount of the registration fee in accordance
with Rule 457(o) under the Securities Act of 1933.
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(2)
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Includes shares of Class A
common stock subject to the underwriters option to
purchase additional shares of Class A common stock.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
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SUBJECT
TO COMPLETION, DATED SEPTEMBER 3, 2010
PRELIMINARY
PROSPECTUS
Shares
FXCM
Inc.
Class A
Common Stock
This is the initial
public offering of shares of Class A common stock of FXCM
Inc. No public market currently exists for our Class A
common stock. We are offering all of
the shares
in this offering. We anticipate that the initial public offering
price will be between $ and
$ per share. We intend to apply to
list the shares of Class A common stock on the New York
Stock Exchange under the symbol FXCM.
We intend to use a
portion of the proceeds from this offering to purchase equity
interests in our business from our existing owners, including
members of our senior management.
Investing in
shares of our Class A common stock involves risks. See
Risk Factors beginning on page 14 to read about
factors you should consider before buying shares of our
Class A common stock.
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Per
Share
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Total
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Initial public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to FXCM Inc.
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$
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$
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To the extent that
the underwriters sell more
than shares
of our Class A common stock, the underwriters have the
option to purchase up to an
additional shares
of our Class A common stock from us at the initial public
offering price less the underwriting discount, within
30 days from the date of this prospectus.
Neither the
Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or
passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
The underwriters
expect to deliver the shares of our Class A common stock
against payment in New York, New York
on ,
2010.
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Credit
Suisse J.P. Morgan |
Citi |
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Sandler
ONeill + Partners, L.P.
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The date of this
prospectus
is ,
2010
We are responsible for the information contained in this
prospectus and in any free writing prospectus we may authorize
to be delivered to you. Neither we nor the underwriters have
authorized anyone to provide you with additional or different
information. We and the underwriters are offering to sell, and
seeking offers to buy, shares of our Class A common stock
only in jurisdictions where offers and sales are permitted. The
information in this prospectus is accurate only as of the date
of this prospectus, regardless of the time of delivery of this
prospectus or any sale of shares of our Class A common
stock.
Table of
Contents
Unless the context suggests otherwise, references in this
prospectus to FXCM, the Company,
we, us and our refer
(1) prior to the consummation of the Offering Transactions
described under Organizational Structure
Offering Transactions, to FXCM Holdings, LLC and its
consolidated subsidiaries and (2) after the Offering
Transactions described under Organizational
Structure Offering Transactions, to FXCM Inc.
and its consolidated subsidiaries. We refer to the owners of
FXCM Holdings, LLC prior to the Offering Transactions,
collectively, as our existing owners.
Unless indicated otherwise, the information included in this
prospectus assumes no exercise by the underwriters of the option
to purchase up to an
additional shares
of Class A common stock from us and that the shares of
Class A common stock to be sold in this offering are sold
at $ per share of Class A
common stock, which is the midpoint of the price range indicated
on the front cover of this prospectus.
i
SUMMARY
This summary highlights selected information contained
elsewhere in this prospectus and does not contain all the
information you should consider before investing in shares of
our Class A common stock. You should read this entire
prospectus carefully, including the section entitled Risk
Factors and the financial statements and the related notes
included elsewhere in this prospectus, before you decide to
invest in shares of our Class A common stock.
FXCM
Our
business
We are a leading online provider of foreign exchange, or FX,
trading and related services to over 165,000 retail and
institutional customers globally. We offer our customers access
to
over-the-counter,
or OTC, FX markets through our proprietary technology platform.
In a FX trade, a participant buys one currency and
simultaneously sells another, a combination known as a
currency pair. Our platform presents our FX
customers with the best price quotations on up to 56 currency
pairs from up to 17 global banks, financial institutions and
market makers, or FX market makers, which we believe provides
our customers with an efficient and cost-effective way to trade
FX. We utilize what is referred to as agency execution or an
agency model. When our customer executes a trade on the best
price quotation offered by our FX market makers, we act as a
credit intermediary, or riskless principal, simultaneously
entering into offsetting trades with both the customer and the
FX market maker. We earn fees by adding a markup to the price
provided by the FX market makers and generate our trading
revenues based on the volume of transactions, not trading
profits or losses. We believe we are one of the largest retail
FX brokers in the world based on transaction volume, number of
customers and annual revenue, and the largest FX broker that
operates almost exclusively using the agency model.
Our agency model is fundamental to our core business philosophy
because we believe that it aligns our interests with those of
our customers, reduces our risks and provides distinct
advantages over the principal model used by the majority of
retail FX brokers. In the principal model, the retail FX broker
sets the price it presents to the customer and may maintain its
trading position if it believes the price may move in its favor
and against the customer. We believe this creates an inherent
conflict between the interests of the customer and those of the
principal model broker. Principal model brokers revenues
typically consist primarily of trading gains or losses, and are
more affected by market volatility than those of brokers
utilizing the agency model. We also believe that regulators in
certain jurisdictions have been implementing requirements in a
manner that may be more favorable to FX brokers utilizing the
agency model as compared to those utilizing the principal model.
We operate our business through two segments: retail trading and
institutional trading. Our retail trading segment accounted for
92% and 90% of our total revenues less referring broker fees in
2009 and the six months ended June 30, 2010, respectively.
Our institutional trading segment, FXCM Pro, offers FX trading
services to banks, hedge funds and other institutional customers
on an agency model basis and accounted for 8% and 10% of our
total revenues less referring broker fees in 2009 and the six
months ended June 30, 2010, respectively. Our revenues less
referring broker fees have grown from $9.5 million in 2001
to $246.1 million in 2009, a compound annual growth rate,
or CAGR, of 50%. Our income before income taxes has grown from
$5.4 million in 2001 to $97.0 million in 2009, a CAGR
of 43.5%. Our revenues less referring broker fees were
$136.5 million and our income before income taxes were
$56.8 million in the six months ended June 30, 2010,
as compared to $127.7 million and $54.3 million,
respectively, in the six months ended June 30, 2009.
Our operating subsidiaries are regulated in a number of
jurisdictions, including the United States, the United Kingdom
(where regulatory passport rights have been exercised to operate
in a number of European Economic Area jurisdictions), Hong Kong,
Australia and Dubai. Upon the completion of our acquisition of
ODL Group Limited, or ODL, a U.K.-based FX broker, which is
expected to close in September 2010, we will also be regulated
in Japan. We maintain offices in these jurisdictions, among
others. We offer our trading software in 16 languages,
produce FX research and content in 12 languages and provide
customer support in
1
13 languages. For the six months ended June 30, 2010,
approximately 76% of our customer trading volume was derived
from customers residing outside the United States. We believe
our global footprint provides us with access to emerging
markets, diversifies our risk from regional economic conditions
and allows us to draw our employees from a broad pool of talent.
Retail FX
industry
The FX market is the largest and most liquid financial market in
the world. According to the Bank for International Settlements,
average daily turnover in the global FX market in April 2010 was
$4.0 trillion. Historically, access to the FX market was
only available to commercial banks, corporations and other large
financial institutions. In the last decade, retail investors
have gained increased access to this market, largely through the
emergence of online retail FX brokerages, like our firm.
According to 2010 analysis by the Aite Group, a financial
services market research firm, retail FX trading volumes have
grown from average daily volumes of approximately
$10 billion in 2001 to approximately $125 billion in
2009, representing a CAGR of 37%. The retail FX trading volumes
were forecasted to be $158 billion as of June 30, 2010.
While online retail trading of FX has many similarities with
online retail trading of equities, there are a number of key
differences. We believe the potential market that is addressable
by an online retail FX broker is larger than that addressable by
an online provider of retail equities trading. Trading of
equities varies by country, requiring retail equity brokers to
establish significant infrastructure in each major market.
Because retail spot FX contracts are neither traded nor cleared
through local exchanges, retail FX brokers do not need to build
unique infrastructure in each market to offer trading services.
We service our retail customers around the world from a common
technological infrastructure.
The FX market is open 24 hours a day, five days per week,
driving extensive participation and more frequent trading.
Unlike equity markets that limit investors to trading during
market hours, retail FX participants have the convenience of
trading FX at any time throughout the day, as well as the
ability to place trades immediately, rather than waiting until
the equity markets reopen the next day. The result is
effectively more than fifteen equity trading days a
week. As a result, our average account traded 3.4 times per day
in 2009 and 2.6 times per day in the first six months of 2010,
which we believe is significantly more frequent than the trades
per day of the average online equity account. Further, retail FX
brokers cannot rely on standardized and inexpensive third-party
infrastructure solutions that are available to online equities
brokers and must build a significant proportion of their own
technology. This requires large investments of time and money
but can result in points of competitive differentiation not
available to retail equity brokers. We believe this
differentiation enables retail FX brokers to compete on the
basis of the quality of their platform rather than merely on
commission per trade.
We believe that retail FX trading will continue to grow at high
rates as retail investors seek new asset choices, become more
knowledgeable about FX markets through frequent media coverage
of global economic issues and recognize the advantages of online
FX trading over online trading of other assets, such as
equities. We also believe that retail FX investors globally are
becoming more sophisticated and demanding more transparency,
better execution and better customer service. We believe our
agency model, scale, proprietary technology platform, network of
FX market makers and award-winning customer service will
continue to attract a diverse and experienced base of customers,
who use a wide range of trading strategies, trade more
frequently and generally maintain long term relationships with
our firm.
Our
opportunities
Continued
growth of the retail FX market
Despite the strong growth of the retail FX market, online retail
FX investors still represent a small fraction of the total
population of online investors. The Aite Group estimates that,
as of July 2010 there were over 110 million retail online
investors globally, but only 1.1 million retail investors
who traded FX. Overall awareness of FX continues to grow among
investors, driven in part by increased media coverage and the
central role FX plays in the global economy. Also, since retail
FX is an asset class that can be traded 24 hours per day,
five days a week, it is convenient to trade for many online
investors as they can trade at any time of
2
the day. Unlike equities, fixed income, real estate and many
other asset classes, FX markets do not experience periods where
all assets move in one direction or another. As a result, the FX
market is not necessarily correlated to other assets popular
with online investors, such as equities or options, and we
believe that, as an increasing number of investors realize this,
retail FX will attract more attention as a way to increase
portfolio diversification.
Increasing
sophistication of FX customers and awareness of the agency model
will drive increased market share for agency model brokers like
FXCM
We believe that as retail FX investors grow in sophistication,
they will recognize the advantages of placing trades with an
agency model broker with a robust technology platform. We
believe these investors value competitive prices, deep
liquidity, reliable execution and the ability to use any trading
strategy they choose without fear of price requotes, unfilled
orders or trading slowdowns that may occur when they are trading
with a principal model FX broker. For instance, we believe
sophisticated customers, such as automated traders, one of the
fastest growing and highest volume segments of the retail FX
market, value an agency model broker who will not place
restrictions on the frequency or style of trading and offers
access to deep pools of liquidity and rapid execution at
attractive prices.
Expanding
our presence in Europe, a large market for retail FX
trading
We believe the retail FX market in Europe presents a significant
growth opportunity for us due to our agency model. According to
Greenwich Associates, a financial services market research firm,
57% of global FX trading volume in 2009 was conducted in Europe.
We believe that awareness of the advantages of the agency model
is growing among European customers and regulators, despite the
current prominence of principal model brokers in Europe. We
believe we can significantly expand our share of this large
market through our existing operations in Europe and our pending
acquisition of ODL.
Regulatory
changes will continue to narrow the pool of providers authorized
to offer retail FX, enhancing the standing of the industry
overall and of the FX brokers like us that can meet the higher
regulatory standards
Regulators in the United States and other jurisdictions have
made a series of changes that impact retail FX brokers,
including substantial increases in minimum required regulatory
capital, increased oversight of third-party referring brokers
and, more recently, regulations regarding the execution of
trades. While these regulations may increase our costs, we
believe that an effect of these regulations has been to
significantly reduce the number of firms offering retail FX,
even as the number of customers and the volume traded has grown.
As the industry consolidates, scale will become increasingly
important, presenting opportunities to larger firms, such as us,
that can meet the more stringent regulatory requirements. We
also believe that regulators in certain jurisdictions have been
implementing requirements in a manner that is more favorable to
agency model retail FX brokers, like us, as compared to those
utilizing the principal model. We believe that this trend will
present additional opportunities for us to increase market share
organically or through acquisitions.
Continued
expansion in institutional market
The institutional FX market is comprised of banks, hedge funds
and corporate treasury departments that trade with each other
predominantly through electronic communication networks, or
ECNs, and single bank platforms. We believe that we can use our
agency model to continue to expand our institutional FX segment
by offering these institutions the deep liquidity of multiple FX
market makers while preserving the anonymity that they value.
3
Our
competitive strengths
Differentiated
agency model that aligns our interests with our customers
interests, produces a better customer trading experience,
generates more stable revenues and exposes us to less market,
regulatory and reputational risk
We believe our agency model aligns our interests with those of
our customers. Our list of products is largely limited to those
we are now, or in the future will be, able to offer on an agency
model basis. Because we earn our fees based on transaction
volume, we design our products and services to make it easier
for our customers to trade. For example, we offer research on
aggregate trading trends, one-click trading and price
improvements for price changes that may occur between order
placement and execution on all order types to help our customers
trade more profitably.
Further, we believe our transaction volume-based revenue is more
stable and predictable than revenue derived from trading against
customers. In addition, because we do not take market risk and
do not extend credit to our customers unless they are fully
collateralized, our regulatory capital requirements are
significantly lower than those applicable to principal model
brokers. As a result, we have more cash we can use to pursue our
growth plans. Further, we believe our exposure to regulatory and
reputational risk is reduced by avoiding the inherent conflict
between the interests of the customer and those of the principal
model broker.
Business
model and proprietary technology designed to minimize risk and
free capital for ongoing operations and expansion
One of our core business philosophies is to seek to minimize
risk. In addition to the reduction of risk exposure that we
believe results directly from utilizing an agency model, this
philosophy is exemplified by the development and implementation
of our margin monitoring technology. This technology reduces the
risk that customers trading on margin could lose more than they
deposit by checking their margins four times per second and
automatically closing open positions if a customer becomes at
risk of going into a negative account balance. In addition, our
platform receives prices from up to 17 FX market makers. By
distributing our trading activity across multiple
counterparties, we reduce the risk that the failure of an
individual market maker will significantly impact the trading
services we offer.
Proprietary
and scalable technology platform and award-winning
products
In the retail FX industry, the technology and infrastructure
required to implement the agency model from customer trading
screen through settlement is not widely available. We have built
our proprietary technology platform over the last 11 years
to handle the complete lifecycle of a FX trade, as well as
customized connections to our network of FX market makers and a
full suite of back office and administrative systems. Our
platform is scalable and can handle sudden changes in the number
of trades and increases in the number of customers. Our platform
is also flexible, enabling us to add new instruments.
We offer our customers various trading alternatives based on
customer sophistication, from beginner to expert, and modes of
access, from smart phones to web-based interfaces to
downloadable desktop applications. Our primary trading
application is award-winning Trading Station II, a desktop
application. We also offer Active Trader, an internet
application targeted at active equity traders. We have also
introduced a trading application designed for customers who
create automated trading strategies, a growing and more active
segment of the retail FX trading population. Additionally, we
offer our customers services to help them automate their trading
strategies, connect their automated trading systems to our
platform and to host their strategies on our platform.
4
Widely
recognized brand and an industry leading in-house marketing
organization driving new customer growth
We believe that we have built a
best-in-class
in-house online marketing organization that has fueled
consistent organic growth in customers at low acquisition costs
through a combination of web properties and internet
advertising. We believe that the FXCM brand is one of the most
well-known, global brands in the retail FX industry, built
through over $146 million in brand advertising expenditure
since 2005. In 2009, our web properties attracted over
2.2 million unique visitors and 19 million page views
per month, as measured by Omniture, a web analytics application
service. Among our most popular web properties is DailyFX.com,
our research and news site that is staffed by a team of nine
full time analysts who produce over 30 articles a day in three
languages which are syndicated on over 80 sites globally,
including Thomson Reuters and
Yahoo!®
Finance. DailyFX is one of the top three FX news and analysis
websites, measured by Alexa, a website which provides traffic
information for websites. We handle all aspects of the marketing
process in-house, including strategy, design, placement,
execution and performance measurement, allowing us to accurately
measure the effectiveness of each campaign and optimize the use
of our marketing and advertising expenses.
International
reach and significant scale
As measured by volume, revenue and number of customer accounts,
we believe we are the largest provider of retail FX in the
United States. Nonetheless, for the six months ended
June 30, 2010, we generated approximately 76% of our
customer trading volume from customers outside the United
States. We are continuing to expand our presence globally,
especially in Europe and the Middle East where we believe retail
FX investors are growing increasingly aware of the advantages of
the agency model.
As one of the largest retail FX firms in the world as measured
by volume, revenue and customer accounts, we believe our scale
gives us a significant competitive advantage over other retail
FX brokers. For example, we believe scale is a significant
factor in a retail FX investors choice of broker and the
amount of funds such investor is willing to deposit. As of
June 30, 2010, total customer equity was
$425.5 million, representing an increase of 38% over that
as of June 30, 2009. In addition, we are among the largest
sources of volume for many of our FX market makers, which
enables us to receive lower prices that we then pass on to our
customers. Our scale in online advertising allows us to lock up
coveted advertising inventory at favorable rates, lowering our
customer acquisition costs. Further, our balance sheet scale
enables us to meet minimum regulatory capital requirements
across all of our jurisdictions. Our technology platform enables
us to add customers organically or through acquisitions and
service them from a single infrastructure with minimal
additional costs.
Experienced
leadership team and innovative culture
Our leadership team is comprised of experienced executives that
have averaged over eight years of service with us and have been
active contributors to the growth of our company since its
founding in 1999 and to the growth of the online retail FX
industry generally. In the late 1990s, current members of our
technology leadership team played key roles in developing the
electronic trading systems for other early FX pioneers. Our
leadership team, led by co-founder and chief executive officer
Dror (Drew) Niv, has built a global presence to address the
international market for retail FX while successfully leading
the firm through the strong growth of the industry and our
transition to an agency model.
Our
Growth Strategy
Continue
to use our global brand and marketing to drive organic customer
growth
We intend to continue to use our brand and our sales and
marketing efforts to increase penetration of the growing retail
FX market. In existing markets, where we believe the FXCM brand
is widely recognized, we are increasing the effectiveness of our
campaigns and lowering the costs of acquisition per account. In
markets where our penetration is low, such as Europe, we are
increasing our marketing expenditure and expanding our physical
presence with sales offices. Since April 2009, we have opened
offices in Athens, Berlin, Dubai and Milan to accelerate our
penetration in these markets.
5
Make
selected acquisitions to expand our customer base or add
presence in markets where we have low penetration
We plan to make selected acquisitions of firms with established
presence in attractive markets and distribution channels to
accelerate our growth. We are in the process of acquiring ODL, a
leading broker of retail FX,
contracts-for-difference,
or CFDs, spread betting and equity options headquartered in
London. Our acquisition of ODL is designed to increase our
profile in the U.K. market and accelerate our growth in
continental Europe, utilizing ODLs relationships and sales
force. We expect the retail FX industry to continue to
consolidate, providing us with additional acquisition
opportunities.
Expand
our range of products to add new customers and increase revenues
from existing customers
We have an established history of introducing new products. For
instance, we introduced our Active Trader platform for our high
volume customers in February 2009, the trading of CFDs in
September 2009, mobile trading in March 2010 and Strategy Trader
in August 2010. We plan to introduce additional products in the
future. We are also making investments in our technology
platform to meet the demands of our customers that we believe
will increase our share of the trading volumes of active and
institutional FX customers.
Capture
market share from competitors who are unable to keep pace with
increasingly demanding regulatory requirements and reap benefits
from improved industry reputation and customer
confidence
Over the past three years, regulatory changes have reduced the
number of retail FX brokers and, we believe, improved the
reputation of retail FX as an asset class and the standing of
the industry as a whole. We expect that increased regulatory
compliance requirements will cause additional firms to leave
individual markets or exit the industry and believe that this
will present additional opportunities for the remaining firms,
especially agency model firms like us, to increase market share
organically or through acquisitions. For example, if proposed
regulatory changes in the United States relating to trade
execution and price improvements are implemented, we believe
that additional
non-U.S. FX
customers desiring superior execution of their trades may seek
to become customers of U.S. regulated retail FX brokers. We
believe we are the largest retail FX broker licensed in the
United States based on transaction volume, revenue and number of
customer accounts and, accordingly, would be well positioned to
capture a significant share of these new accounts.
Investment
Risks
An investment in shares of our Class A common stock
involves substantial risks and uncertainties that may adversely
affect our business, financial condition and results of
operations and cash flows. Some of the more significant
challenges and risks relating to an investment in our company
include those associated with:
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the continuously evolving regulatory requirements of the FX
industry, potentially increased costs of compliance with those
requirements, and the risks associated with the failure to
comply with any such regulations;
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the limited history of the retail FX industry and, accordingly,
a limited operating history upon which to evaluate our
performance;
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the possibility that our risk management policies may not be
effective and could expose us to unidentified or unanticipated
risks;
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our dependence on our proprietary as well as third party
technology;
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our dependence upon, and ability to continue to attract and
retain, key personnel;
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a continuing downturn in global economic conditions, which
negatively impacts our customer base;
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our dependence on FX market makers to continually provide us
with FX liquidity; and
|
|
|
|
any default by any financial institution that holds our funds
and our customers funds.
|
Please see Risk Factors for a discussion of these
and other factors you should consider before making an
investment in shares of our Class A common stock.
6
Our
Structure
Following this offering, FXCM Inc. will be a holding company and
its sole asset will be a controlling equity interest in FXCM
Holdings, LLC. FXCM Inc. will operate and control all of the
business and affairs and consolidate the financial results of
FXCM Holdings, LLC and its subsidiaries. Prior to the completion
of this offering, the limited liability company agreement of
FXCM Holdings, LLC will be amended and restated to, among other
things, modify its capital structure by reclassifying the
interests currently held by our existing owners into a single
new class of units that we refer to as Holdings
Units. We and our existing owners will also enter into an
exchange agreement under which they (or certain permitted
transferees thereof) will have the right, from and after the
first anniversary of the date of the closing of this offering
(subject to the terms of the exchange agreement), to exchange
their Holdings Units for shares of our Class A common stock
on a
one-for-one
basis, subject to customary conversion rate adjustments for
stock splits, stock dividends and reclassifications.
Following this offering, each of our existing owners will hold
one or more shares of Class B common stock. The shares of
Class B common stock have no economic rights but entitle
the holder, without regard to the number of shares of
Class B common stock held, to a number of votes on matters
presented to stockholders of FXCM Inc. that is equal to the
aggregate number of Holdings Units of FXCM Holdings, LLC held by
such holder.
The diagram below depicts our organizational structure
immediately following this offering.
See Organizational Structure.
FXCM Inc. was incorporated in Delaware on August 10, 2010.
Our principal executive offices are located at 32 Old Slip, New
York, NY 10005 and our telephone number is
(646) 432-2936.
7
The
Offering
|
|
|
Class A common stock offered by FXCM Inc.
|
|
shares. |
|
Over-allotment option
|
|
shares. |
|
Class A common stock outstanding after giving effect to
this offering
|
|
shares
(or shares
if all outstanding Holdings Units held by our existing owners
were exchanged for newly-issued shares of Class A common
stock on a
one-for-one
basis). |
|
Class B common stock outstanding after giving effect to
this offering
|
|
shares,
or one share for each holder of Holdings Units (other than FXCM
Inc.). |
|
Voting power held by holders of Class A common stock after
giving effect to this offering
|
|
% (or 100% if all outstanding
Holdings Units held by our existing owners were exchanged for
newly-issued shares of Class A common stock on a
one-for-one
basis). |
|
Voting power held by holders of Class B common stock after
giving effect to this offering
|
|
% (or 0% if all outstanding
Holdings Units held by our existing owners were exchanged for
newly-issued shares of Class A common stock on a
one-for-one
basis). |
|
Use of proceeds
|
|
We estimate that the net proceeds to FXCM Inc. from this
offering, after deducting estimated underwriting discounts and
offering expenses, will be approximately
$ (or
$ if the underwriters exercise in
full their option to purchase additional shares of Class A
common stock). |
|
|
|
FXCM Inc. intends to use $ of these
proceeds to purchase newly-issued Holdings Units from FXCM
Holdings, LLC, as described under Organizational
Structure Offering Transactions. We intend to
cause FXCM Holdings, LLC to use these proceeds to enhance our
capital, to fund acquisitions that we may identify in the future
and for general corporate purposes. |
|
|
|
FXCM Inc. intends to use the remaining net proceeds from this
offering, or $ (or
$ if the underwriters exercise in
full their option to purchase additional shares of Class A
common stock), to purchase Holdings Units from our existing
owners, including members of our senior management, as described
under Organizational Structure Offering
Transactions. Accordingly, we will not retain any of these
proceeds. See Principal Stockholders for information
regarding the proceeds from this offering that will be paid to
our directors and named executive officers. |
|
Voting rights
|
|
Each share of our Class A common stock entitles its holder
to one vote on all matters to be voted on by stockholders
generally. |
|
|
|
Following the Offering Transactions, each of our existing owners
will hold one or more shares of Class B common stock. The
shares of Class B common stock have no economic rights but
entitle the holder, without regard to the number of shares of
Class B common |
8
|
|
|
|
|
stock held, to a number of votes on matters presented to
stockholders of FXCM Inc. that is equal to the aggregate number
of Holdings Units of FXCM Holdings, LLC held by such holder. See
Description of Capital Stock Common
Stock Class B Common Stock. Holders of
our Class A common stock and Class B common stock vote
together as a single class on all matters presented to our
stockholders for their vote or approval, except as otherwise
required by applicable law. |
|
Dividend policy
|
|
Following this offering and subject to legally available funds,
we intend to pay quarterly cash dividends to the holders of our
Class A common stock initially equal to
$ per share of Class A common
stock, commencing with
the quarter
of . |
|
|
|
The declaration, amount and payment of any future dividends will
be at the sole discretion of our board of directors. Our board
of directors will take into account general economic and
business conditions, our financial condition and operating
results, our available cash and current and anticipated cash
needs, capital requirements, contractual, legal, tax and
regulatory restrictions and implications on the payment of
dividends by us to our stockholders or by our subsidiaries
(including FXCM Holdings, LLC) to us, and such other
factors as our board of directors may deem relevant. |
|
|
|
FXCM Inc. is a holding company and has no material assets other
than its ownership of Holdings Units in FXCM Holdings, LLC. We
intend to cause FXCM Holdings, LLC to make distributions to FXCM
Inc. in an amount sufficient to cover cash dividends, if any,
declared by us. If FXCM Holdings, LLC makes such distributions
to FXCM Inc., the other holders of Holdings Units will be
entitled to receive equivalent distributions. |
|
Exchange rights of holders of Holdings Units
|
|
Prior to this offering we will enter into an exchange agreement
with our existing owners so that they may (subject to the terms
of the exchange agreement) exchange their Holdings Units for
shares of Class A common stock of FXCM Inc. on a
one-for-one
basis, subject to customary conversion rate adjustments for
stock splits, stock dividends and reclassifications. |
|
Risk factors
|
|
See Risk Factors for a discussion of risks you
should carefully consider before deciding to invest in our
Class A common stock. |
|
Proposed New York Stock Exchange symbol
|
|
FXCM |
In this prospectus, unless otherwise indicated, the number of
shares of Class A common stock outstanding and the other
information based thereon does not reflect:
|
|
|
|
|
shares
of Class A common stock issuable upon exercise of the
underwriters option to purchase additional shares of
Class A common stock from us;
|
9
|
|
|
|
|
shares
of Class A common stock issuable upon exchange
of
Holdings Units (or, if the underwriters exercise in full their
option to purchase additional shares of Class A common
stock, shares
of Class A common stock issuable upon exchange
of
Holdings Units) that will be held by our existing owners
immediately following this offering; or
|
|
|
|
shares
of Class A common stock that may be granted under the FXCM
Inc. 2010 Long Term Incentive Plan, or Long Term Incentive Plan,
including shares
issuable upon the exercise of stock options that we intend to
grant to our employees at the time of this offering. See
Management Long Term Incentive Plan and
IPO Date Stock Option Awards.
|
See Pricing Sensitivity Analysis to see how some of
the information presented above would be affected by an initial
public offering price per share of Class A common stock at
the low-, mid- and high-points of the price range indicated on
the front cover of this prospectus or if the underwriters
option to purchase additional shares of Class A common
stock is exercised in full.
10
Summary
Historical Consolidated Financial and Other Data
The following summary historical consolidated financial and
other data of FXCM Holdings, LLC should be read together with
Organizational Structure, Unaudited Pro Forma
Consolidated Financial Information, Selected
Consolidated Financial Data, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the historical financial statements and
related notes included elsewhere in this prospectus. FXCM
Holdings, LLC will be considered our predecessor for accounting
purposes, and its consolidated financial statements will be our
historical financial statements following this offering.
We derived the summary historical consolidated statements of
operations and comprehensive income data of FXCM Holdings, LLC
for each of the years ended December 31, 2009, 2008 and
2007 and the summary historical consolidated statements of
financial condition data as of December 31, 2009 and 2008
from the audited consolidated financial statements of FXCM
Holdings, LLC which are included elsewhere in this prospectus,
and derived the summary historical combined statement of
operations and comprehensive income for each of the years ended
December 31, 2006 and 2005 and the summary historical
combined statement of financial condition data as of
December 31, 2006 and 2005 and the summary historical
consolidated statements of financial condition data as of
December 31, 2007 from the audited financial statements of
FXCM Holdings, LLC, which are not included in this prospectus.
The consolidated statements of operations and comprehensive
income data for the six months ended June 30, 2010 and
2009, and the consolidated statements of financial condition
data as of June 30, 2010 and 2009 have been derived from
unaudited consolidated financial statements of FXCM Holdings,
LLC included elsewhere in this prospectus. The unaudited
consolidated financial statements of FXCM Holdings, LLC have
been prepared on substantially the same basis as the audited
consolidated financial statements and include all adjustments
that we consider necessary for a fair presentation of our
consolidated financial position and results of operations for
all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007(1)
|
|
|
2006(1)(2)
|
|
|
2005(2)
|
|
|
|
(In thousands)
|
|
|
Consolidated Statements of Operations and Comprehensive
Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail trading revenue
|
|
$
|
154,823
|
|
|
$
|
155,217
|
|
|
$
|
291,668
|
|
|
$
|
281,385
|
|
|
$
|
144,935
|
|
|
$
|
131,950
|
|
|
$
|
215,672
|
|
Institutional trading revenue
|
|
|
13,589
|
|
|
|
11,012
|
|
|
|
21,107
|
|
|
|
18,439
|
|
|
|
11,695
|
|
|
|
5,610
|
|
|
|
95
|
|
Interest income
|
|
|
1,005
|
|
|
|
638
|
|
|
|
1,289
|
|
|
|
9,085
|
|
|
|
16,357
|
|
|
|
11,112
|
|
|
|
4,501
|
|
Other income
|
|
|
4,205
|
|
|
|
4,837
|
|
|
|
8,666
|
|
|
|
13,731
|
|
|
|
11,535
|
|
|
|
16,000
|
|
|
|
2,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
173,622
|
|
|
|
171,704
|
|
|
|
322,730
|
|
|
|
322,640
|
|
|
|
184,522
|
|
|
|
164,672
|
|
|
|
222,451
|
|
Referring broker fees
|
|
|
37,073
|
|
|
|
44,004
|
|
|
|
76,628
|
|
|
|
64,567
|
|
|
|
33,211
|
|
|
|
51,360
|
|
|
|
49,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
|
136,549
|
|
|
|
127,700
|
|
|
|
246,102
|
|
|
|
258,073
|
|
|
|
151,311
|
|
|
|
113,312
|
|
|
|
173,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
34,499
|
|
|
|
29,292
|
|
|
|
62,588
|
|
|
|
54,578
|
|
|
|
53,575
|
|
|
|
48,669
|
|
|
|
33,281
|
|
Advertising and marketing
|
|
|
11,315
|
|
|
|
16,911
|
|
|
|
29,355
|
|
|
|
24,629
|
|
|
|
27,846
|
|
|
|
28,223
|
|
|
|
25,595
|
|
Communication and technology
|
|
|
12,798
|
|
|
|
12,283
|
|
|
|
24,026
|
|
|
|
21,311
|
|
|
|
17,836
|
|
|
|
13,773
|
|
|
|
7,914
|
|
General and administrative
|
|
|
17,614
|
|
|
|
11,775
|
|
|
|
26,453
|
|
|
|
20,247
|
|
|
|
17,037
|
|
|
|
20,917
|
|
|
|
22,604
|
|
Depreciation and amortization
|
|
|
3,461
|
|
|
|
3,104
|
|
|
|
6,542
|
|
|
|
6,095
|
|
|
|
7,364
|
|
|
|
6,732
|
|
|
|
4,326
|
|
Interest expense
|
|
|
51
|
|
|
|
51
|
|
|
|
125
|
|
|
|
2,168
|
|
|
|
1,374
|
|
|
|
34
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
79,738
|
|
|
|
73,416
|
|
|
|
149,089
|
|
|
|
129,028
|
|
|
|
125,032
|
|
|
|
118,348
|
|
|
|
93,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
56,811
|
|
|
|
54,284
|
|
|
|
97,013
|
|
|
|
129,045
|
|
|
|
26,279
|
|
|
|
(5,036
|
)
|
|
|
79,288
|
|
Income tax provision
|
|
|
4,966
|
|
|
|
3,870
|
|
|
|
10,053
|
|
|
|
8,872
|
|
|
|
3,120
|
|
|
|
1,720
|
|
|
|
1,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
51,845
|
|
|
$
|
50,414
|
|
|
$
|
86,960
|
|
|
$
|
120,173
|
|
|
$
|
23,159
|
|
|
$
|
(6,756
|
)
|
|
$
|
77,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007(1)
|
|
|
2006(1)(2)
|
|
|
2005(2)
|
|
|
|
(In thousands)
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
$
|
(144
|
)
|
|
$
|
284
|
|
|
$
|
452
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
51,701
|
|
|
$
|
50,698
|
|
|
$
|
87,412
|
|
|
$
|
120,174
|
|
|
$
|
23,159
|
|
|
$
|
(6,756
|
)
|
|
$
|
77,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Financial Condition
Data End of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
153,010
|
|
|
$
|
125,119
|
|
|
$
|
139,858
|
|
|
$
|
179,967
|
|
|
$
|
131,799
|
|
|
$
|
67,631
|
|
|
$
|
75,605
|
|
Cash and cash equivalents, held for customers
|
|
$
|
425,549
|
|
|
$
|
307,894
|
|
|
$
|
353,825
|
|
|
$
|
253,391
|
|
|
$
|
315,440
|
|
|
$
|
253,257
|
|
|
$
|
202,554
|
|
Total assets
|
|
$
|
605,823
|
|
|
$
|
460,054
|
|
|
$
|
517,936
|
|
|
$
|
451,044
|
|
|
$
|
472,564
|
|
|
$
|
364,636
|
|
|
$
|
301,611
|
|
Customer account liabilities
|
|
$
|
425,549
|
|
|
$
|
307,894
|
|
|
$
|
353,825
|
|
|
$
|
253,391
|
|
|
$
|
315,440
|
|
|
$
|
253,257
|
|
|
$
|
202,554
|
|
Total equity
|
|
$
|
141,767
|
|
|
$
|
114,567
|
|
|
$
|
130,788
|
|
|
$
|
140,454
|
|
|
$
|
96,280
|
|
|
$
|
93,851
|
|
|
$
|
89,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands, except as noted)
|
|
|
Selected Operational Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net account additions(3)
|
|
|
24,722
|
|
|
|
19,781
|
|
|
|
33,857
|
|
|
|
58,823
|
|
|
|
11,090
|
|
|
|
6,739
|
|
|
|
10,036
|
|
Standard account
|
|
|
20,671
|
|
|
|
6,935
|
|
|
|
16,944
|
|
|
|
19,357
|
|
|
|
11,090
|
|
|
|
6,739
|
|
|
|
10,036
|
|
Micro account(4)
|
|
|
4,051
|
|
|
|
12,846
|
|
|
|
16,913
|
|
|
|
37,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tradeable accounts(5)
|
|
|
165,287
|
|
|
|
126,489
|
|
|
|
140,565
|
|
|
|
106,708
|
|
|
|
49,885
|
|
|
|
38,795
|
|
|
|
32,056
|
|
Standard account
|
|
|
106,857
|
|
|
|
76,177
|
|
|
|
86,186
|
|
|
|
69,242
|
|
|
|
49,885
|
|
|
|
38,795
|
|
|
|
32,056
|
|
Micro account(4)
|
|
|
58,430
|
|
|
|
50,312
|
|
|
|
54,379
|
|
|
|
37,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total active accounts(6)
|
|
|
131,778
|
|
|
|
109,150
|
|
|
|
116,919
|
|
|
|
86,149
|
|
|
|
59,541
|
|
|
|
69,661
|
|
|
|
55,752
|
|
Total customer trading volume (dollars in billions)
|
|
$
|
1,566
|
|
|
$
|
1,750
|
|
|
$
|
3,504
|
|
|
$
|
2,901
|
|
|
$
|
1,729
|
|
|
$
|
2,100
|
|
|
$
|
1,413
|
|
Trading days in period
|
|
|
128
|
|
|
|
128
|
|
|
|
259
|
|
|
|
260
|
|
|
|
259
|
|
|
|
260
|
|
|
|
260
|
|
Daily average trades
|
|
|
320,533
|
|
|
|
373,268
|
|
|
|
347,104
|
|
|
|
165,063
|
|
|
|
70,714
|
|
|
|
76,771
|
|
|
|
60,752
|
|
Daily average trades per active account(7)
|
|
|
2.6
|
|
|
|
3.8
|
|
|
|
3.4
|
|
|
|
2.3
|
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
1.1
|
|
Retail trading revenue per million traded
|
|
$
|
99
|
|
|
$
|
89
|
|
|
$
|
83
|
|
|
$
|
97
|
|
|
$
|
84
|
|
|
$
|
63
|
|
|
$
|
153
|
|
Total customer equity(8)
|
|
$
|
425,549
|
|
|
$
|
307,894
|
|
|
$
|
353,825
|
|
|
$
|
253,391
|
|
|
$
|
315,440
|
|
|
$
|
253,257
|
|
|
$
|
202,554
|
|
Capital in excess of regulatory requirements(9)
|
|
$
|
104,104
|
|
|
$
|
89,844
|
|
|
$
|
96,904
|
|
|
$
|
127,030
|
|
|
$
|
75,650
|
|
|
$
|
79,640
|
|
|
$
|
72,457
|
|
Customer trading volume by region (dollars in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia
|
|
$
|
446
|
|
|
$
|
635
|
|
|
$
|
1,184
|
|
|
$
|
796
|
|
|
$
|
383
|
|
|
$
|
447
|
|
|
$
|
195
|
|
United States
|
|
|
378
|
|
|
|
573
|
|
|
|
1,038
|
|
|
|
1,008
|
|
|
|
679
|
|
|
|
800
|
|
|
|
493
|
|
EMEA
|
|
|
315
|
|
|
|
348
|
|
|
|
760
|
|
|
|
547
|
|
|
|
346
|
|
|
|
418
|
|
|
|
294
|
|
Rest of World
|
|
|
427
|
|
|
|
194
|
|
|
|
522
|
|
|
|
550
|
|
|
|
321
|
|
|
|
435
|
|
|
|
431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,566
|
|
|
$
|
1,750
|
|
|
$
|
3,504
|
|
|
$
|
2,901
|
|
|
$
|
1,729
|
|
|
$
|
2,100
|
|
|
$
|
1,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
(1) |
|
In 2005, a shareholder and white label (a firm that offers FX
trading services to their customers on our platform under their
own brand in exchange for a revenue sharing arrangement with us)
of FXCM declared bankruptcy, at the time representing
approximately 40% of total revenues, resulting in a significant
disruption in the business that led in large part to the
reduction in revenues and the loss recorded in 2006. As a
response to such bankruptcy and its effects on the business, our
senior management initiated fundamental changes to our business
model, including the decision to transition to an agency model,
which became fully operational in July 2007. |
|
(2) |
|
Financial statements at December 31, 2006 and 2005 and for
the year then ended were prepared on a combined basis. |
|
(3) |
|
Net account additions represents new accounts funded less
accounts closed by our customers. |
|
(4) |
|
Micro accounts are accounts with limited customer service and
permitted to trade in very small lot sizes; this account option
was introduced in June 2008. |
|
(5) |
|
A tradeable account represents an account that has sufficient
funds to make a trade in accordance with firm policies. |
|
(6) |
|
An active account represents an account that has traded at least
once in the previous 12 months. |
|
(7) |
|
Daily average trades per active account represents the total
daily average trades per average active account in period. |
|
(8) |
|
Total customer equity represents the total amount of cash and
unrealized profit (loss) as of that date in all our customer
accounts. |
|
(9) |
|
Capital in excess of regulatory requirements represents total
consolidated capital less the sum of the minimum requirements of
our regulated operating subsidiaries. |
13
RISK
FACTORS
An investment in shares of our Class A common stock
involves risks. You should carefully consider the following
information about these risks, together with the other
information contained in this prospectus, before investing in
shares of our Class A common stock.
Risks
Related to Our Business
The FX
market has only recently become accessible to retail investors
and, accordingly, we have a limited operating history upon which
to evaluate our performance.
The FX market has only recently become accessible to retail
investors. Prior to 1996, retail investors generally did not
directly trade in the FX market, and we believe most current
retail FX traders only recently viewed currency trading as a
practical alternative investment class. Our FX trading
operations were launched in 1999, at which time we began
offering FX trading services domestically and internationally.
Accordingly, we have a limited operating history in a relatively
new international retail FX trading market upon which you can
evaluate our prospects and future performance. Our prospects may
be materially adversely affected by the risks, expenses and
difficulties frequently encountered in the operation of a new
business in a rapidly evolving industry characterized by intense
competition and evolving regulatory oversight and rules.
Our
revenue and profitability are influenced by trading volume and
currency volatility, which are directly impacted by domestic and
international market and economic conditions that are beyond our
control.
In the past few years, there has been significant disruption and
volatility in the global financial markets and economic
conditions, and many countries, including the United States,
have been in an economic slowdown. Our revenue is influenced by
the general level of trading activity in the FX market. Our
revenue and operating results may vary significantly from period
to period due primarily to movements and trends in the
worlds currency markets and to fluctuations in trading
levels. We have generally experienced greater trading volume and
higher revenue in periods of volatile currency markets. In the
event we experience lower levels of currency volatility, our
revenue and profitability will likely be negatively affected.
Like other financial services firms, our business and
profitability are directly affected by factors that are beyond
our control, such as economic and political conditions, broad
trends in business and finance, changes in the volume of foreign
currency transactions, changes in supply and demand for
currencies, movements in currency exchange rates, changes in the
financial strength of market participants, legislative and
regulatory changes, changes in the markets in which such
transactions occur, changes in how such transactions are
processed and disruptions due to terrorism, war or extreme
weather events. Any one or more of these factors, or other
factors, may adversely affect our business and results of
operations and cash flows. A weakness in equity markets, such as
the current economic slowdown causing a reduction in trading
volume in U.S. or foreign securities and derivatives, could
result in reduced trading activity in the FX market and
therefore could have a material adverse effect on our business,
financial condition and results of operations and cash flows. As
a result, period to period comparisons of our operating results
may not be meaningful and our future operating results may be
subject to significant fluctuations or declines.
Our
risk management policies and procedures may not be effective and
may leave us exposed to unidentified or unexpected
risks.
We are dependent on our risk management policies and the
adherence to such policies by our trading staff. Our policies,
procedures and practices are used to identify, monitor and
control a variety of risks, including risks related to human
error, customer defaults, market movements, fraud and
money-laundering. Some of our methods for managing risk are
discretionary by nature and are based on internally developed
controls and observed historical market behavior, and also
involve reliance on standard industry practices. These methods
may not adequately prevent losses, particularly as they relate
to extreme market movements, which may be significantly greater
than historical changes in market prices. Our risk management
methods also may not adequately prevent losses due to technical
errors if our testing and quality control practices are not
effective in preventing software or hardware failures. In
addition, we may elect to adjust our risk
14
management policies to allow for an increase in risk tolerance,
which could expose us to the risk of greater losses. Our risk
management methods rely on a combination of technical and human
controls and supervision that are subject to error and failure.
These methods may not protect us against all risks or may
protect us less than anticipated, in which case our business,
financial condition and results of operations and cash flows may
be materially adversely affected.
We
depend on our proprietary technology. Any disruption or
corruption of our proprietary technology or our inability to
maintain technological superiority in our industry could have a
material adverse effect on our business, financial condition and
results of operations and cash flows. We may experience failures
while developing our proprietary technology.
We rely on our proprietary technology to receive and properly
process internal and external data. Any disruption for any
reason in the proper functioning, or any corruption, of our
software or erroneous or corrupted data may cause us to make
erroneous trades, accept customers from jurisdictions where we
do not possess the proper licenses, authorizations or permits,
or require us to suspend our services and could have a material
adverse effect on our business, financial condition and results
of operations and cash flows. For example, our technology
platform includes a real time margin-watcher feature to ensure
that open positions are automatically closed out if a customer
becomes at risk of going into a negative balance on his or her
account. Any disruption or corruption of this feature would
subject us to the risk that amounts owed to us by such customer
exceed the collateral in such customers account, and our
policy is generally not to pursue claims for negative equity
against our customers.
In order to remain competitive, we need to continuously develop
and redesign our proprietary technology. In doing so, there is
an ongoing risk that failures may occur and result in service
interruptions or other negative consequences, such as slower
quote aggregation, slower trade execution, erroneous trades, or
mistaken risk management information.
Our success in the past has largely been attributable to our
proprietary technology that has taken us many years to develop.
We believe our proprietary technology has provided us with a
competitive advantage relative to many FX market participants.
If our competitors develop more advanced technologies, we may be
required to devote substantial resources to the development of
more advanced technology to remain competitive. The FX market is
characterized by rapidly changing technology, evolving industry
standards and changing trading systems, practices and
techniques. We may not be able to keep up with these rapid
changes in the future, develop new technology, realize a return
on amounts invested in developing new technologies, and as such,
may not remain competitive in the future.
System
failures could cause interruptions in our services or decreases
in the responsiveness of our services which could harm our
business.
If our systems fail to perform, we could experience disruptions
in operations, slower response times or decreased customer
service and customer satisfaction. Our ability to facilitate
transactions successfully and provide high quality customer
service depends on the efficient and uninterrupted operation of
our computer and communications hardware and software systems.
Our systems also are vulnerable to damage or interruption from
human error, natural disasters, power loss, telecommunication
failures, break-ins, sabotage, computer viruses, intentional
acts of vandalism and similar events. We do not have fully
redundant capabilities. While we currently maintain a disaster
recovery plan, or DRP, which is intended to minimize service
interruptions and secure data integrity, our DRP may not work
effectively during an emergency. Any system failure that causes
an interruption in our services, decreases the responsiveness of
our services or affects access to our services could impair our
reputation, damage our brand name and materially adversely
affect our business, financial condition and results of
operations and cash flows.
15
We may
not be able to protect our intellectual property rights or may
be prevented from using intellectual property necessary for our
business.
We rely on a combination of trademark, copyright, trade secret
and fair business practice laws in the United States and other
jurisdictions to protect our proprietary technology,
intellectual property rights and our brand. We also enter into
confidentiality and invention assignment agreements with our
employees and consultants, and confidentiality agreements with
other third parties. We also rigorously control access to our
proprietary technology. It is possible that third parties may
copy or otherwise obtain and use our proprietary technology
without authorization or otherwise infringe on our rights. We
may also face claims of infringement that could interfere with
our ability to use technology that is material to our business
operations.
In the future, we may have to rely on litigation to enforce our
intellectual property rights, protect our trade secrets,
determine the validity and scope of the proprietary rights of
others or defend against claims of infringement or invalidity.
Any such litigation, whether successful or unsuccessful, could
result in substantial costs and the diversion of resources and
the attention of management, any of which could negatively
affect our business.
Our
cost structure is largely fixed. If our revenues decline and we
are unable to reduce our costs, our profitability will be
adversely affected.
Our cost structure is largely fixed. We base our cost structure
on historical and expected levels of demand for our products and
services, as well as our fixed operating infrastructure, such as
computer hardware and software, hosting facilities and security
and staffing levels. If demand for our products and services
declines and, as a result, our revenues decline, we may not be
able to adjust our cost structure on a timely basis and our
profitability may be materially adversely affected.
We
operate in a heavily regulated environment that imposes
significant compliance requirements and costs on us. Failure to
comply with the rapidly evolving laws and regulations governing
our FX and other businesses may result in regulatory agencies
taking action against us and significant legal expenses in
defending ourselves, which could adversely affect our revenues
and the way we conduct our business.
We are regulated by governmental bodies
and/or
self-regulatory organizations in a number of jurisdictions,
including the United States, the United Kingdom (where
regulatory passport rights have been exercised to operate in a
number of European Economic Area jurisdictions), Hong Kong,
Australia and Dubai. Upon the completion of our acquisition of
ODL, which is expected to close in September 2010, we will also
be regulated in Japan. We are also exposed to substantial risks
of liability under federal and state securities laws, federal
commodity futures laws, other federal and state laws and court
decisions, as well as rules and regulations promulgated by the
Securities and Exchange Commission, or SEC, the Federal Reserve
and state securities regulators.
Many of the regulations we are governed by are intended to
protect the public, our customers and the integrity of the
markets, and not necessarily our shareholders. Substantially all
of our operations involving the execution and clearing of
transactions in foreign currencies, CFDs, gold and silver and
securities are conducted through subsidiaries that are regulated
by governmental bodies or self-regulatory organizations. In the
United States, we are principally regulated by the
Commodity Futures Trading Commission, or CFTC, and the National
Futures Association, or NFA. We are also regulated in all
regions by applicable regulatory authorities and the various
exchanges of which we are members. For example, we are regulated
by the Financial Services Authority in the United Kingdom, or
FSA, the Comité des Établissements de Credit et des
Entreprises dInvestissement in France, or CECEI, the
Securities and Futures Commission in Hong Kong, or SFC, the
Australian Securities and Investment Commission in Australia, or
ASIC, and the Dubai Multi Commodities Centre in Dubai, or DMCC,
among others, and, upon the completion of our acquisition of
ODL, the Kanto Local Finance Bureau in Japan, or KLFB. These
regulators and self-regulatory organizations regulate the
conduct of our business in many ways and conduct regular
examinations of our business to monitor our compliance with
these regulations. Among other things, we are subject to
regulation with regard to:
|
|
|
|
|
our sales practices, including our interaction with and
solicitation of customers and our marketing activities;
|
16
|
|
|
|
|
the custody, control and safeguarding of our customers
assets;
|
|
|
|
account statements, record-keeping and retention;
|
|
|
|
maintaining specified minimum amounts of capital and limiting
withdrawals of funds from our regulated operating subsidiaries;
|
|
|
|
making regular financial and other reports to regulators;
|
|
|
|
anti-money laundering practices;
|
|
|
|
licensing for our operating subsidiaries and our employees;
|
|
|
|
the conduct of our directors, officers, employees and
affiliates; and
|
|
|
|
supervision of our business.
|
Compliance with these regulations is complicated, time consuming
and expensive. Even minor, inadvertent irregularities can
potentially give rise to claims that applicable laws and
regulations have been violated. Failure to comply with all
potentially applicable laws and regulations could lead to fines
and other penalties which could adversely affect our revenues
and our ability to conduct our business as planned. In addition,
we could incur significant legal expenses in defending ourselves
against and resolving actions or investigations by such
regulatory agencies.
We
accept customers from many jurisdictions in a manner which we
believe does not require local registration, licensing or
authorization. As a result, our growth may be limited by future
restrictions in these jurisdictions and we remain at risk that
we may be exposed to civil or criminal penalties or be required
to cease operations if we are found to be operating in
jurisdictions without the proper license or authorization or if
we become subject to regulation by local government
bodies.
Trading volume for 2009 with customers resident in jurisdictions
in which we are not licensed or authorized by governmental
bodies
and/or
self-regulatory organizations was in the aggregate about 55% of
our total customer trading volume. We seek to deal with
customers resident in foreign jurisdictions in a manner which
does not breach any local laws or regulations where they are
resident or require local registration, licensing or
authorization from local governmental or regulatory bodies or
self-regulatory organizations. We determine the nature and
extent of services we can provide and the manner in which we
conduct our business with customers resident in foreign
jurisdictions based on a variety of factors.
In jurisdictions where we are not licensed or authorized, we are
generally restricted from direct marketing to retail investors
including the operation of a website specifically targeted to
investors in a particular foreign jurisdiction. This restriction
may limit our ability to grow our business in such jurisdictions
or may result in increased overhead costs or lower service
quality to customers in such jurisdictions. Accordingly, we
currently have only a limited presence in a number of
significant markets and may not be able to gain a significant
presence there unless and until legal and regulatory barriers to
international firms in certain of those markets are modified.
Existing and future legal and regulatory requirements and
restrictions may adversely impact our international expansion on
an ongoing basis and we may not be able to successfully develop
our business in a number of markets, including emerging markets,
as we currently plan.
We have consulted with legal counsel in selected jurisdictions,
including each jurisdiction in which residents of such
jurisdiction account for one percent (1%) or greater of our
total retail customer trading volume, for advice regarding
whether we are operating in compliance with local laws and
regulations (including whether we are required to be licensed or
authorized) or, in some cases where licensing or authorization
requirements could be read to be applicable to foreign dealers
without a local presence, whether such requirements are
generally not enforced. We have not similarly consulted with
legal counsel in each of the other jurisdictions in which our
customers reside, and trading volume from customers resident in
these latter jurisdictions accounts for approximately 20% of our
total retail customer trading volume. We are accordingly exposed
to the risk that we may be found to be operating in
jurisdictions without required licenses or authorizations or
without being in compliance with local legal or regulatory
requirements. Furthermore,
17
where we have taken legal advice we are exposed to the risk that
our legal and regulatory analysis is subsequently determined by
a local regulatory agency or other authority to be incorrect and
that we have not been in compliance with local laws or
regulations (including local licensing or authorization
requirements) and to the risk that the regulatory environment in
a jurisdiction may change, including a circumstance where laws
or regulations or licensing or authorization requirements that
previously were not enforced become subject to enforcement. In
any of these circumstances, we may be subject to sanctions,
fines and restrictions on our business or other civil or
criminal penalties and our contracts with customers may be void
or unenforceable, which could lead to losses relating to
restitution of client funds or principal risk on open positions.
Any such action in one jurisdiction could also trigger similar
actions in other jurisdictions. We may also be required to cease
the conduct of our business with customers in any such
jurisdiction
and/or we
may determine that compliance with the laws or licensing,
authorization or other regulatory requirements for continuance
of the business are too onerous to justify making the necessary
changes to continue that business. In addition, any such event
could impact our relationship with the regulators or
self-regulatory organizations in the jurisdictions where we are
subject to regulation, including our regulatory compliance or
authorizations. If sanctions, fines, restrictions on our
business or other penalties are imposed on us for failure to
comply with applicable legal requirements, guidelines or
regulations, our financial condition and results of operations,
and our reputation and ability to engage in business, may be
materially adversely affected.
We evaluate our activities in relation to jurisdictions in which
we are not currently regulated by governmental bodies
and/or
self-regulatory organizations on an ongoing basis. As a result
of these evaluations we may determine to alter our business
practices in order to comply with legal or regulatory
developments in such jurisdictions and, at any given time, are
generally in various stages of updating our business practices
in relation to various jurisdictions, including jurisdictions
which account for one percent (1%) or less of our total retail
customer trading volume. Depending on the circumstances, such
changes to our business practices may result in increased costs
or reduced revenues and negatively impact our financial results.
The
Canadian regulatory environment with respect to FX products is
complex and evolving and subject to provincial and territorial
differences. Although we are not currently subject to regulatory
proceedings, our FX trading services may not be compliant with
the regulations of all provinces and territories in Canada. We
may be required to register our business in one or more
provinces or territories, or to restructure our Canadian
activities to be in compliance. Any such restructuring could
negatively impact our profitability because, among other things,
we may be required to share a portion of our
revenue.
Approximately 6% of our total customer trading volume for the
first six months of 2010 was generated from customers located in
Canada. In Canada, the securities and derivatives industry is
governed locally by provincial or territorial legislation, and
there is no national regulator. The regulation of FX products
differs from province to province and territory to territory.
For example, the provincial laws of British Columbia would
require us to register as an investment dealer to offer our
trading services directly. We previously conducted our business
in British Columbia through an affiliate that was a registered
exchange contract dealer with the British Columbia Securities
Commission. We currently conduct our business in British
Columbia through an arrangement with a registered investment
dealer in Canada. In other provinces and territories in Canada,
where we conduct the bulk of our Canadian business, we have
historically provided our services directly from our
U.S. facilities, without registering as a dealer in Canada.
We have received letters from local regulators in Quebec and
Manitoba requesting information about our customers resident in
such provinces. We are aware that local regulators in certain
Canadian provinces and territories have begun to determine that
FX trading services must be carried out through a registered
investment dealer. Accordingly, we are evaluating the
restructuring of our Canadian activities, including possible
arrangements with registered investment dealers, to address
these regulatory developments. We anticipate that our
profitability in Canada will decrease significantly due to the
restructuring of our Canadian activities because, among other
things, we may have to share a portion of our revenue. In
addition to the potential adverse effect on our results of
operations as a result of a need to restructure our Canadian
activities, we may also be subject to enforcement actions and
penalties or customer claims in any province or territory where
our FX trading operations are deemed to have violated local
regulations in the past.
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Servicing
customers via the internet may require us to comply with the
laws and regulations of each country in which we are deemed to
conduct business. Failure to comply with such laws may
negatively impact our financial results.
Since our services are available over the internet in foreign
countries and we have customers residing in foreign countries,
foreign jurisdictions may require us to qualify to do business
in their country. We believe that the number of our customers
residing outside of the United States will increase over time.
We are required to comply with the laws and regulations of each
country in which we conduct business, including laws and
regulations currently in place or which may be enacted related
to internet services available to their citizens from service
providers located elsewhere. Any failure to develop effective
compliance and reporting systems could result in regulatory
penalties in the applicable jurisdiction, which could have a
material adverse effect on our business, financial condition and
results of operations and cash flows.
Our
failure to comply with regulatory requirements could subject us
to sanctions and could have a material adverse effect on our
business, financial condition and results of operations and cash
flows.
Many of the laws and regulations by which we are governed grant
regulators broad powers to investigate and enforce compliance
with their rules and regulations and to impose penalties and
other sanctions for non-compliance. Our ability to comply with
all applicable laws and regulations is dependent in large part
on our internal compliance function as well as our ability to
attract and retain qualified compliance personnel, which we may
not be able to do. If a regulator finds that we have failed to
comply with applicable rules and regulations, we may be subject
to censure, fines,
cease-and-desist
orders, suspension of our business, removal of personnel, civil
litigation or other sanctions, including, in some cases,
increased reporting requirements or other undertakings,
revocation of our operating licenses or criminal conviction. In
2007, the NFA filed a complaint against us and our chief
executive officer alleging, among other things, that we were
using deficient promotional material, had not established and
implemented an adequate anti-money laundering program and failed
to supervise the firms operations. Although we denied the
allegations, we were required to pay a fine. Any disciplinary
action taken against us could result in negative publicity,
potential litigation, remediation costs and loss of customers
which could have a material adverse effect on our business,
financial condition and results of operations and cash flows.
The
regulatory environment in which we operate is subject to
continual change. Changes in the regulatory environment could
have a material adverse effect on our business, financial
condition and results of operations and cash
flows.
The legislative and regulatory environment in which we operate
has undergone significant changes in the recent past and there
may be future regulatory changes in our industry. The financial
services industry in general has been subject to increasing
regulatory oversight in recent years. The governmental bodies
and self-regulatory organizations that regulate our business
have proposed and may consider additional legislative and
regulatory initiatives and may adopt new or revised laws and
regulations. As a result, in the future, we may become subject
to new regulations that may affect the way in which we conduct
our business and may make our business less profitable. For
example, a regulatory body may reduce the levels of leverage we
are allowed to offer to our customers, which may adversely
impact our business, financial condition and results of
operations and cash flows. Changes in the interpretation or
enforcement of existing laws and regulations by those entities
may also adversely affect our business.
For example, in August 2010, the CFTC released final rules
relating to retail FX regarding, among other things,
registration, disclosure, recordkeeping, financial reporting,
minimum capital and other operational standards. Most
significantly the regulations:
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impose an initial minimum security deposit amount of 2% of the
notional value for major currency pairs and 5% of the notional
value for all other retail FX transactions and provide that the
NFA will designate which currencies are major
currencies and review, at least annually, major currency
designations and security deposit requirements and adjust such
designations and requirements as necessary in light of changes
in the volatility of currencies and other economic and market
factors;
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provide that referring brokers must either meet the minimum net
capital requirements applicable to futures and commodity options
referring brokers or enter into a guarantee agreement with a
CFTC-regulated FX dealer member, along with a requirement that
such referring broker may be a party to only one guarantee
agreement at a time;
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require that the risk disclosure statement provided to every
retail FX customer include disclosure of the number of
non-discretionary accounts maintained by the futures commission
merchant, or FCM, or retail foreign exchange dealer, or RFED,
that were profitable and those that were not during the four
most recent calendar quarters;
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require that, FCMs and RFEDs are obligated when requoting prices
to do so in a symmetrical fashion so that the requoted prices do
not represent an increase in the spread from the initially
quoted prices, regardless of the direction the market
moves; and
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prohibit the making of guarantees against loss to retail FX
customers by FCMs, RFEDs and referring brokers and require that
FCMs, RFEDs and referring brokers provide retail FX customers
with enhanced written disclosure statements that, among other
things, inform customers of the risk of loss.
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The impact on us of these new regulations, which will become
effective on October 18, 2010, is uncertain. However, the
inability to offer customers who are U.S. residents
leverage in excess of 50-to-1 (as compared to 100-to-1
previously) may diminish the trading volume of these customers
which may affect our revenue and profitability.
In addition, the Dodd-Frank Wall Street Reform and Consumer
Protection Act, or the Dodd-Frank Act, enacted in July 2010 will
have broad effects on the derivatives markets generally. For
example, this legislation may affect the ability of FX market
makers to do business or affect the prices and terms on which
such market makers will do business with us. Such legislation
may also affect the structure, size, depth and liquidity of the
FX markets generally. These effects may adversely impact our
ability to provide FX transactions to our customers and could
have a material adverse affect on our business and
profitability. In addition, beginning in July 2011, the
Dodd-Frank Act will require us to ensure that our customers
resident in the United States have accounts with our
NFA-registered operating entity. As a result, some of our
customers may decide to transact their trading with a FX broker
who is not subject to this requirement.
In the European Union, new laws have been proposed to regulate
OTC derivatives. These proposals would, among other things,
require mandatory central clearing of some derivatives, higher
collateral requirements, and higher capital charges for
bilaterally cleared OTC derivatives. These proposals are still
at the consultation stage and detailed legislative proposals
have not yet been published. Accordingly, it is difficult to
ascertain what impact these proposals, once adopted, will have
on our business, financial condition and results of operations
and cash flows. If the products that we trade are subjected to
mandatory central clearing, exchange trading, higher collateral
requirements or higher capital charges, this may have an impact
upon the economics of our business and thus have a material
adverse effect on our business, financial condition and results
of operations and cash flows.
Regulators in the European Union have also proposed stringent
regulation of remuneration practices, including proposals to
require 50% of variable remuneration to be paid in the form of
shares or similar capital requirements, 40% to 60% of variable
remuneration to be deferred, bonuses to be proportionate to
fixed salary, and up-front cash bonuses to be capped at 20% of
the total bonus (30% for particularly large bonuses). The
U.K.s FSA has introduced its own proposals to widen the
application of its Remuneration Code to all firms subject to the
Capital Requirements Directive and to include certain
quantitative restrictions on bonuses in line with the European
Unions proposals. These proposals, if adopted, may
constrain our ability to operate certain remuneration practices
in relation to our operations in the U.K. and elsewhere in
Europe.
In addition, Australias ASIC is considering new
regulations which would limit any inappropriate advertising by
the industry, provide disclosure benchmarks for
over-the-counter
CFD providers, and devise a policy on customer suitability.
20
These and other future regulatory changes could have a material
adverse effect on our business and profitability and the FX
industry as a whole.
In addition, the regulatory enforcement environment has created
uncertainty with respect to certain practices or types of
transactions that, in the past, were considered permissible and
appropriate among financial services firms, but that later have
been called into question or with respect to which additional
regulatory requirements have been imposed. Legal or regulatory
uncertainty and additional regulatory requirements could result
in a loss of business.
We are
required to maintain high levels of capital, which could
constrain our growth and subject us to regulatory
sanctions.
The CFTC, NFA and other U.S. and
non-U.S. regulators
have stringent rules requiring that we maintain specific minimum
levels of regulatory capital in our operating subsidiaries that
conduct our spot foreign exchange, CFDs, including contracts for
gold, silver, oil and stock indices and securities business. As
of December 31, 2009, on a separate company basis, we would
have been required to maintain approximately $33.9 million
of minimum net capital in the aggregate across all
jurisdictions, representing a $20.4 million increase from
our minimum net capital requirement at December 31, 2008.
Regulators continue to evaluate and modify minimum capital
requirements from time to time in response to market events and
to improve the stability of the international financial system.
For example, the FSA recently increased capital requirements in
the United Kingdom and may do so again in the future. Additional
revisions to this framework or new capital adequacy rules
applicable to us may be proposed and ultimately adopted, which
could further increase our minimum capital requirements in the
future.
Even if regulators do not change existing regulations or adopt
new ones, our minimum capital requirements will generally
increase in proportion to the size of our business conducted by
our regulated subsidiaries. As a result, we will need to
increase our regulatory capital in order to expand our
operations and increase our revenue, and our inability to
increase our capital on a cost-efficient basis could constrain
our growth. In addition, in many cases, we are not permitted to
withdraw regulatory capital maintained by our subsidiaries
without prior regulatory approval or notice, which could
constrain our ability to allocate our capital resources most
efficiently throughout our global operations. In particular,
these restrictions could limit our ability to pay dividends or
make other distributions on our shares and, in some cases, could
adversely affect our ability to withdraw funds needed to satisfy
our ongoing operating expenses, debt service and other cash
needs.
Regulators monitor our levels of capital closely. We are
required to report the amount of regulatory capital we maintain
to our regulators on a regular basis, and to report any
deficiencies or material declines promptly. While we expect that
our current amount of regulatory capital will be sufficient to
meet anticipated short-term increases in requirements, any
failure to maintain the required levels of regulatory capital,
or to report any capital deficiencies or material declines in
capital could result in severe sanctions, including fines,
censure, restrictions on our ability to conduct business and
revocation of our registrations. The imposition of one or more
of these sanctions could ultimately lead to our liquidation, or
the liquidation of one or more of our subsidiaries.
The Basel Committee on Banking Supervision has proposed a new
regime for regulatory capital and liquidity, known as Basel III,
and these proposals are mirrored by proposals published by the
European Commission. The proposals include more restricted
definitions of what counts as eligible regulatory capital,
liquidity standards, and reform of counterparty credit risk
rules. These proposals, if adopted, may further increase our
regulatory capital requirements.
Procedures
and requirements of the Patriot Act and similar laws may expose
us to significant costs or penalties.
As a financial services firm, we and our subsidiaries are
subject to laws and regulations, including the Uniting and
Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001, or the Patriot
Act, that require that we know our customers and monitor
transactions
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for suspicious financial activities. The cost of complying with
the Patriot Act and related laws and regulations is significant.
We face the risk that our policies, procedures, technology and
personnel directed toward complying with the Patriot Act and
similar laws and regulations are insufficient and that we could
be subject to significant criminal and civil penalties or
reputational damage due to noncompliance. Such penalties and
subsequent remediation costs could have a material adverse
effect on our business, financial condition and results of
operations and cash flows.
Due to
the evolving nature of financial regulations in certain
jurisdictions of the world, our operations may be disrupted if a
regulatory authority deems them inappropriate and requires us to
comply with additional regulatory requirements.
The legislative and regulatory environment in which we operate
has undergone significant changes in the recent past and there
may be future regulatory changes affecting our industry. The
financial services industry in general has been subject to
increasing regulatory oversight in various jurisdictions
throughout the world. We have benefited from recent regulatory
liberalization in several emerging markets in developing regions
enabling us to increase our presence in those markets. Our
ability to continue to expand our presence in these regions,
however, will depend to a large extent upon continued evolution
of the regulatory environment in these several markets, and
there is no assurance that favorable regulatory trends will
continue. Moreover, we currently have only a limited presence in
a number of significant markets and may not be able to gain a
significant presence there unless and until regulatory barriers
to international firms in certain of those markets are modified.
Consequently, our recent success in various regions may not
continue or we may not be able to develop our business in
emerging markets as we currently plan. To the extent current
activities are deemed inappropriate, we may incur a disruption
in services offered to current customers as we are forced to
comply with additional regulations.
Attrition
of customer accounts and failure to attract new accounts could
have a material adverse effect on our business, financial
condition and results of operations and cash flows. Even if we
do attract new customers, we may fail to attract the customers
in a cost-effective manner, which could materially adversely
affect our profitability and growth.
Our customer base is primarily comprised of individual retail
customers. Although we offer products and tailored services
designed to educate, support and retain our customers, our
efforts to attract new customers or reduce the attrition rate of
our existing customers may not be successful. If we are unable
to maintain or increase our customer retention rates or generate
a substantial number of new customers in a cost-effective
manner, our business, financial condition and results of
operations and cash flows would likely be adversely affected.
For the year ended December 31, 2009, we incurred
advertising and marketing expenses of $29.4 million.
Although we have spent significant financial resources on
advertising and marketing expenses and plan to continue to do
so, these efforts may not be a cost-effective way to attract new
customers. In particular, we believe that rates for desirable
advertising and marketing placements, including online, search
engine, print and television advertising fell in 2008 and 2009
due to the overall economic slow-down and are likely to increase
in the foreseeable future. As a result, we may be disadvantaged
relative to our larger competitors in our ability to expand or
maintain our advertising and marketing commitments, which may
raise our customer acquisition costs. Additionally, our
advertising and marketing methods are subject to regulation by
the CFTC and NFA. The rules and regulations of these
organizations impose specific limitations on our sales methods,
advertising and marketing. If we do not achieve our advertising
objectives, our profitability and growth may be materially
adversely affected.
We are
subject to litigation risk which could adversely affect our
reputation, business, financial condition and results of
operations and cash flows.
Many aspects of our business involve risks that expose us to
liability under U.S. federal and state laws, as well as the
rules and enforcement efforts of our regulators and
self-regulatory organizations worldwide. These risks include,
among others, disputes over trade terms with customers and other
market participants, customer losses resulting from system delay
or failure and customer claims that we or our employees executed
22
unauthorized transactions, made materially false or misleading
statements or lost or diverted customer assets in our custody.
We may also be subject to regulatory investigation and
enforcement actions seeking to impose significant fines or other
sanctions, which in turn could trigger civil litigation for our
previous operations that may be deemed to have violated
applicable rules and regulations in various jurisdictions.
The volume of claims and the amount of damages and fines claimed
in litigation and regulatory proceedings against financial
services firms have been increasing, particularly in the current
environment of heightened scrutiny of financial institutions.
The amounts involved in the trades we execute, together with
rapid price movements in our currency pairs, can result in
potentially large damage claims in any litigation resulting from
such trades. Dissatisfied customers may make claims against us
regarding the quality of trade execution, improperly settled
trades, mismanagement or even fraud, and these claims may
increase as our business expands.
Litigation may also arise from disputes over the exercise of our
rights with respect to customer accounts. Although our customer
agreements generally provide that we may exercise such rights
with respect to customer accounts as we deem reasonably
necessary for our protection, our exercise of these rights may
lead to claims by customers that we did so improperly.
Even if we prevail in any litigation or enforcement proceedings
against us, we could incur significant legal expenses defending
against the claims, even those without merit. Moreover, because
even claims without merit can damage our reputation or raise
concerns among our customers, we may feel compelled to settle
claims at significant cost. The initiation of any claim,
proceeding or investigation against us, or an adverse resolution
of any such matter could have a material adverse effect on our
reputation, business, financial condition and results of
operations and cash flows.
We may
be subject to customer litigation, financial losses, regulatory
sanctions and harm to our reputation as a result of employee
misconduct or errors that are difficult to detect and
deter.
There have been a number of highly publicized cases involving
fraud or other misconduct by employees of financial services
firms in recent years. Our employees could execute unauthorized
transactions for our customers, use customer assets improperly
or without authorization, carry out improper activities on
behalf of customers or use confidential customer or company
information for personal or other improper purposes, as well as
misrecord or otherwise try to hide improper activities from us.
In addition, employee errors, including mistakes in executing,
recording or reporting transactions for customers, may cause us
to enter into transactions that customers disavow and refuse to
settle. Employee errors expose us to the risk of material losses
until the errors are detected and the transactions are reversed.
The risk of employee error or miscommunication may be greater
for products that are new or have non-standardized terms.
Further, such errors may be more likely to occur in the
aftermath of any acquisitions during the integration of or
migration from technological systems.
Misconduct by our employees or former employees could subject us
to financial losses or regulatory sanctions and seriously harm
our reputation. It may not be possible to deter or detect
employee misconduct and the precautions we take to prevent and
detect this activity may not be effective in all cases. Our
employees may also commit good faith errors that could subject
us to financial claims for negligence or otherwise, as well as
regulatory actions.
Misconduct by employees of our customers can also expose us to
claims for financial losses or regulatory proceedings when it is
alleged we or our employees knew or should have known that an
employee of our customer was not authorized to undertake certain
transactions. Dissatisfied customers can make claims against us,
including claims for negligence, fraud, unauthorized trading,
failure to supervise, breach of fiduciary duty, employee errors,
intentional misconduct, unauthorized transactions by associated
persons and failures in the processing of transactions.
23
Any
restriction in the availability of credit cards as a payment
option for our customers could adversely affect our business,
financial condition and results of operations and cash
flows.
We currently allow our customers to use credit cards to fund
their accounts with us, and over 81% of our customers elected to
fund their accounts in this manner during 2009. There is a risk
that in the future, new regulations or credit card issuing
institutions may restrict the use of credit and debit cards as a
means to fund accounts used to trade in investment products. The
elimination or a reduction in the availability of credit cards
as a means to fund customer accounts, particularly for our
customers residing outside the United States, could have a
material adverse effect on our business, financial condition and
results of operations and cash flows.
Our
customer accounts may be vulnerable to identity theft and credit
card fraud.
Credit card issuers have adopted credit card security guidelines
as part of their ongoing efforts to prevent identity theft and
credit card fraud. We continue to work with credit card issuers
to ensure that our services, including customer account
maintenance, comply with these rules. There can be no
assurances, however, that our services are fully protected from
unauthorized access or hacking. If there is unauthorized access
to credit card data that results in financial loss, we may
experience reputational damage and parties could seek damages
from us.
In the
current environment facing financial services firms, a
firms reputation is critically important. If our
reputation is harmed, or the reputation of the online financial
services industry as a whole or retail FX industry is harmed,
our business, financial condition and results of operations and
cash flows may be materially adversely affected.
Our ability to attract and retain customers and employees may be
adversely affected if our reputation is damaged. If we fail, or
appear to fail, to deal with issues that may give rise to
reputation risk, we could harm our business prospects. These
issues include, but are not limited to, appropriately dealing
with potential conflicts of interest, legal and regulatory
requirements, ethical issues, money-laundering, privacy,
customer data protection, record-keeping, sales and trading
practices, and the proper identification of the legal, credit,
liquidity, operational and market risks inherent in our
business. Failure to appropriately address these issues could
also give rise to additional legal risk to us, which could, in
turn, increase the size and number of claims and damages
asserted against us or subject us to regulatory enforcement
actions, fines and penalties. Any such sanction would materially
adversely affect our reputation, thereby reducing our ability to
attract and retain customers and employees.
In addition, our ability to attract and retain customers may be
adversely affected if the reputation of the online financial
services industry as a whole or retail FX industry is damaged.
In recent years, a number of financial services firms have
suffered significant damage to their reputations from highly
publicized incidents that in turn resulted in significant and in
some cases irreparable harm to their business. The perception of
instability within the online financial services industry could
materially adversely affect our ability to attract and retain
customers.
The
loss of members of our senior management could compromise our
ability to effectively manage our business and pursue our growth
strategy.
We rely on members of our senior management to execute our
existing business plans and to identify and pursue new
opportunities. Our chief executive officer, Mr. Drew Niv,
has been our chief executive officer since our founding and was
one of our founders. Certain others on our management team have
been with us for most of our history and have significant
experience in the FX industry. Our continued success is
dependent upon the retention of these and other key executive
officers and employees, as well as the services provided by our
trading staff, technology and programming specialists and a
number of other key managerial, marketing, planning, financial,
technical and operations personnel. The loss of such key
personnel could have a material adverse effect on our business.
In addition, our ability to grow our business is dependent, to a
large degree, on our ability to retain such employees.
24
Our
pending acquisition of ODL may adversely affect our business,
and new acquisitions or joint ventures that we may pursue could
present unforeseen integration obstacles.
We are in the process of acquiring ODL, a London-based broker
dealer of FX, CFDs, spread betting, stocks and options with
substantial business in U.K. and Europe. The process of
integrating ODLs operations with ours may require a
disproportionate amount of resources and management attention as
the acquisition will increase the geographic footprint of our
operations, especially in Europe and the Middle East. Any
substantial diversion of management attention or difficulties in
operating the combined business could affect our ability to
achieve operational, financial and strategic objectives. The
unsuccessful integration of ODLs operations with ours may
also have adverse short-term effects on reported operating
results and may lead to the loss of key personnel. In addition,
ODLs customers may react unfavorably to the combination of
our businesses or we may be exposed to additional liabilities of
the combined business, both of which could materially adversely
affect our revenue and results of operations.
We may also pursue new acquisitions or joint ventures that could
present integration obstacles or costs. We may not realize any
of the benefits we anticipated from the strategy and we may be
exposed to additional liabilities of any acquired business, any
of which could materially adversely affect our revenue and
results of operations. In addition, future acquisitions or joint
ventures may involve the issuance of additional Holdings Units
or shares of our Class A common stock, which would dilute
your ownership.
New
lines of business or new products and services may subject us to
additional risks.
From time to time, we may implement new lines of business or
offer new products and services within existing lines of
business. There are substantial risks and uncertainties
associated with these efforts, particularly in instances where
the markets are not fully developed. In developing and marketing
new lines of business
and/or new
products and services, we may invest significant time and
resources. Initial timetables for the introduction and
development of new lines of business
and/or new
products or services may not be achieved and price and
profitability targets may not prove feasible. External factors,
such as compliance with regulations, competitive alternatives
and shifting market preferences, may also impact the successful
implementation of a new line of business or a new product or
service. Furthermore, any new line of business
and/or new
product or service could have a significant impact on the
effectiveness of our system of internal controls. Failure to
successfully manage these risks in the development and
implementation of new lines of business or new products or
services could have a material adverse effect on our business,
results of operations and financial condition.
We may
be unable to effectively manage our rapid growth and retain our
customers.
The rapid growth of our business during our short history has
placed significant demands on our management and other
resources. If our business continues to grow at a rate
consistent with our historical growth, we may need to expand and
upgrade the reliability and scalability of our transaction
processing systems, network infrastructure and other aspects of
our proprietary technology. We may not be able to expand and
upgrade our technology systems and infrastructure to accommodate
such increases in our business activity in a timely manner,
which could lead to operational breakdowns and delays, loss of
customers, a reduction in the growth of our customer base,
increased operating expenses, financial losses, increased
litigation or customer claims, regulatory sanctions or increased
regulatory scrutiny.
In addition, due to our rapid growth, we will need to continue
to attract, hire and retain highly skilled and motivated
officers and employees. We may not be able to attract or retain
the officers and employees necessary to manage this growth
effectively.
We may
be unable to respond to customers demands for new services
and products and our business, financial condition and results
of operations and cash flows may be materially adversely
affected.
Our business is subject to rapid change and evolving industry
standards. New services and products provided by our competitors
may render our existing services and products less competitive.
Our future
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success will depend, in part, on our ability to respond to
customers demands for new services and products on a
timely and cost-effective basis and to adapt to address the
increasingly sophisticated requirements and varied needs of our
customers and prospective customers. We may not be successful in
developing, introducing or marketing new services and products.
In addition, our new service and product enhancements may not
achieve market acceptance. Any failure on our part to anticipate
or respond adequately to customer requirements or changing
industry practices, or any significant delays in the
development, introduction or availability of new services,
products or service or product enhancements could have a
material adverse effect on our business, financial condition and
results of operations and cash flows.
We
intend to enter into a credit facility. The credit agreement
governing such credit facility may restrict our current and
future operations, particularly our ability to respond to
changes or to take certain actions.
We intend to enter into a credit facility. The credit agreement
governing such credit facility may contain a number of
restrictive covenants that impose significant operating and
financial restrictions on us and may limit our ability to engage
in acts that may be in our long-term best interest. A breach of
the covenants under such credit agreement governing our credit
facility could result in an event of default under that
indebtedness. Such a default may allow the creditors to
accelerate that debt and may result in the acceleration of any
other debt to which a cross-acceleration or cross-default
provision applies. In addition, an event of default under such
credit agreement governing our credit facility may permit the
lenders under our credit facility to terminate all commitments
to extend further credit under that facility. Furthermore, if we
are unable to repay the amounts due and payable under our credit
facility, those lenders could proceed against the collateral
granted to them to secure that indebtedness. In the event our
lenders accelerate the repayment of our borrowings, we and our
subsidiaries may not have sufficient assets to repay that
indebtedness. As a result of these restrictions, we may be:
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limited in how we conduct our business;
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unable to raise additional debt or equity financing to operate
during general economic or business downturns; or
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unable to compete effectively or to take advantage of new
business opportunities.
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These restrictions may affect our ability to grow in accordance
with our strategy.
We
face significant competition. Many of our competitors and
potential competitors have larger customer bases, more
established brand recognition and greater financial, marketing,
technological and personnel resources than we do which could put
us at a competitive disadvantage. Additionally, some of our
competitors and many potential competitors are better
capitalized than we are and able to obtain capital more easily
which could put us at a competitive disadvantage.
We compete in the FX market based on our ability to execute our
customers trades at competitive prices, to retain our
existing customers and to attract new customers. Certain of our
competitors have larger customer bases, more established name
recognition, a greater market share in certain markets, such as
Europe, and greater financial, marketing, technological and
personnel resources than we do. These advantages may enable
them, among other things, to:
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develop products and services that are similar to ours, or that
are more attractive to customers than ours, in one or more of
our markets;
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provide products and services we do not offer;
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provide execution and clearing services that are more rapid,
reliable or efficient, or less expensive than ours;
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offer products and services at prices below ours to gain market
share and to promote other businesses, such as FX options listed
securities, CFDs, including contracts for precious metals,
energy and stock indices, and OTC derivatives;
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adapt at a faster rate to market conditions, new technologies
and customer demands;
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offer better, faster and more reliable technology;
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outbid us for desirable acquisition targets;
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more efficiently engage in and expand existing relationships
with strategic alliances;
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market, promote and sell their products and services more
effectively; and
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develop stronger relationships with customers.
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These larger and better capitalized competitors, including
commercial and investment banking firms, may have access to
capital in greater amounts and at lower costs than we do and
thus, may be better able to respond to changes in the FX
industry, to compete for skilled professionals, to finance
acquisitions, to fund internal growth and to compete for market
share generally. Access to capital is critical to our business
to satisfy regulatory obligations and liquidity requirements.
Among other things, access to capital determines our
creditworthiness, which if perceived negatively in the market
could materially impair our ability to provide clearing services
and attract customer assets, both of which are important sources
of revenue. Access to capital also determines the degree to
which we can expand our operations. Thus, if we are unable to
maintain or increase our capital on competitive terms, we could
be at a significant competitive disadvantage, and our ability to
maintain or increase our revenue and earnings could be
materially impaired. Also, new or existing competitors in our
markets could make it difficult for us to maintain our current
market share or increase it in desirable markets. In addition,
our competitors could offer their services at lower prices, and
we may be required to reduce our fees significantly to remain
competitive. A fee reduction without a commensurate reduction in
expenses would decrease our profitability. We may not be able to
compete effectively against these firms, particularly those with
greater financial resources, and our failure to do so could
materially and adversely affect our business, financial
condition and results of operations and cash flows. We may in
the future face increased competition, resulting in narrowing
bid/offer spreads which could materially adversely affect our
business, financial condition and results of operations and cash
flows.
If we
are unable to effectively compete in emerging international
markets, either directly or through joint ventures with local
firms, the future growth of our business may be adversely
affected.
We regard emerging international markets as an important area of
our future growth. Due to cultural, regulatory and other factors
relevant to those markets, however, we may be at a competitive
disadvantage in those regions relative to local firms or to
international firms that have a well established local presence.
In some regions, we may need to enter into joint ventures with
local firms in order to establish a presence in the local
market, and we may face intense competition from other
international firms over relatively scarce opportunities for
market entry. Given the intense competition from other
international firms that are also seeking to enter these
fast-growing markets, we may have difficulty finding suitable
local firms willing to enter into the types of relationships
with us that we may need to gain access to these markets. This
competition could make it difficult for us to expand our
business internationally as planned. For the six months ended
June 30, 2010, we generated approximately 76% of our
customer trading volume from customers outside the United
States. Expanding our business in emerging markets is an
important part of our growth strategy. We face significant risks
in doing business in international markets, particularly in
developing regions. These business, legal and tax risks include:
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less developed or mature local technological infrastructure and
higher costs, which could make our products and services less
attractive or accessible in emerging markets;
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difficulty in complying with the diverse regulatory requirements
of multiple jurisdictions, which may be more burdensome, not
clearly defined, and subject to unexpected changes, potentially
exposing us to significant compliance costs and regulatory
penalties;
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less developed and established local financial and banking
infrastructure, which could make our products and services less
accessible in emerging markets;
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reduced protection of intellectual property rights;
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inability to enforce contracts in some jurisdictions;
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difficulties and costs associated with staffing and managing
foreign operations, including reliance on newly hired local
personnel;
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tariffs and other trade barriers;
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currency and tax laws that may prevent or restrict the transfer
of capital and profits among our various operations around the
world; and
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time zone, language and cultural differences among personnel in
different areas of the world.
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In addition, in order to be competitive in these local markets,
or in some cases because of restrictions on the ability of
foreign firms to conduct business locally, we may seek to
operate through joint ventures with local firms as we have done,
for example, in South Korea. Doing business through joint
ventures may limit our ability to control the conduct of the
business and could expose us to reputational and greater
operational risks.
Our
business could be adversely affected if global economic
conditions continue to negatively impact our customer
base.
Our customer base is primarily comprised of individual retail
customers who view foreign currency trading as an alternative
investment class. If global economic conditions continue to
negatively impact the FX market or adverse developments in
global economic conditions continue to limit the disposable
income of our customers, our business could be materially
adversely affected as our customers may choose to curtail their
trading in the FX market which could result in reduced customer
trading volume and trading revenue.
A
systemic market event that impacts the various market
participants with whom we interact could have a material adverse
effect on our business, financial condition and results of
operations and cash flows.
We interact with various third parties through our relationships
with our prime brokers, white labels and referring brokers. Some
of these market participants could be overleveraged. In the
event of sudden, large market price movements, such market
participants may not be able to meet their obligations to
brokers who, in turn, may not be able to meet their obligations
to their counterparties. As a result, if a systemic collapse in
the financial system were to occur, defaults by one or more
counterparties could have a material adverse effect on our
business, financial condition and results of operations and cash
flows.
The
decline in short-term interest rates has had an adverse effect
on our interest income and revenues.
A portion of our revenue is derived from interest income. We
earn interest on customer balances held in customer accounts and
on our cash held in deposit accounts at various financial
institutions. As a result of the recent decline in short-term
interest rates, our interest income has declined significantly.
Short-term interest rates are highly sensitive to factors that
are beyond our control, including general economic conditions
and the policies of various governmental and regulatory
authorities. For the six months ended June 30, 2010 and for
the years ended December 31, 2009 and 2008, our interest
income was approximately $1.0 million, $1.3 million
and $9.1 million, respectively. Interest income may not
return to the amount we reported in prior years, and any further
deterioration in short-term interest rates could further
adversely affect our interest income and revenue.
In addition, this decline in interest rates has narrowed
cross-border interest rate differentials, which has adversely
affected the carry trade, a once popular investing
strategy which involves buying a currency that offers a higher
interest rate while selling a currency that offers a lower
interest rate. The decline in the carry
28
trade has resulted in a decrease in the number of retail FX
customers. Accordingly, our growth could be impeded if
cross-border interest rate differentials remain compressed.
Our
operations in certain developing regions may be subject to the
risks associated with politically unstable and less economically
developed regions of the world. Trading in the currencies of
these developing regions may expose our customers and the third
parties with whom we interact to sudden and significant
financial loss as a result of exceptionally volatile and
unpredictable price movements and could negatively impact our
business.
Our operations in some emerging markets may be subject to the
political, legal and economic risks associated with politically
unstable and less economically developed regions of the world,
including the risks of war, insurgency, terrorism and government
appropriation. For example, we do business in countries whose
currencies may be less stable than those in our primary markets.
Currency instability or government imposition of currency
restrictions in these countries could impede our operations in
the FX markets in these countries. In addition, emerging markets
may be subject to exceptionally volatile and unpredictable price
movements that can expose customers and brokers to sudden and
significant financial loss. Trading in these markets may be less
liquid, market participants may be less well capitalized and
market oversight may be less extensive, all of which could
increase trading risk, particularly in markets for derivatives,
commodities and currencies. Substantial trading losses by
customers or customer or counterparty defaults, or the prospect
of them, in turn, could drive down trading volume in these
markets.
We are
dependent on FX market makers to continually provide us with FX
market liquidity. In the event we lose access to current prices
and liquidity levels, we may be unable to provide competitive FX
trading services, which will materially adversely affect our
business, financial condition and results of operations and cash
flows.
We rely on third party financial institutions to provide us with
FX market liquidity. As of June 30, 2010, we have
established trading relationships with 17 market makers. These
FX market makers, although under contract with us, have no
obligation to provide us with liquidity and may terminate our
arrangements at any time. We also rely upon these FX market
makers to provide us with competitive FX pricing which we can
pass on to our customers. In the event we lose access to the
competitive FX pricing
and/or
liquidity levels that we currently have, we may be unable to
provide competitive FX trading services, which will materially
adversely affect our business, financial condition and results
of operations and cash flows. As a riskless principal between
our customers and our FX market makers, we provide our customers
with the best bid and offer price for each currency pair from
our FX market makers plus a fixed markup. When a customer places
a trade and opens a position, we act as the counterparty to that
trade and our system immediately opens a trade between us and
the FX market maker who provided the price that the customer
selected. In the event that an offsetting trade fails, we could
incur losses resulting from our trade with our customer.
In addition, whether as a result of exceptional volatility or
situations affecting the market, the absence of competitive
pricing from FX market makers
and/or the
suspension of liquidity would expose us to the risk of a default
by the customer and consequent trading losses. Although our
margining practices are designed to mitigate this risk, we may
be unable to close out customer positions at a level where
margin posted by the customer is sufficient to cover the
customers losses. As a result, a customer may suffer
losses greater than any margin or other funds or assets posted
by that customer or held by us on behalf of that customer. Our
policy is generally not to seek to pursue claims for negative
equity against our customers.
We are
subject to risk of default by financial institutions that hold
our funds and our customers funds.
We have significant deposits with banks and other financial
institutions. Pursuant to current guidelines set forth by the
NFA and the CFTC for our
U.S.-regulated
subsidiaries, we are not required to segregate customer funds
from our own funds. As such, we aggregate our customers
funds and our funds and hold them in collateral and deposit
accounts at various financial institutions. In the event of
insolvency of one or more of the financial institutions with
whom we have deposited these funds, both we and our customers
may not be able to recover our funds. Because our
customers funds are aggregated with our own, they are not
insured by
29
the Federal Deposit Insurance Corporation or any other similar
insurer domestically or abroad, except to the extent of the
maximum insured amount per deposit, which is unlikely to provide
significant benefits to customers. In any such insolvency we and
our customers would rank as unsecured creditors in respect of
claims to funds deposited with any such financial institution.
As a result, we may be subject to claims by customers due to the
loss of customer funds and our business would be harmed by the
loss of our own funds.
We
depend on the services of prime brokers to assist in providing
us access to liquidity through our FX market makers. The loss of
one or more of our prime brokerage relationships could lead to
increased transaction costs and capital posting requirements, as
well as having a negative impact on our ability to verify our
open positions, collateral balances and trade
confirmations.
We depend on the services of prime brokers to assist in
providing us access to liquidity through our FX market makers.
We currently have established three prime brokerage
relationships which act as central hubs through which we are
able to deal with our FX market makers. In return for paying a
transaction-based prime brokerage fee, we are able to aggregate
our trading exposures, thereby reducing our transaction costs.
Since we trade with our FX market makers through our prime
brokers, they also serve as a third party check on our open
positions, collateral balances and trade confirmations. If we
were to lose one or more of our prime brokerage relationships,
we could lose this source of third party verification of our
trading activity, which could lead to an increased number of
record-keeping or documentation errors. Although we have
relationships with FX market makers who could provide clearing
services as a
back-up for
our prime brokerage services, if we were to experience a
disruption in prime brokerage services due to a financial,
technical, regulatory or other development adversely affecting
any of our current prime brokers, our business could be
materially adversely affected to the extent that we are unable
to transfer positions and margin balances to another financial
institution in a timely fashion. In the event of the insolvency
of a prime broker, we might not be able to fully recover the
assets we have deposited (and have deposited on behalf of our
customers) with the prime broker or our unrealized profits since
we will be among the prime brokers unsecured creditors.
Failure
of third-party systems or third-party service and software
providers upon which we rely could adversely affect our
business.
We rely on certain third party computer systems or third party
service and software providers, including technology platforms,
back-office systems, internet service providers and
communications facilities. For example, for the six months ended
June 30, 2010, 8% of our trading volume was derived from
trades utilizing the Meta Trader 4 platform, a third-party
technology platform we license that is popular in the
international trading community and offers our customers an
alternative trading interface. Any interruption in these third
party services, or deterioration in their performance or
quality, could adversely affect our business. If our arrangement
with any third party is terminated, we may not be able to find
an alternative systems or services provider on a timely basis or
on commercially reasonable terms. This could have a material
adverse effect on our business, financial condition and results
of operations and cash flows.
Our
computer infrastructure may be vulnerable to security breaches.
Any such problems could jeopardize confidential information
transmitted over the internet, cause interruptions in our
operations or give rise to liabilities to third
parties.
Our computer infrastructure is potentially vulnerable to
physical or electronic computer break-ins, viruses and similar
disruptive problems and security breaches. Any such problems or
security breaches could give rise to liabilities to one or more
third parties, including our customers, and disrupt our
operations. A party able to circumvent our security measures
could misappropriate proprietary information or customer
information, jeopardize the confidential nature of information
we transmit over the internet or cause interruptions in our
operations. Concerns over the security of internet transactions
and the safeguarding of confidential personal information could
also inhibit the use of our systems to conduct FX transactions
over the internet. To the extent that our activities involve the
storage and transmission of proprietary information and personal
financial information, security breaches could expose us to a
risk of financial loss, litigation and other liabilities. Our
current insurance policies may not protect us against all of
such losses and liabilities. Any of these events,
30
particularly if they result in a loss of confidence in our
services, could have a material adverse effect on our business,
financial condition and results of operations and cash flows.
We
have relationships with referring brokers who direct new
customers to us. Failure to maintain these relationships could
have a material adverse effect on our business, financial
condition and results of operations and cash
flows.
We have relationships with NFA-registered referring brokers who
direct new customers to us and provide marketing and other
services for these customers. For the six months ended
June 30, 2010, our largest referring broker accounted for
4% of our total volume. Many of our relationships with referring
brokers are non-exclusive or may be terminated by the brokers on
short notice. In addition, under our agreements with referring
brokers, they have no obligation to provide us with new
customers or minimum levels of transaction volume. Our failure
to maintain our relationships with these referring brokers, the
failure of the referring brokers to provide us with customers or
our failure to create new relationships with referring brokers
would result in a loss of revenue, which could have a material
adverse effect on our business, financial condition and results
of operations and cash flows. To the extent any of our
competitors offers more attractive compensation terms to one of
our referring brokers, we could lose the brokers services
or be required to increase the compensation we pay to retain the
broker. In addition, we may agree to set the compensation for
one or more referring brokers at a level where, based on the
transaction volume generated by customers directed to us by such
brokers, it would have been more economically attractive to seek
to acquire the customers directly rather than through the
referring broker. To the extent we do not enter into
economically attractive relationships with referring brokers,
our referring brokers terminate their relationship with us or
our referring brokers fail to provide us with customers, our
business, financial condition and results of operations and cash
flows could be materially adversely affected.
Our
relationships with our referring brokers may also expose us to
significant reputational and legal risks as we could be harmed
by referring broker misconduct or errors that are difficult to
detect and deter.
Our reputation may be harmed by, or we may be liable for,
improper conduct by our referring brokers, even though we do not
control their activities. Referring brokers maintain customer
relationships and delegate to us the responsibilities associated
with FX and back-office operations. Furthermore, many of our
referring brokers operate websites, which they use to advertise
our services or direct customers to us. It is difficult for us
to closely monitor the contents of their websites to ensure that
the statements they make in relation to our services are
accurate and comply with applicable rules and regulations. Under
the current rules of the NFA, we are responsible for the
activities of any party that solicits or introduces a customer
to us unless such party is a member or associate of the NFA.
Although all of our referring brokers are members or associates
of the NFA, any disciplinary action taken against our referring
brokers in the United States and abroad, could have a material
adverse effect on our reputation, damage our brand name and
materially adversely affect our business, financial condition
and results of operations and cash flows, and, in any event, we
may be subject to claims by customers and others concerning the
conduct of referring brokers. In August 2010, the CFTC adopted
regulations which require that referring brokers either meet the
minimum net capital requirements applicable to futures and
commodity options referring brokers or enter into a guarantee
agreement with a CFTC-regulated FX broker, along with a
requirement that such referring broker may be a party to only
one guarantee agreement at a time. If the referring brokers with
whom we currently do business choose to enter into a guarantee
agreement, we cannot assure you that such referring brokers will
choose to enter into such a guarantee agreement with us, rather
than one of our competitors. We would be liable for the
solicitation activity and performance of our referring brokers
we guarantee. At this time, the effect of this rule change on
our operations is unclear.
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We
have relationships with white labels who direct customer trading
volume to us. Failure to maintain these relationships or develop
new white label relationships could have a material adverse
effect on our business, financial condition and results of
operations and cash flows.
We have relationships with white labels which provide FX trading
to their customers by using our technology platform and other
services and therefore provide us with an additional source of
revenue. In certain jurisdictions, we are only able to provide
our services through white label relationships. Many of our
relationships with white labels are non-exclusive or may be
terminated by them on short notice. In addition, our white
labels have no obligation to provide us with minimum levels of
transaction volume. Our failure to maintain our relationships
with these white labels, the failure of these white labels to
continue to offer online FX trading services to their customers
using our technology platform, the loss of requisite licenses by
our white labels or our inability to enter into new
relationships with white labels would result in a loss of
revenue, which could have a material adverse effect on our
business, financial condition and results of operations and cash
flows. For the six months ended June 30, 2010, revenue
generated through our white labels represented 2.7% of our total
revenue, and our largest white label relationship represented
2.5% of our total revenue. To the extent any of our competitors
offers more attractive compensation terms to one or more of our
white labels, we could lose the white label relationship or be
required to increase the compensation we pay to retain the white
label. Our relationships with our white labels also may expose
us to significant regulatory, reputational and other risks as we
could be harmed by white label misconduct or errors that are
difficult to detect and deter. If any of our white labels
provided unsatisfactory service to their customers or are deemed
to have failed to comply with applicable laws or regulations,
our reputation may be harmed or we may be subject to claims as a
result of our association with such white label. Any such harm
to our reputation or liability would have a material adverse
effect on our business, financial condition and results of
operations and cash flows.
Reduced
spreads in foreign currencies, levels of trading activity,
trading through alternative trading systems and price
competition from principal model firms could harm our
business.
Computer-generated buy and sell programs and other technological
advances and regulatory changes in the FX market may continue to
tighten spreads on foreign currency transactions. Tighter
spreads and increased competition could make the execution of
trades and market-making activities less profitable. In
addition, new and enhanced alternative trading systems have
emerged as an option for individual and institutional investors
to avoid directing their trades through retail FX brokers, which
could result in reduced revenue derived from our FX brokerage
business. We may also face price competition from our
competitors. Many competing firms using a principal model can
set their own prices as they generate income from trading with
their customers. In contrast, the prices we provide to our
customers are set by our FX market makers which vary based on
market conditions.
Risks
Related to Our Organizational Structure
FXCM
Inc.s only material asset after completion of this
offering will be its interest in FXCM Holdings, LLC, and it is
accordingly dependent upon distributions from FXCM Holdings, LLC
to pay taxes, make payments under the tax receivable agreement
or pay dividends.
FXCM Inc. will be a holding company and will have no material
assets other than its ownership of Holdings Units. FXCM Inc. has
no independent means of generating revenue. FXCM Inc. intends to
cause FXCM Holdings, LLC to make distributions to its
unitholders in an amount sufficient to cover all applicable
taxes at assumed tax rates, payments under the tax receivable
agreement and dividends, if any, declared by it. Deterioration
in the financial condition, earnings or cash flow of FXCM
Holdings, LLC and its subsidiaries for any reason could limit or
impair their ability to pay such distributions. Additionally, to
the extent that FXCM Inc. needs funds, and FXCM Holdings, LLC is
restricted from making such distributions under applicable law
or regulation or under the terms of our financing arrangements,
or is otherwise unable to provide such funds, it could
materially adversely affect our liquidity and financial
condition.
32
Payments of dividends, if any, will be at the discretion of our
board of directors after taking into account various factors,
including our business, operating results and financial
condition, current and anticipated cash needs, plans for
expansion and any legal or contractual limitations on our
ability to pay dividends. We also intend to enter into a credit
facility which may include restrictive covenants that limit our
ability to pay dividends. In addition, FXCM Holdings, LLC is
generally prohibited under Delaware law from making a
distribution to a member to the extent that, at the time of the
distribution, after giving effect to the distribution,
liabilities of FXCM Holdings, LLC (with certain exceptions)
exceed the fair value of its assets.
FXCM
Inc. is controlled by our existing owners, whose interests may
differ from those of our public shareholders.
Immediately following this offering and the application of net
proceeds from this offering, our existing owners will control
approximately % of the combined
voting power of our Class A and Class B common stock
(or % if the underwriters exercise
in full their option to purchase additional shares of
Class A common stock). Accordingly, our existing owners
will have the ability to elect all of the members of our board
of directors, and thereby to control our management and affairs.
In addition, they will be able to determine the outcome of all
matters requiring shareholder approval, including mergers and
other material transactions, and will be able to cause or
prevent a change in the composition of our board of directors or
a change in control of our company that could deprive our
shareholders of an opportunity to receive a premium for their
Class A common stock as part of a sale of our company and
might ultimately affect the market price of our Class A
common stock.
In addition, immediately following this offering and the
application of the net proceeds therefrom, our existing owners
will own % of the Holdings Units
(or % if the underwriters exercise
in full their option to purchase additional shares of
Class A common stock). Because they hold their ownership
interest in our business through FXCM Holdings, LLC, rather than
through the public company, these existing owners may have
conflicting interests with holders of shares of our Class A
common stock. For example, our existing owners may have
different tax positions from us which could influence their
decisions regarding whether and when to dispose of assets,
especially in light of the existence of the tax receivable
agreement that we will enter in connection with this offering,
whether and when to incur new or refinance existing
indebtedness, and whether and when FXCM Inc. should terminate
the tax receivable agreement and accelerate its obligations
thereunder. In addition, the structuring of future transactions
may take into consideration these existing owners tax or
other considerations even where no similar benefit would accrue
to us. See Certain Relationships and Related Person
Transactions Tax Receivable Agreement.
Our
existing owners could take steps so that we would qualify for
exemptions from certain corporate governance requirements
available to a controlled company within the meaning
of the New York Stock Exchange rules.
Upon completion of the offering of our Class A common
stock, our existing owners will continue to control a majority
of the combined voting power of all classes of our voting stock.
Under the New York Stock Exchange corporate governance
standards, a company of which more than 50% of the voting power
for the election of directors is held by an individual, a group
or another company is a controlled company and may
elect not to comply with certain corporate governance
requirements of the New York Stock Exchange, including
(1) the requirement that a majority of the board of
directors consist of independent directors, (2) the
requirement that we have a corporate governance and nominating
committee that is composed entirely of independent directors
with a written charter addressing the committees purpose
and responsibilities and (3) the requirement that we have a
compensation committee that is composed entirely of independent
directors with a written charter addressing the committees
purpose and responsibilities. While we do not currently intend
to take advantage of the exemptions available to a
controlled company under the New York Stock Exchange
corporate governance standards, if we were to do so we would not
be required to have a majority of independent directors and our
compensation and corporate governance and nominating committees
would not be required to consist entirely of independent
directors. Accordingly, you may not have the same protections
afforded to stockholders of companies that are subject to all of
the corporate governance requirements of the New York Stock
Exchange.
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FXCM
Inc. will be required to pay our existing owners for certain tax
benefits it may claim arising in connection with this offering
and related transactions, and the amounts it may pay could be
significant.
As described in Organizational Structure
Offering Transactions, FXCM Inc. intends to use a portion
of the proceeds from this offering to purchase Holdings Units
from our existing owners, including members of our senior
management.
We will enter into a tax receivable agreement with our existing
owners that will provide for the payment by FXCM Inc. to our
existing owners of 85% of the benefits, if any, that FXCM Inc.
is deemed to realize as a result of the increases in tax basis
resulting from our purchases or exchanges of Holdings Units and
certain other tax benefits related to our entering into the tax
receivable agreement, including tax benefits attributable to
payments under the tax receivable agreement. See Certain
Relationships and Related Person Transactions Tax
Receivable Agreement.
We expect that the payments that FXCM Inc. may make under the
tax receivable agreement will be substantial. Assuming no
material changes in the relevant tax law, and that we earn
sufficient taxable income to realize all tax benefits that are
subject to the tax receivable agreement, we expect future
payments under the tax receivable agreement relating to the
purchase by FXCM Inc. of Holdings Units as part of the Offering
Transactions to aggregate
$ million (or
$ million if the underwriters
exercise their option to purchase additional shares) and to
range over the next 15 years from approximately
$ million to
$ million per year (or
approximately $ million to
$ million per year if the
underwriters exercise their option to purchase additional
shares) and decline thereafter. Future payments to our existing
owners in respect of subsequent exchanges would be in addition
to these amounts and are expected to be substantial as well. The
foregoing numbers are merely estimates, and the actual payments
could differ materially. It is possible that future transactions
or events could increase or decrease the actual tax benefits
realized and the corresponding tax receivable agreement
payments. There may be a material negative effect on our
liquidity if, as a result of timing discrepancies or otherwise,
the payments under the tax receivable agreement exceed the
actual benefits we realize in respect of the tax attributes
subject to the tax receivable agreement
and/or
distributions to FXCM Inc. by FXCM Holdings, LLC are not
sufficient to permit FXCM Inc. to make payments under the tax
receivable agreement after it has paid taxes. The payments under
the tax receivable agreement are not conditioned upon our
existing owners continued ownership of us.
In
certain cases, payments under the tax receivable agreement to
our existing owners may be accelerated and/or significantly
exceed the actual benefits FXCM Inc. realizes in respect of the
tax attributes subject to the tax receivable
agreement.
The tax receivable agreement provides that upon certain mergers,
asset sales, other forms of business combinations or other
changes of control, or if, at any time, FXCM Inc. elects an
early termination of the tax receivable agreement, FXCM
Inc.s (or its successors) obligations with respect
to exchanged or acquired Holdings Units (whether exchanged or
acquired before or after such transaction) would be based on
certain assumptions, including that FXCM Inc. would have
sufficient taxable income to fully utilize the deductions
arising from the increased tax deductions and tax basis and
other benefits related to entering into the tax receivable
agreement. As a result, (1) FXCM Inc. could be required to
make payments under the tax receivable agreement that are
greater than or less than the specified percentage of the actual
benefits FXCM Inc. realizes in respect of the tax attributes
subject to the tax receivable agreement and (2) if FXCM
Inc. elects to terminate the tax receivable agreement early,
FXCM Inc. would be required to make an immediate payment equal
to the present value of the anticipated future tax benefits,
which upfront payment may be made years in advance of the actual
realization of such future benefits. Upon a subsequent actual
exchange, any additional increase in tax deductions, tax basis
and other benefits in excess of the amounts assumed at the
change in control will also result in payments under the tax
receivable agreement. In these situations, our obligations under
the tax receivable agreement could have a substantial negative
impact on our liquidity. There can be no assurance that we will
be able to finance our obligations under the tax receivable
agreement.
Payments under the tax receivable agreement will be based on the
tax reporting positions that we determine. Although we are not
aware of any issue that would cause the Internal Revenue
Service, or the IRS,
34
to challenge a tax basis increase, FXCM Inc. will not be
reimbursed for any payments previously made under the tax
receivable agreement. As a result, in certain circumstances,
payments could be made under the tax receivable agreement in
excess of the benefits that FXCM Inc. actually realizes in
respect of the increases in tax basis resulting from our
purchases or exchanges of Holdings Units and certain other tax
benefits related to our entering into the tax receivable
agreement, including tax benefits attributable to payments under
the tax receivable agreement.
The
requirements of being a public company may strain our resources
and distract our management.
As a public company, we will be subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended,
or the Exchange Act, and requirements of the Sarbanes-Oxley Act
of 2002, or the Sarbanes-Oxley Act. These requirements may place
a strain on our systems and resources. The Exchange Act requires
that we file annual, quarterly and current reports with respect
to our business and financial condition. The Sarbanes-Oxley Act
requires that we maintain effective disclosure controls and
procedures and internal controls over financial reporting. To
maintain and improve the effectiveness of our disclosure
controls and procedures, we will need to commit significant
resources, hire additional staff and provide additional
management oversight. We will be implementing additional
procedures and processes for the purpose of addressing the
standards and requirements applicable to public companies. In
addition, sustaining our growth also will require us to commit
additional management, operational and financial resources to
identify new professionals to join our firm and to maintain
appropriate operational and financial systems to adequately
support expansion. These activities may divert managements
attention from other business concerns, which could have a
material adverse effect on our business, financial condition,
results of operations and cash flows. We expect to incur
significant additional annual expenses related to these steps
and, among other things, additional directors and officers
liability insurance, director fees, reporting requirements,
transfer agent fees, hiring additional accounting, legal and
administrative personnel, increased auditing and legal fees and
similar expenses.
Our
internal controls over financial reporting currently do not meet
all of the standards contemplated by Section 404 of the
Sarbanes-Oxley Act, and failure to achieve and maintain
effective internal controls over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act could
have a material adverse effect on our business and common stock
price.
Our internal controls over financial reporting currently do not
meet all of the standards contemplated by Section 404 of
the Sarbanes-Oxley Act that eventually we will be required to
meet. Because currently we do not have comprehensive
documentation of our internal controls and have not yet tested
our internal controls in accordance with Section 404, we
cannot conclude in accordance with Section 404 that we do
not have a material weakness in our internal controls or a
combination of significant deficiencies that could result in the
conclusion that we have a material weakness in our internal
controls. If we are not able to complete our initial assessment
of our internal controls and otherwise implement the
requirements of Section 404 in a timely manner or with
adequate compliance, our independent registered public
accounting firm may not be able to certify as to the adequacy of
our internal controls over financial reporting.
Matters impacting our internal controls may cause us to be
unable to report our financial information on a timely basis and
thereby subject us to adverse regulatory consequences, including
sanctions by the SEC or violations of applicable stock exchange
listing rules, which may result in a breach of the covenants
under our financing arrangements. There also could be a negative
reaction in the financial markets due to a loss of investor
confidence in us and the reliability of our financial
statements. Confidence in the reliability of our financial
statements also could suffer if we or our independent registered
public accounting firm were to report a material weakness in our
internal controls over financial reporting. This could
materially adversely affect us and lead to a decline in the
price of our Class A common stock.
35
Anti-takeover
provisions in our charter documents and Delaware law might
discourage or delay acquisition attempts for us that you might
consider favorable.
Our certificate of incorporation and bylaws will contain
provisions that may make the acquisition of our company more
difficult without the approval of our board of directors. Among
other things, these provisions:
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authorize the issuance of undesignated preferred stock, the
terms of which may be established and the shares of which may be
issued without stockholder approval, and which may include super
voting, special approval, dividend, or other rights or
preferences superior to the rights of the holders of
Class A common stock;
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prohibit stockholder action by written consent, which requires
all stockholder actions to be taken at a meeting of our
stockholders;
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provide that the board of directors is expressly authorized to
make, alter, or repeal our bylaws and that our stockholders may
only amend our bylaws with the approval of 80% or more of all of
the outstanding shares of our capital stock entitled to
vote; and
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establish advance notice requirements for nominations for
elections to our board or for proposing matters that can be
acted upon by stockholders at stockholder meetings.
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These anti-takeover provisions and other provisions under
Delaware law could discourage, delay or prevent a transaction
involving a change in control of our company, including actions
that our stockholders may deem advantageous, or negatively
affect the trading price of our Class A common stock. These
provisions could also discourage proxy contests and make it more
difficult for you and other stockholders to elect directors of
your choosing and to cause us to take other corporate actions
you desire.
Risks
Related to this Offering
A
significant portion of the proceeds from this offering will be
used to purchase Holdings Units from our existing owners,
including members of our senior management.
We intend to use $ of the proceeds
from this offering (or $ if the
underwriters exercise in full their option to purchase
additional shares) to purchase Holdings Units from our existing
owners, including members of our senior management, as described
under Organizational Structure Offering
Transactions. Accordingly, we will not retain any of these
proceeds.
There
may not be an active trading market for shares of our
Class A common stock, which may cause shares of our
Class A common stock to trade at a discount from the
initial offering price and make it difficult to sell the shares
of Class A common stock you purchase.
Prior to this offering, there has not been a public trading
market for shares of our Class A common stock. It is
possible that after this offering an active trading market will
not develop or continue or, if developed, that any market will
be sustained which would make it difficult for you to sell your
shares of Class A common stock at an attractive price or at
all. The initial public offering price per share of Class A
common stock will be determined by agreement among us and the
representatives of the underwriters, and may not be indicative
of the price at which shares of our Class A common stock
will trade in the public market after this offering.
The
market price of our Class A common stock may decline due to
the large number of shares of Class A common stock eligible for
exchange and future sale.
The market price of shares of our Class A common stock
could decline as a result of sales of a large number of shares
of Class A common stock in the market after the offering or
the perception that such sales could occur. These sales, or the
possibility that these sales may occur, also might make it more
difficult for us to sell shares of Class A common stock in
the future at a time and at a price that we deem appropriate.
See Shares Eligible for Future Sale.
36
In addition, we and our existing owners will enter into an
exchange agreement under which they (or certain permitted
transferees thereof) will have the right, from and after the
first anniversary of the date of the closing of this offering
(subject to the terms of the exchange agreement), to exchange
their Holdings Units for shares of our Class A common stock
on a
one-for-one
basis, subject to customary conversion rate adjustments. The
market price of shares of our Class A common stock could
decline as a result of the exchange or the perception that an
exchange could occur. These exchanges, or the possibility that
these exchanges may occur, also might make it more difficult for
holders of our Class A common stock to sell such stock in
the future at a time and at a price that they deem appropriate.
See Certain Relationships and Related Person
Transactions Exchange Agreement.
If
securities or industry analysts do not publish research or
reports about our business, or if they downgrade their
recommendations regarding our Class A common stock, our
stock price and trading volume could decline.
The trading market for our Class A common stock will be
influenced by the research and reports that industry or
securities analysts publish about us or our business. If any of
the analysts who covers us downgrades our Class A common
stock or publishes inaccurate or unfavorable research about our
business, our Class A common stock price may decline. If
analysts cease coverage of us or fail to regularly publish
reports on us, we could lose visibility in the financial
markets, which in turn could cause our Class A common stock
price or trading volume to decline and our Class A common
stock to be less liquid.
The
market price of shares of our Class A common stock may be
volatile, which could cause the value of your investment to
decline.
Even if a trading market develops, the market price of our
Class A common stock may be highly volatile and could be
subject to wide fluctuations. Securities markets worldwide
experience significant price and volume fluctuations. This
market volatility, as well as general economic, market or
political conditions, could reduce the market price of shares of
our Class A common stock in spite of our operating
performance. In addition, our operating results could be below
the expectations of public market analysts and investors due to
a number of potential factors, including variations in our
quarterly operating results or dividends, if any, to
stockholders, additions or departures of key management
personnel, failure to meet analysts earnings estimates,
publication of research reports about our industry, litigation
and government investigations, changes or proposed changes in
laws or regulations or differing interpretations or enforcement
thereof affecting our business, adverse market reaction to any
indebtedness we may incur or securities we may issue in the
future, changes in market valuations of similar companies or
speculation in the press or investment community, announcements
by our competitors of significant contracts, acquisitions,
dispositions, strategic partnerships, joint ventures or capital
commitments, adverse publicity about the industries we
participate in or individual scandals, and in response the
market price of shares of our Class A common stock could
decrease significantly. You may be unable to resell your shares
of Class A common stock at or above the initial public
offering price.
In the past few years, stock markets have experienced extreme
price and volume fluctuations. In the past, following periods of
volatility in the overall market and the market price of a
companys securities, securities class action litigation
has often been instituted against public companies. This
litigation, if instituted against us, could result in
substantial costs and a diversion of our managements
attention and resources.
Investors
in this offering will suffer immediate and substantial
dilution
The initial public offering price per share of Class A
common stock will be substantially higher than our pro forma net
tangible book value per share immediately after this offering.
As a result, you will pay a price per share of Class A
common stock that substantially exceeds the per share book value
of our tangible assets after subtracting our liabilities. In
addition, you will pay more for your shares of Class A
common stock than the amounts paid for the Holdings Units by our
existing owners. Assuming an offering price of
$ per share of Class A common
stock, which is the midpoint of the range on the front cover of
this prospectus, you will incur immediate and substantial
dilution in an amount of $ per
share of Class A common stock. See Dilution.
37
You
may be diluted by the future issuance of additional Class A
common stock in connection with our incentive plans,
acquisitions or otherwise.
After this offering we will have
approximately shares
of Class A common stock authorized but unissued, including
approximately shares
of Class A common stock issuable upon exchange of Holdings
Units that will be held by our existing owners. Our certificate
of incorporation authorizes us to issue these shares of
Class A common stock and options, rights, warrants and
appreciation rights relating to Class A common stock for
the consideration and on the terms and conditions established by
our board of directors in its sole discretion, whether in
connection with acquisitions or otherwise. We have
reserved shares
for issuance under our Long Term Incentive Plan,
including shares
issuable upon the exercise of stock options that we intend to
grant to our employees at the time of this offering. See
Management Long Term Incentive Plan and
IPO Date Stock Option Awards. Any
Class A common stock that we issue, including under our
Long Term Incentive Plan or other equity incentive plans that we
may adopt in the future, would dilute the percentage ownership
held by the investors who purchase Class A common stock in
this offering.
38
FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking statements, which
reflect our current views with respect to, among other things,
our operations and financial performance. You can identify these
forward-looking statements by the use of words such as
outlook, believes, expects,
potential, continues, may,
will, should, seeks,
approximately, predicts,
intends, plans, estimates,
anticipates or the negative version of these words
or other comparable words. Such forward-looking statements are
subject to various risks and uncertainties. Accordingly, there
are or will be important factors that could cause actual
outcomes or results to differ materially from those indicated in
these statements. We believe these factors include but are not
limited to those described under Risk Factors. These
factors should not be construed as exhaustive and should be read
in conjunction with the other cautionary statements that are
included in this prospectus. We undertake no obligation to
publicly update or review any forward-looking statement, whether
as a result of new information, future developments or
otherwise, except as required by law.
MARKET
DATA
This prospectus includes market and industry data and forecasts
that we have derived from independent consultant reports,
publicly available information, various industry publications,
other published industry sources and our internal data and
estimates. Independent consultant reports, industry publications
and other published industry sources generally indicate that the
information contained therein was obtained from sources believed
to be reliable.
Our internal data and estimates are based upon information
obtained from trade and business organizations and other
contacts in the markets in which we operate and our
managements understanding of industry conditions. Although
we believe that such information is reliable, we have not had
this information verified by any independent sources.
39
ORGANIZATIONAL
STRUCTURE
The diagram below depicts our organizational structure
immediately following this offering.
Reclassification
Prior to the completion of this offering, the limited liability
company agreement of FXCM Holdings, LLC will be amended and
restated to, among other things, modify its capital structure by
creating a single new class of units that we refer to as
Holdings Units. We refer to this as the
Reclassification. Immediately following the
Reclassification but prior to the Offering Transactions
described below, there will
be
Holdings Units issued and outstanding.
Incorporation
of FXCM Inc.
FXCM Inc. was incorporated as a Delaware corporation on
August 10, 2010. FXCM Inc. has not engaged in any business
or other activities except in connection with its formation. The
certificate of incorporation of
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FXCM Inc. authorizes two classes of common stock, Class A
common stock and Class B common stock, each having the
terms described in Description of Capital Stock.
Following this offering, each of our existing owners will hold
one or more shares of Class B common stock of FXCM Inc.,
each of which provides its owner with no economic rights but
entitles the holder, without regard to the number of shares of
Class B common stock held by such holder, to one vote on
matters presented to stockholders of FXCM Inc. for each Holdings
Unit held by such holder, as described in Description of
Capital Stock Common Stock Class B
Common Stock. Holders of our Class A common stock and
Class B common stock vote together as a single class on all
matters presented to our stockholders for their vote or
approval, except as otherwise required by applicable law.
We and our existing owners will enter into an exchange agreement
under which they (or certain permitted transferees thereof) will
have the right, from and after the first anniversary of the date
of the closing of this offering (subject to the terms of the
exchange agreement), to exchange their Holdings Units for shares
of our Class A common stock on a
one-for-one
basis, subject to customary conversion rate adjustments for
stock splits, stock dividends and reclassifications. See
Certain Relationships and Related Person
Transactions Exchange Agreement.
Offering
Transactions
At the time of this offering, FXCM Inc. intends to purchase
Holdings Units from FXCM Holdings, LLC and from our existing
owners, including members of our senior management, at a
purchase price per unit equal to the initial public offering
price per share of Class A common stock in this offering
net of underwriting discounts. Assuming that the shares of
Class A common stock to be sold in this offering are sold
at $ per share, which is the
midpoint of the range on the front cover of this prospectus, at
the time of this offering, FXCM Inc. will purchase from FXCM
Holdings,
LLC newly-issued
Holdings Units for an aggregate of
$ million and purchase from
our existing
owners
Holdings Units for an aggregate of
$ million (or Holdings Units
for an aggregate of $ million
if the underwriters exercise in full their option to purchase
additional shares of Class A common stock). FXCM Holdings,
LLC will bear or reimburse FXCM Inc. for all of the expenses of
this offering.
See Principal Stockholders for information regarding
the proceeds from this offering that will be paid to our
directors and executive officers.
As described above, we intend to use a portion of the proceeds
from this offering to purchase Holdings Units from our existing
owners, including members of our senior management. In addition,
the unitholders of FXCM Holdings, LLC (other than FXCM Inc.) may
(subject to the terms of the exchange agreement) exchange their
Holdings Units for shares of Class A common stock of FXCM
Inc. on a
one-for-one
basis. The purchase of Holdings Units and subsequent exchanges
are expected to result in increases in the tax basis of the
assets of FXCM Holdings, LLC that otherwise would not have been
available. These increases in tax basis may reduce the amount of
tax that FXCM Inc. would otherwise be required to pay in the
future. These increases in tax basis may also decrease gains (or
increase losses) on future dispositions of certain capital
assets to the extent tax basis is allocated to those capital
assets. We will enter into a tax receivable agreement with our
existing owners that will provide for the payment by FXCM Inc.
to our existing owners of 85% of the amount of the benefits, if
any, that FXCM Inc. is deemed to realize as a result of these
increases in tax basis and certain other tax benefits related to
our entering into the tax receivable agreement, including tax
benefits attributable to payments under the tax receivable
agreement. These payment obligations are obligations of FXCM
Inc. and not of FXCM Holdings, LLC. See Certain
Relationships and Related Person Transactions Tax
Receivable Agreement.
In connection with its acquisition of Holdings Units, FXCM Inc.
will become the sole managing member of FXCM Holdings, LLC and,
through FXCM Holdings, LLC and its subsidiaries, operate our
business. Accordingly, although FXCM Inc. will initially have a
minority economic interest in FXCM Holdings, LLC, FXCM Inc. will
have 100% of the voting power and control the management of FXCM
Holdings, LLC.
We refer to the foregoing transactions as the Offering
Transactions.
41
As a result of the transactions described above:
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the investors in this offering will collectively
own shares
of our Class A common stock
(or shares
of Class A common stock if the underwriters exercise in
full their option to purchase additional shares of Class A
common stock) and FXCM Inc. will
hold
Holdings Units
(or
Holdings Units if the underwriters exercise in full their option
to purchase additional shares of Class A common stock);
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our existing owners will
hold
Holdings Units
(or
Holdings Units if the underwriters exercise in full their option
to purchase additional shares of Class A common stock);
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the investors in this offering will collectively
have % of the voting power in FXCM
Inc. (or % if the underwriters
exercise in full their option to purchase additional shares of
Class A common stock); and
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our existing owners, through their holdings of our Class B
common stock, will collectively
have % of the voting power in FXCM
Inc. (or % if the underwriters
exercise in full their option to purchase additional shares of
Class A common stock).
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Our post-offering organizational structure will allow our
existing owners to retain their equity ownership in FXCM
Holdings, LLC, an entity that is classified as a partnership for
United States federal income tax purposes, in the form of
Holdings Units. Investors in this offering will, by contrast,
hold their equity ownership in FXCM Inc., a Delaware corporation
that is a domestic corporation for United States federal income
tax purposes, in the form of shares of Class A common
stock. We believe that our existing owners generally find it
advantageous to hold their equity interests in an entity that is
not taxable as a corporation for United States federal income
tax purposes. Our existing owners, like FXCM Inc., will incur
United States federal, state and local income taxes on their
proportionate share of any taxable income of FXCM Holdings, LLC.
We do not believe that our organizational structure gives rise
to any significant benefit or detriment to our business or
operations.
As noted above, we will enter into an exchange agreement with
our existing owners that will entitle them, from and after the
first anniversary of the date of the closing of this offering,
to exchange their Holdings Units for shares of our Class A
common stock on a
one-for-one
basis, subject to customary conversion rate adjustments. The
exchange agreement provides, however, that such exchanges must
be for a minimum of the lesser of 1,000 Holdings Units or all of
the vested Holdings Units held by such existing owner. The
exchange agreement also provides that an existing owner will not
have the right to exchange Holdings Units if FXCM Inc.
determines that such exchange would be prohibited by law or
regulation or would violate other agreements with FXCM Inc. to
which the existing owner may be subject. FXCM Inc. may impose
additional restrictions on exchange that it determines to be
necessary or advisable so that FXCM Holdings, LLC is not treated
as a publicly traded partnership for United States
federal income tax purposes.
Our existing owners will also hold shares of Class B common
stock of FXCM Inc. Although these shares have no economic
rights, they will allow our existing owners to exercise voting
power at FXCM Inc., the managing member of FXCM Holdings, LLC,
at a level that is consistent with their overall equity
ownership of our business. Under the certificate of
incorporation of FXCM Inc., each holder of Class B common
stock shall be entitled, without regard to the number of shares
of Class B common stock held by such holder, to one vote
for each Holdings Unit held by such holder. Accordingly, as our
existing owners sell Holdings Units to FXCM Inc. as part of the
Offering Transactions or subsequently exchange Holdings Units
for shares of Class A common stock of FXCM Inc. pursuant to
the exchange agreement, the voting power afforded to them by
their shares of Class B common stock is automatically and
correspondingly reduced.
Holding
Company Structure
FXCM Inc. will be a holding company, and its sole material asset
will be a controlling equity interest in FXCM Holdings, LLC. As
the sole managing member of FXCM Holdings, LLC, FXCM Inc. will
operate and control all of the business and affairs of FXCM
Holdings, LLC and, through FXCM Holdings, LLC and its
subsidiaries, conduct our business.
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FXCM Inc. will consolidate the financial results of FXCM
Holdings, LLC and its subsidiaries, and the ownership interest
of the other members of FXCM Holdings, LLC will be reflected as
a non-controlling interest in FXCM Inc.s consolidated
financial statements.
Pursuant to the limited liability company agreement of FXCM
Holdings, LLC, FXCM Inc. has the right to determine when
distributions will be made to the members of FXCM Holdings, LLC
and the amount of any such distributions. If FXCM Inc.
authorizes a distribution, such distribution will be made to the
members of FXCM Holdings, LLC pro rata in accordance with the
percentages of their respective limited liability company
interests.
The holders of limited liability company interests in FXCM
Holdings, LLC, including FXCM Inc., will incur United States
federal, state and local income taxes on their proportionate
share of any taxable income of FXCM Holdings, LLC. Net profits
and net losses of FXCM Holdings, LLC will generally be allocated
to its members (including FXCM Inc.) pro rata in accordance with
the percentages of their respective limited liability company
interests. The limited liability company agreement provides for
cash distributions to the holders of limited liability company
interests of FXCM Holdings, LLC if FXCM Inc. determines that the
taxable income of FXCM Holdings, LLC will give rise to taxable
income for its members. In accordance with the limited liability
company agreement, we intend to cause FXCM Holdings, LLC to make
cash distributions to the holders of limited liability company
interests of FXCM Holdings, LLC for purposes of funding their
tax obligations in respect of the income of FXCM Holdings, LLC
that is allocated to them. Generally, these tax distributions
will be computed based on our estimate of the taxable income of
FXCM Holdings, LLC allocable to such holder of limited liability
company interests multiplied by an assumed tax rate equal to the
highest effective marginal combined United States federal, state
and local income tax rate prescribed for an individual or
corporate resident in New York, New York (taking into account
the nondeductibility of certain expenses and the character of
our income).
See Certain Relationships and Related Person
Transactions FXCM Holdings, LLC Limited
Liability Company Agreement.
Regulated
Subsidiaries
We operate our business through our operating subsidiaries, some
of which are subject to the requirements of various regulatory
bodies. Our operating subsidiaries are regulated in a number of
jurisdictions, including the United States, the United Kingdom
(where regulatory passport rights have been exercised to operate
in a number of European Economic Area jurisdictions), Hong Kong,
Australia and Dubai. Upon the completion of our acquisition of
ODL, which is expected to close in September 2010, we will also
be regulated in Japan. For further information regarding our
regulated subsidiaries, see Business
Regulation.
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USE OF
PROCEEDS
We estimate that the proceeds to FXCM Inc. from this offering,
after deducting estimated underwriting discounts and offering
expenses, will be approximately
$ million (or
$ million if the underwriters
exercise in full their option to purchase additional shares of
Class A common stock).
FXCM Inc. intends to use
$ million of these proceeds
to purchase newly-issued Holdings Units from FXCM Holdings, LLC,
as described under Organizational Structure
Offering Transactions. We intend to cause FXCM Holdings,
LLC to use these proceeds to enhance our capital, to fund
acquisitions that we may identify in the future and for general
corporate purposes.
FXCM Inc. intends to use all of the remaining proceeds from this
offering, or $ million (or
$ million if the underwriters
exercise in full their option to purchase additional shares of
Class A common stock), to purchase Holdings Units from our
existing owners, including members of our senior management, as
described under Organizational Structure
Offering Transactions. Accordingly, we will not retain any
of these proceeds. See Principal Stockholders for
information regarding the proceeds from this offering that will
be paid to our directors and named executive officers.
Pending specific application of these proceeds, we expect to
invest them primarily in short-term demand deposits at various
financial institutions.
See Pricing Sensitivity Analysis to see how the
information presented above would be affected by an initial
public offering price per share of class A common stock at
the low-, mid- and high-points of the price range indicated on
the front cover of this prospectus or if the underwriters
option to purchase additional shares of Class A common
stock is exercised in full.
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DIVIDEND
POLICY
Following this offering and subject to legally available funds,
we intend to pay quarterly cash dividends to the holders of our
Class A common stock initially equal to
$ per share of Class A common
stock, commencing with
the
quarter
of .
The declaration, amount and payment of any future dividends on
shares of Class A common stock will be at the sole
discretion of our board of directors. Our board of directors may
take into account general and economic conditions, our financial
condition and operating results, our available cash and current
and anticipated cash needs, capital requirements, contractual,
legal, tax and regulatory restrictions and implications on the
payment of dividends by us to our stockholders or by our
subsidiaries to us, and such other factors as our board of
directors may deem relevant.
FXCM Inc. is a holding company and has no material assets other
than its ownership of Holdings Units in FXCM Holdings, LLC. We
intend to cause FXCM Holdings, LLC to make distributions to us
in an amount sufficient to cover cash dividends, if any,
declared by us. If FXCM Holdings, LLC makes such distributions
to FXCM Inc., the other holders of Holdings Units will be
entitled to receive equivalent distributions.
Other than tax-related distributions, FXCM Holdings, LLC has not
made any distributions to our existing owners during 2008, 2009
and through June 30, 2010. Distributions aggregated
$76.0 million in 2008, $97.1 million in 2009 and
$41.0 million to date in 2010.
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CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of June 30, 2010:
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on a historical basis for FXCM Holdings, LLC; and
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on a pro forma basis for FXCM Inc. giving effect to the
transactions described under Unaudited Pro Forma
Consolidated Financial Information, including the
application of the proceeds from this offering as described in
Use of Proceeds.
|
You should read this table together with the information
contained in this prospectus, including Organizational
Structure, Use of Proceeds, Unaudited
Pro Forma Consolidated Financial Information,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the historical
financial statements and related notes included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
|
(In thousands,
|
|
|
|
except share and
|
|
|
|
per share amounts)
|
|
|
Cash and cash equivalents
|
|
$
|
153,010
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
$
|
|
|
Total members equity
|
|
$
|
141,767
|
|
|
|
|
|
Class A common stock, par value $0.01 per share,
3,000,000,000 shares
authorized, shares
issued and outstanding on a pro forma basis
|
|
|
|
|
|
|
|
|
Class B common stock, par value $0.01 per share,
1,000,000 shares
authorized, shares
issued
and shares
outstanding on a pro forma basis
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
Total members equity/Total stockholders equity
attributable to FXCM Inc.
|
|
|
141,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
141,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
141,767
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
See Pricing Sensitivity Analysis to see how the
information presented above would be affected by an initial
public offering price per share of Class A common stock at
the low-, mid- and high-points of the price range indicated on
the front cover of this prospectus or if the underwriters
option to purchase additional shares of Class A common
stock is exercised in full.
46
DILUTION
If you invest in shares of our Class A common stock, your
interest will be diluted to the extent of the difference between
the initial public offering price per share of Class A
common stock and the pro forma net tangible book value per share
of Class A common stock after this offering. Dilution
results from the fact that the per share offering price of the
shares of Class A common stock is substantially in excess
of the pro forma net tangible book value per share attributable
to our existing owners.
Our pro forma net tangible book value as of June 30, 2010
was approximately $ , or
$ per share of Class A common
stock. Pro forma net tangible book value represents the amount
of total tangible assets less total liabilities, and pro forma
net tangible book value per share of Class A common stock
represents pro forma net tangible book value divided by the
number of shares of Class A common stock outstanding, after
giving effect to the Reclassification and assuming that all of
the holders of Holdings Units in FXCM Holdings, LLC (other than
FXCM Inc.) exchanged their Holdings Units for newly-issued
shares of Class A common stock on a
one-for-one
basis.
After giving effect to the transactions described under
Unaudited Pro Forma Financial Information, including
the application of the proceeds from this offering as described
in Use of Proceeds, our pro forma net tangible book
value as of June 30, 2010 would have been
$ , or
$ per share of Class A common
stock. This represents an immediate increase in net tangible
book value of $ per share of
Class A common stock to our existing owners and an
immediate dilution in net tangible book value of
$ per share of Class A common
stock to investors in this offering.
The following table illustrates this dilution on a per share of
Class A common stock basis assuming the underwriters do not
exercise their option to purchase additional shares of
Class A common stock:
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share of Class A
common stock
|
|
|
|
|
|
$
|
|
|
Pro forma net tangible book value per share of Class A
common stock as of June 30, 2010
|
|
$
|
|
|
|
|
|
|
Increase in pro forma net tangible book value per share of
Class A common stock attributable to investors in this
offering
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share of Class A
common stock after the offering
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Dilution in pro forma net tangible book value per share of
Class A common stock to investors in this offering
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Because our existing owners do not own any Class A common
stock or other economic interests in FXCM Inc., we have
presented dilution in pro forma net tangible book value per
share of Class A common stock to investors in this offering
assuming that all of the holders of Holdings Units in FXCM
Holdings, LLC (other than FXCM Inc.) exchanged their Holdings
Units for newly-issued shares of Class A common stock on a
one-for-one
basis in order to more meaningfully present the dilutive impact
on the investors in this offering.
See Pricing Sensitivity Analysis to see how some of
the information presented above would be affected by an initial
public offering price per share of Class A common stock at
the low-, mid- and high-points of the price range indicated on
the front cover of this prospectus or if the underwriters
exercise in full their option to purchase additional shares of
Class A common stock.
47
The following table summarizes, on the same pro forma basis as
of June 30, 2010, the total number of shares of
Class A common stock purchased from us, the total cash
consideration paid to us and the average price per share of
Class A common stock paid by our existing owners and by new
investors purchasing shares of Class A common stock in this
offering, assuming that all of the holders of Holdings Units in
FXCM Holdings, LLC (other than FXCM Inc.) exchanged their
Holdings Units for shares of our Class A common stock on a
one-for-one
basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Shares of Class A
|
|
|
Total
|
|
|
Price per
|
|
|
|
Common Stock Purchased
|
|
|
Consideration
|
|
|
Share of Class A
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Common Stock
|
|
|
|
(In thousands)
|
|
|
Existing owners
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
Investors in this offering
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated statements of operations
for the year ended December 31, 2009 and for the six months
ended June 30, 2010 present our consolidated results of
operations giving pro forma effect to the probable acquisition
by FXCM Holdings, LLC of ODL described under
Managements Discussion and Analysis of Financial
Condition and Results of Operations Acquisition of
ODL and to the Offering Transactions described under
Organizational Structure and the use of the
estimated net proceeds from this offering as described under
Use of Proceeds, as if such transactions occurred on
January 1, 2009. The unaudited pro forma consolidated
statement of financial condition as of June 30, 2010
presents our consolidated financial position giving pro forma
effect to the Offering Transactions described under
Organizational Structure and the use of the
estimated net proceeds from this offering as described under
Use of Proceeds, as if such transactions occurred on
June 30, 2010. The pro forma adjustments are based on
available information and upon assumptions that our management
believes are reasonable in order to reflect, on a pro forma
basis, the impact of these transactions on the historical
financial information of FXCM Holdings, LLC.
The unaudited pro forma consolidated financial information
should be read together with Organizational
Structure, Managements Discussion and Analysis
of Financial Condition and Results of Operations and the
historical financial statements and related notes included
elsewhere in this prospectus.
The unaudited pro forma consolidated financial information is
included for informational purposes only and does not purport to
reflect the results of operations or financial position of FXCM
Inc. that would have occurred had we operated as a public
company during the periods presented. The unaudited pro forma
consolidated financial information should not be relied upon as
being indicative of our results of operations or financial
position had the Offering Transactions described under
Organizational Structure and the use of the
estimated net proceeds from this offering as described under
Use of Proceeds occurred on the dates assumed. The
unaudited pro forma consolidated financial information also does
not project our results of operations or financial position for
any future period or date.
The pro forma adjustments principally give effect to:
|
|
|
|
|
the probable acquisition by FXCM Holdings, LLC of ODL as
described under Managements Discussion and Analysis
of Financial Condition and Results of Operations
Acquisition of ODL;
|
|
|
|
the purchase by FXCM Inc. of Holdings Units from FXCM Holdings,
LLC and from our existing owners with the proceeds of this
offering and the related effects of the tax receivable
agreement. See Organizational Structure
Offering Transactions and Certain Relationships and
Related Person Transactions Tax Receivable
Agreement; and
|
|
|
|
in the case of the unaudited pro forma consolidated statements
of income, a provision for corporate income taxes on the income
of FXCM Inc. at an effective rate
of %, which includes a provision
for United States federal income taxes and assumes the highest
statutory rates apportioned to each state, local
and/or
foreign jurisdiction.
|
The unaudited pro forma consolidated financial information
presented assumes no exercise by the underwriters of the option
to purchase up to an
additional shares
of Class A common stock from us and that the shares of
Class A common stock to be sold in this offering are sold
at $ per share of Class A
common stock, which is the midpoint of the price range indicated
on the front cover of this prospectus. See Pricing
Sensitivity Analysis to see how certain aspects of the
Offering Transactions would be affected by an initial public
offering price per share of Class A common stock at the
low-, mid- and high-points of the price range indicated on the
front cover of this prospectus or if the underwriters
option to purchase additional shares of Class A common
stock is exercised in full.
49
FXCM
Inc.
Unaudited
Pro Forma Consolidated Statement of Financial Condition
As of
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ODL
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
FXCM
|
|
|
ODL
|
|
|
Acquisition
|
|
|
|
|
|
Offering and
|
|
|
|
|
|
|
Holdings
|
|
|
Actual
|
|
|
Related
|
|
|
|
|
|
Other
|
|
|
FXCM Inc.
|
|
|
|
LLC Actual
|
|
|
(U.S. GAAP)
|
|
|
Adjustments(1)
|
|
|
Sub Total
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
(In thousands)
|
|
|
Assets
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
153,010
|
|
|
$
|
3,727
|
|
|
$
|
|
|
|
$
|
156,737
|
|
|
$
|
|
(3)
|
|
|
|
|
Cash and cash equivalents, held for customers
|
|
|
425,549
|
|
|
|
167,087
|
|
|
|
|
|
|
$
|
592,636
|
|
|
|
|
|
|
|
|
|
Due from brokers
|
|
|
741
|
|
|
|
2,461
|
|
|
|
|
|
|
|
3,202
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
5,608
|
|
|
|
14,254
|
|
|
|
|
|
|
|
19,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
584,908
|
|
|
|
187,529
|
|
|
|
|
|
|
|
772,437
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
|
360
|
|
|
|
5,957
|
|
|
|
|
|
|
|
6,317
|
|
|
|
|
(4)
|
|
|
|
|
Office, communication and computer equipment, net
|
|
|
10,658
|
|
|
|
8,520
|
|
|
|
|
|
|
|
19,178
|
|
|
|
|
|
|
|
|
|
Intangible assets and goodwill
|
|
|
1,363
|
|
|
|
|
|
|
|
33,880
|
|
|
|
35,243
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
8,534
|
|
|
|
290
|
|
|
|
|
|
|
|
8,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
605,823
|
|
|
$
|
202,296
|
|
|
$
|
33,880
|
|
|
$
|
841,999
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer account liabilities
|
|
$
|
425,549
|
|
|
$
|
188,470
|
|
|
$
|
|
|
|
$
|
614,019
|
|
|
$
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
21,669
|
|
|
|
7,599
|
|
|
|
|
|
|
|
29,268
|
|
|
|
|
|
|
|
|
|
Due to brokers
|
|
|
7,838
|
|
|
|
1,277
|
|
|
|
|
|
|
|
9,115
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
461,056
|
|
|
|
197,346
|
|
|
|
|
|
|
|
658,402
|
|
|
|
|
|
|
|
|
|
Payable to related parties pursuant to tax receivable agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
|
|
|
|
Deferred tax liability
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration for acquisition
|
|
|
|
|
|
|
|
|
|
|
15,073
|
|
|
|
15,073
|
|
|
|
|
|
|
|
|
|
Long term lease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
464,056
|
|
|
|
197,346
|
|
|
|
15,073
|
|
|
|
676,475
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value per share
|
|
|
|
|
|
|
3,047
|
|
|
|
(3,047
|
)
|
|
|
|
|
|
|
|
(5)
|
|
|
|
|
Total members capital
|
|
|
141,458
|
|
|
|
|
|
|
|
35,171
|
|
|
|
176,629
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
27,109
|
|
|
|
(27,109
|
)
|
|
|
|
|
|
|
|
(5)
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
(25,206
|
)
|
|
|
13,791
|
|
|
|
(11,415
|
)
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
605,823
|
|
|
$
|
202,296
|
|
|
$
|
33,879
|
|
|
$
|
841,998
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
On May 1, 2010, we signed a purchase agreement to acquire a
100% voting and equity interest in ODL subject to certain
conditions precedent, with the acquisition expected to close
September 2010. The purchase price shall be a 3.5% equity
interest in FXCM Holdings, LLC (Initial
Consideration) and an additional equity interest in FXCM
Holdings, LLC if ODL earns greater than $20.0 million up to
a maximum of a 3.5% additional equity interest in FXCM Holdings,
if ODL earns $40.0 million in the twelve month period
ending June 30, 2011 (Contingent Consideration).
The purchase price has been allocated to the assets acquired and
liabilities assumed based on managements preliminary
estimate of their respective fair values. Independent valuation
specialists assisted FXCMs management in the acquisition
in determining the preliminary fair values of the net assets
acquired and the intangible assets. The work performed by the
independent valuation specialists has been considered by
management in determining the fair value reflected in these
unaudited pro forma financial statements. The valuations are
based on the estimated assets acquired and liabilities assumed
as of June 30, 2010 and managements consideration of
the independent specialists valuation work. All balances
are preliminary as the transaction is expected to close in
September 2010 and final closing balance and closing date are
currently not known.
The total preliminary purchase price is estimated at
$50.2 million, comprised of $35.1 million of Initial
Consideration, and $15.1 million of Contingent
Consideration. The value of the Initial Consideration was
managements estimate of the fair value of consideration
given based on a dividend discount approach, a comparable public
company approach and a comparable private market transactions
approach. The value of Contingent Consideration was estimated
based on managements estimate of consideration given using
the aforementioned valuation approaches combined with
managements estimate of the probability of ODL achieving
its performance targets.
Statement of financial condition data as of June 30, 2010
have been translated at the period-end exchange rate of 1.495
British pounds to the U.S. dollar. Statement of operations data
for the twelve months ended December 31, 2009 and the six
months ended June 30, 2010 have been translated at the
average exchange rates for the period of 1.566 and 1.526 British
pounds to the U.S. dollar, respectively. ODL financial data has
been converted from U.K. to U.S. GAAP and reclassified to
conform to FXCMs financial statement presentation.
The following is a summary of the preliminary allocation of the
purchase price in the ODL acquisition as reflected in the
unaudited pro forma consolidated statement of financial
condition as of June 30, 2010:
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
|
Fair value of net tangible assets acquired:
|
|
$
|
2,201
|
|
Fair value of identifiable intangible assets:
|
|
|
|
|
Customer relationships
|
|
|
16,985
|
|
Non-compete agreements
|
|
|
6,108
|
|
Trade name
|
|
|
589
|
|
|
|
|
|
|
Total fair value of identifiable intangible assets
|
|
|
23,682
|
|
Residual goodwill created from the ODL acquisition
|
|
|
24,361
|
|
|
|
|
|
|
Total preliminary purchase price
|
|
$
|
50,244
|
|
|
|
|
|
|
51
The preliminary allocations to adjust the book value of ODL
assets to their estimated fair value and record amortization
expense on ODL intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Average
|
|
|
Estimated Annual
|
|
|
Six Month
|
|
|
|
|
|
|
Remaining
|
|
|
Depreciation and
|
|
|
Depreciation and
|
|
|
|
|
|
|
Useful Life
|
|
|
Amortization
|
|
|
Amortization
|
|
|
|
Value
|
|
|
(in Years)
|
|
|
Expense for 2009
|
|
|
Expense for 2010
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
16,985
|
|
|
|
3-5 years
|
|
|
$
|
5,140
|
|
|
$
|
2,179
|
|
Non-compete agreements
|
|
|
6,108
|
|
|
|
2-3 years
|
|
|
|
2,175
|
|
|
|
1,087
|
|
Trade name
|
|
|
589
|
|
|
|
3 years
|
|
|
|
196
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization expense
|
|
|
|
|
|
|
|
|
|
$
|
7,511
|
|
|
$
|
3,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
23,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Customer
Relationships
|
The fair value of ODLs retail and institutional customer
relationships was valued separately and estimated using the
excess earnings method. This valuation approach relied on
assumptions regarding projected revenues, attrition rates, and
operating cash flows for its customers, which were projected up
to 2 years. The useful life is based on the period the
customer relationships are expected to contribute to future cash
flows as determined by the companys historical experience.
The cash flows were then tax-effected at a rate of 28%, the U.K.
statutory rate, and were discounted at 18%.
|
|
b.
|
Non-Compete
Agreements
|
The fair value of the non-compete agreements being entered into
with certain key employees of ODL were estimated using the
income approach. This approach estimates the present worth of
the profits that would be lost if these employees were to
compete. Such loss would arise from their ability to divert
existing and future business from ODL. Based upon our knowledge
of ODL and the market, we estimated the likelihood and impact of
competition and the solicitation of other executives for each
covenanter. In estimating the fair value of the non-compete
agreements, two scenarios were analyzed. The first scenario was
one in which the non-compete agreement was in place and no
profits were expected to be lost due to competition and the
second scenario represented a situation whereby there was no
non-compete agreement in place and, consequently, some profits
were lost due to competition. We calculated the present value of
those cash flows using an 18% discount rate and the resulting
difference between the cash flows under the two scenarios
provided an estimate of the fair value of the non-compete
agreements.
The fair value of ODLs trade name was estimated using the
relief-from-royalty method where it is assumed that the trade
name is owned by a third party and that the true owner would be
required to pay a royalty for the privilege of using the trade
name. Under the relief-from-royalty approach, we estimated the
fair value of the ODL trade name by considering the benefits of
ownership of the trade name in the form of future cash flows. To
develop future cash flows attributable to a trade name, we
started with a projection of future revenues from the business
operations of ODL. From the projected revenue, the annual
royalty savings was estimated by applying an estimated royalty
rate of 1% to the projected revenue stream. The annual royalty
savings was then adjusted to reflect taxes at a 28% rate to
arrive at the after-tax cash flow savings associated with
ownership of the trade name. The resulting cash flows were
discounted to a present value based on an 18% discount rate and
then summed.
|
|
|
(2) |
|
Reflects a $ million current
deferred tax liability and a
$ million non-current
deferred tax liability (a total deferred tax liability of
$ million) that has been set
up against the $ million
value of ODLs assets outlined in the above table. The
deferred tax liabilities represent the tax effect of the |
52
|
|
|
|
|
difference between the estimated assigned fair value of the
acquired intangible assets
($ million) and the tax basis
($ million) of such assets.
The estimated amount of
$ million is determined by
multiplying the difference of
$ million by the pro forma
U.S. effective tax rate of %. |
|
(3) |
|
Reflects the net effect on cash and cash equivalents of the
receipt of net offering proceeds of
$ million and the uses of
proceeds described in Use of Proceeds. |
|
(4) |
|
Reflects adjustments to give effect to the tax receivable
agreement (as described in Certain Relationships and
Related Person Transactions Tax Receivable
Agreement) based on the following assumptions: |
|
|
|
we will record an increase of
$ million in deferred tax
assets for estimated income tax effects of the increase in the
tax basis of the purchased interests, based on an effective
income tax rate of % (which
includes a provision for U.S. federal, state, local and/or
foreign income taxes);
|
|
|
|
we will record
$ million, representing 85%
of the estimated realizable tax benefit resulting from
(i) the tax basis in the intangible assets of FXCM
Holdings, LLC on the date of the offering, (ii) the
increase in the tax basis of the purchased interests as noted
above and (iii) certain other tax benefits related to
entering into the tax receivable agreement, including tax
benefits attributable to payments under the tax receivable
agreement as an increase to the liability due to existing owners
under the tax receivable agreement;
|
|
|
|
we will record an increase to additional paid-in
capital of $ million, which
is an amount equal to the difference between the increase in
deferred tax assets and the increase in liability due to
existing owners under the tax receivable agreement; and
|
|
|
|
there are no material changes in the relevant tax
law and we earn sufficient taxable income in each year to
realize the full tax benefit of the amortization of our assets.
|
|
(5) |
|
Reflects net proceeds from the sale by us
of shares
of Class A common stock pursuant to this offering at the
initial public offering price of $
per share, less underwriting discounts and commission and
estimated expenses payable in connection with this offering. |
|
(6) |
|
As described in Organizational Structure, FXCM Inc.
has become the sole managing member of FXCM Holdings, LLC. FXCM
Inc. will initially own less than 100% of the economic interest
in FXCM Holdings, LLC, but will have 100% of the voting power
and control the management of FXCM Holdings, LLC. As a result,
we will consolidate the financial results of FXCM Holdings, LLC
and will record non-controlling interest on our consolidated
statements of financial condition. Immediately following this
offering, the non-controlling interest, based on the assumptions
to the pro forma financial information, will be
$ million. Pro forma
non-controlling interest
represents % of the pro forma
equity of FXCM Holdings, LLC of
$ million, which differs from
the pro forma equity of FXCM Inc. as the former is not affected
by the adjustments relating to the tax receivable agreement
described above in note (3). |
Pursuant to an agreement dated August 26, 2010, a former
employee of ours is, upon a change of control (CIC)
of FXCM Holdings, LLC, entitled to a payment of (i) 1.00%
of the implied value placed upon 100% of us in the event of the
CIC, excluding any amount of capital invested as part of the
CIC, any expenses related to the execution of the CIC and any
undistributed capital invested in us prior to the CIC or
(ii) if we have an initial public offering
(IPO) prior to the CIC, 0.75% of the implied value
placed upon 100% of us in the event of such IPO, excluding the
amount of capital raised in the IPO, any expenses related to the
execution of the IPO and any undistributed capital invested in
us prior to the IPO. Pursuant to ASC 718 Compensation
Arrangements, any expense relating to this arrangement
should be accrued when probable and we have not accrued any
expense relating to this arrangement to date.
53
FXCM
Inc.
Unaudited
Pro Forma Consolidated Statements of Operations
For the
Fiscal Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ODL
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
FXCM
|
|
|
ODL
|
|
|
Acquisition
|
|
|
|
|
|
Offering
|
|
|
|
|
|
|
Holdings
|
|
|
Actual
|
|
|
Related
|
|
|
|
|
|
and Other
|
|
|
FXCM Inc.
|
|
|
|
LLC Actual
|
|
|
(U.S. GAAP)
|
|
|
Adjustments(1)
|
|
|
Sub Total
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
(In thousands except share and per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail trading revenues
|
|
$
|
291,668
|
|
|
$
|
58,977
|
|
|
$
|
|
|
|
$
|
350,645
|
|
|
$
|
|
|
|
|
|
|
Institutional trading revenues
|
|
|
21,107
|
|
|
|
1,940
|
|
|
|
|
|
|
|
23,047
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,289
|
|
|
|
3,164
|
|
|
|
|
|
|
|
4,453
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
8,666
|
|
|
|
405
|
|
|
|
|
|
|
|
9,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
322,730
|
|
|
|
64,486
|
|
|
|
|
|
|
|
387,216
|
|
|
|
|
|
|
|
|
|
Referring broker fees
|
|
|
76,628
|
|
|
|
20,240
|
|
|
|
|
|
|
|
96,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
|
246,102
|
|
|
|
44,246
|
|
|
|
|
|
|
|
290,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
62,588
|
|
|
|
22,814
|
|
|
|
|
|
|
|
85,402
|
|
|
|
|
|
|
|
|
|
Advertising and marketing
|
|
|
29,355
|
|
|
|
4,520
|
|
|
|
|
|
|
|
33,875
|
|
|
|
|
|
|
|
|
|
Communication and technology
|
|
|
24,026
|
|
|
|
12,327
|
|
|
|
|
|
|
|
36,353
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
26,453
|
|
|
|
23,493
|
|
|
|
|
|
|
|
49,946
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,542
|
|
|
|
4,830
|
|
|
|
7,610
|
|
|
|
18,982
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
125
|
|
|
|
207
|
|
|
|
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
149,089
|
|
|
|
68,191
|
|
|
|
7,610
|
|
|
|
224,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
97,013
|
|
|
|
(23,943
|
)
|
|
|
(7,610
|
)
|
|
|
65,460
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
|
(10,053
|
)
|
|
|
6,136
|
|
|
|
|
|
|
|
3,917
|
|
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the controlling and the
non-controlling interests
|
|
$
|
86,960
|
|
|
$
|
(17,807
|
)
|
|
$
|
(7,610
|
)
|
|
$
|
61,543
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to the non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to FXCM Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income available per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
On May 1, 2010, we signed a purchase agreement to acquire a
100% voting and equity interest in ODL subject to certain
conditions precedent, with the acquisition expected to close in
September 2010. For additional information, see Unaudited
Pro Forma Consolidated Statement of Financial Condition as of
June 30, 2010.
|
|
|
(2) |
|
Following this offering we will be subject to U.S. federal
income taxes, in addition to state, local and international
taxes with respect to our allocable share of any net taxable
income of FXCM Holdings, LLC, which will result in higher income
taxes. As a result the pro forma statements of income reflect an
adjustment to our provision for corporate income taxes to
reflect an effective rate of %,
which includes a provision for U.S. federal income taxes and
assumes the highest statutory rates apportioned to each state,
local and/or foreign jurisdiction. |
|
(3) |
|
As described in Organizational Structure, FXCM Inc.
will become the sole managing member of FXCM Holdings, LLC. FXCM
Inc. will initially own less than 100% of the economic interest
in FXCM Holdings, LLC, but will have 100% of the voting power
and control the management of FXCM Holdings, LLC. Immediately
following this offering, the non-controlling interest will
be %. Net income attributable to
the non-controlling interest
represents %
($ ) of income before income taxes
($ ). These amounts have been
determined based on an assumption that the underwriters
option to purchase additional shares is not exercised. If the
underwriters option to purchase additional shares is
exercised, the ownership percentage held by the non-controlling
interest would decrease to %. |
Pursuant to an agreement dated August 26, 2010, a former
employee of ours is, upon a CIC of FXCM Holdings, LLC, entitled
to a payment of (i) 1.00% of the implied value placed upon 100%
of us in the event of the CIC, excluding any amount of capital
invested as part of the CIC, any expenses related to the
execution of the CIC and any undistributed capital invested in
us prior to the CIC or (ii) if we have an IPO prior to the CIC,
0.75% of the implied value placed upon 100% of us in the event
of such IPO, excluding the amount of capital raised in the IPO,
any expenses related to the execution of the IPO and any
undistributed capital invested in us prior to the IPO. Pursuant
to ASC 718 Compensation Arrangements, any expense
relating to this arrangement should be accrued when probable and
we have not accrued any expense relating to this arrangement to
date.
55
FXCM
Inc.
Unaudited
Pro Forma Consolidated Statements of Operations
For the
Six Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ODL
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
FXCM
|
|
|
ODL
|
|
|
Acquisition
|
|
|
|
|
|
Offering and
|
|
|
|
|
|
|
Holdings
|
|
|
Actual
|
|
|
Related
|
|
|
|
|
|
Other
|
|
|
FXCM Inc.
|
|
|
|
LLC Actual
|
|
|
(U.S. GAAP)
|
|
|
Adjustments(1)
|
|
|
Sub Total
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
|
|
|
(In thousands except share and per share data)
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail trading revenues
|
|
$
|
154,823
|
|
|
$
|
27,332
|
|
|
$
|
|
|
|
$
|
182,155
|
|
|
$
|
|
|
|
|
|
|
Institutional trading revenues
|
|
|
13,589
|
|
|
|
3,117
|
|
|
|
|
|
|
|
16,706
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,005
|
|
|
|
1,097
|
|
|
|
|
|
|
|
2,102
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
4,205
|
|
|
|
1,129
|
|
|
|
|
|
|
|
5,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
173,622
|
|
|
|
32,675
|
|
|
|
|
|
|
|
206,297
|
|
|
|
|
|
|
|
|
|
Referring broker fees
|
|
|
37,073
|
|
|
|
7,806
|
|
|
|
|
|
|
|
44,879
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
|
136,549
|
|
|
|
24,869
|
|
|
|
|
|
|
|
161,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
34,499
|
|
|
|
9,065
|
|
|
|
|
|
|
|
43,564
|
|
|
|
|
|
|
|
|
|
Advertising and marketing
|
|
|
11,315
|
|
|
|
1,269
|
|
|
|
|
|
|
|
12,584
|
|
|
|
|
|
|
|
|
|
Communication and technology
|
|
|
12,798
|
|
|
|
4,831
|
|
|
|
|
|
|
|
17,629
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
17,614
|
|
|
|
21,795
|
|
|
|
|
|
|
|
39,409
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,461
|
|
|
|
1,582
|
|
|
|
3,805
|
|
|
|
8,848
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
51
|
|
|
|
183
|
|
|
|
|
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
79,738
|
|
|
|
38,725
|
|
|
|
3,805
|
|
|
|
122,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
56,811
|
|
|
|
(13,856
|
)
|
|
|
3,805
|
|
|
|
39,150
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
4,966
|
|
|
|
(2,767
|
)
|
|
|
|
|
|
|
2,199
|
|
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to the controlling and the
non-controlling interests
|
|
$
|
51,845
|
|
|
$
|
(11,089
|
)
|
|
$
|
(3,805
|
)
|
|
$
|
36,951
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to the non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to FXCM Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income available per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
On May 1, 2010, we signed a purchase agreement to acquire a
100% voting and equity interest in ODL subject to certain
conditions precedent, with the acquisition expected to close in
September 2010. For additional information, see Unaudited
Pro Forma Consolidated Statements of Financial Condition as of
June 30, 2010.
|
|
|
(2) |
|
Following this offering, we will be subject to U.S. federal
income taxes, in addition to state, local and international
taxes with respect to our allocable share of any net taxable
income of FXCM Holdings, LLC, which will result in higher income
taxes. As a result the pro forma statements of income reflect an
adjustment to our provision for corporate income taxes to
reflect an effective rate of %,
which includes a provision for U.S. federal income taxes and
assumes the highest statutory rates apportioned to each state,
local and/or foreign jurisdiction. |
|
(3) |
|
As described in Organizational Structure, FXCM Inc.
will become the sole managing member of FXCM Holdings, LLC. FXCM
Inc. will initially own less than 100% of the economic interest
in FXCM Holdings, LLC, but will have 100% of the voting power
and control the management of FXCM Holdings, LLC. Immediately
following this offering, the non-controlling interest will
be %. Net income attributable to
the non-controlling interest
represents %
($ ) of income before income taxes
($ ). These amounts have been
determined based on an assumption that the underwriters
option to purchase additional shares is not exercised. If the
underwriters option to purchase additional shares is
exercised, the ownership percentage held by the non-controlling
interest would decrease to %. |
Pursuant to an agreement dated August 26, 2010, a former
employee of ours is, upon a CIC of FXCM Holdings, LLC, entitled
to a payment of (i) 1.00% of the implied value placed upon
100% of us in the event of the CIC, excluding any amount of
capital invested as part of the CIC, any expenses related to the
execution of the CIC and any undistributed capital invested in
us prior to the CIC or (ii) if we have an IPO prior to the
CIC, 0.75% of the implied value placed upon 100% of us in the
event of such IPO, excluding the amount of capital raised in the
IPO, any expenses related to the execution of the IPO and any
undistributed capital invested in us prior to the IPO. Pursuant
to ASC 718 Compensation Arrangements, any expense
relating to this arrangement should be accrued when probable and
we have not accrued any expense relating to this arrangement to
date.
57
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data of
FXCM Holdings, LLC should be read together with
Organizational Structure, Unaudited Pro Forma
Consolidated Financial Information,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the historical
financial statements and related notes included elsewhere in
this prospectus. FXCM Holdings, LLC will be considered our
predecessor for accounting purposes, and its consolidated
financial statements will be our historical consolidated
financial statements following this offering.
We derived the selected historical consolidated statements of
operations and comprehensive income data of FXCM Holdings, LLC
for each of the years ended December 31, 2009, 2008 and
2007 and the selected historical consolidated statements of
financial condition data as of December 31, 2009 and 2008
from the audited consolidated financial statements of FXCM
Holdings, LLC which are included elsewhere in this prospectus,
and derived the selected historical combined statement of
operations and comprehensive income for each of the years ended
December 31, 2006 and 2005 and the selected historical
combined statement of financial condition data as of
December 31, 2006 and 2005 and the summary historical
consolidated statements of financial condition data as of
December 31, 2007 from the audited financial statements of
FXCM Holdings, LLC which are not included in this prospectus.
The consolidated statements of operations and comprehensive
income data for the six months ended June 30, 2010 and
2009, and the consolidated statement of financial condition data
as of June 30, 2010 and 2009 have been derived from
unaudited consolidated financial statements of FXCM Holdings,
LLC included elsewhere in this prospectus. The unaudited
consolidated financial statements of FXCM Holdings, LLC have
been prepared on substantially the same basis as the audited
consolidated financial statements and include all adjustments
that we consider necessary for a fair presentation of our
consolidated financial position and results of operations for
all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007(1)
|
|
|
2006(1)(2)
|
|
|
2005(2)
|
|
|
|
(In thousands)
|
|
|
Consolidated Statements of Operations and Comprehensive
Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail trading revenue
|
|
$
|
154,823
|
|
|
$
|
155,217
|
|
|
$
|
291,668
|
|
|
$
|
281,385
|
|
|
$
|
144,935
|
|
|
$
|
131,950
|
|
|
$
|
215,672
|
|
Institutional trading revenue
|
|
|
13,589
|
|
|
|
11,012
|
|
|
|
21,107
|
|
|
|
18,439
|
|
|
|
11,695
|
|
|
|
5,610
|
|
|
|
95
|
|
Interest income
|
|
|
1,005
|
|
|
|
638
|
|
|
|
1,289
|
|
|
|
9,085
|
|
|
|
16,357
|
|
|
|
11,112
|
|
|
|
4,501
|
|
Other income
|
|
|
4,205
|
|
|
|
4,837
|
|
|
|
8,666
|
|
|
|
13,731
|
|
|
|
11,535
|
|
|
|
16,000
|
|
|
|
2,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
173,622
|
|
|
|
171,704
|
|
|
|
322,730
|
|
|
|
322,640
|
|
|
|
184,522
|
|
|
|
164,672
|
|
|
|
222,451
|
|
Referring broker fees
|
|
|
37,073
|
|
|
|
44,004
|
|
|
|
76,628
|
|
|
|
64,567
|
|
|
|
33,211
|
|
|
|
51,360
|
|
|
|
49,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
|
136,549
|
|
|
|
127,700
|
|
|
|
246,102
|
|
|
|
258,073
|
|
|
|
151,311
|
|
|
|
113,312
|
|
|
|
173,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
34,499
|
|
|
|
29,292
|
|
|
|
62,588
|
|
|
|
54,578
|
|
|
|
53,575
|
|
|
|
48,669
|
|
|
|
33,281
|
|
Advertising and marketing
|
|
|
11,315
|
|
|
|
16,911
|
|
|
|
29,355
|
|
|
|
24,629
|
|
|
|
27,846
|
|
|
|
28,223
|
|
|
|
25,595
|
|
Communication and technology
|
|
|
12,798
|
|
|
|
12,283
|
|
|
|
24,026
|
|
|
|
21,311
|
|
|
|
17,836
|
|
|
|
13,773
|
|
|
|
7,914
|
|
General and administrative
|
|
|
17,614
|
|
|
|
11,775
|
|
|
|
26,453
|
|
|
|
20,247
|
|
|
|
17,037
|
|
|
|
20,917
|
|
|
|
22,604
|
|
Depreciation and amortization
|
|
|
3,461
|
|
|
|
3,104
|
|
|
|
6,542
|
|
|
|
6,095
|
|
|
|
7,364
|
|
|
|
6,732
|
|
|
|
4,326
|
|
Interest expense
|
|
|
51
|
|
|
|
51
|
|
|
|
125
|
|
|
|
2,168
|
|
|
|
1,374
|
|
|
|
34
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
79,738
|
|
|
|
73,416
|
|
|
|
149,089
|
|
|
|
129,028
|
|
|
|
125,032
|
|
|
|
118,348
|
|
|
|
93,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
56,811
|
|
|
|
54,284
|
|
|
|
97,013
|
|
|
|
129,045
|
|
|
|
26,279
|
|
|
|
(5,036
|
)
|
|
|
79,288
|
|
Income tax provision
|
|
|
4,966
|
|
|
|
3,870
|
|
|
|
10,053
|
|
|
|
8,872
|
|
|
|
3,120
|
|
|
|
1,720
|
|
|
|
1,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
51,845
|
|
|
|
50,414
|
|
|
|
86,960
|
|
|
|
120,173
|
|
|
|
23,159
|
|
|
|
(6,756
|
)
|
|
|
77,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
(144
|
)
|
|
|
284
|
|
|
|
452
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
51,701
|
|
|
$
|
50,698
|
|
|
$
|
87,412
|
|
|
$
|
120,174
|
|
|
$
|
23,159
|
|
|
$
|
(6,756
|
)
|
|
$
|
77,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007(1)
|
|
|
2006(1)(2)
|
|
|
2005(2)
|
|
|
|
(In thousands)
|
|
|
Consolidated Statements of Financial Condition
Data End of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
153,010
|
|
|
$
|
125,119
|
|
|
$
|
139,858
|
|
|
$
|
179,967
|
|
|
$
|
131,799
|
|
|
$
|
67,631
|
|
|
$
|
75,605
|
|
Cash and cash equivalents, held for customers
|
|
$
|
425,549
|
|
|
$
|
307,894
|
|
|
$
|
353,825
|
|
|
$
|
253,391
|
|
|
$
|
315,440
|
|
|
$
|
253,257
|
|
|
$
|
202,554
|
|
Total assets
|
|
$
|
605,823
|
|
|
$
|
460,054
|
|
|
$
|
517,936
|
|
|
$
|
451,044
|
|
|
$
|
472,564
|
|
|
$
|
364,636
|
|
|
$
|
301,611
|
|
Customer account liabilities
|
|
$
|
425,549
|
|
|
$
|
307,894
|
|
|
$
|
353,825
|
|
|
$
|
253,391
|
|
|
$
|
315,440
|
|
|
$
|
253,257
|
|
|
$
|
202,554
|
|
Total equity
|
|
$
|
141,767
|
|
|
$
|
114,567
|
|
|
$
|
130,788
|
|
|
$
|
140,454
|
|
|
$
|
96,280
|
|
|
$
|
93,851
|
|
|
$
|
89,902
|
|
|
|
|
(1) |
|
In 2005, a shareholder and white label relationship of FXCM
declared bankruptcy, at the time representing 40% of total
revenues, resulting in a significant disruption in the business
that led in large part to the reduction in revenues and the loss
recorded in 2006. As a response to such bankruptcy and its
effects on the business, our senior management initiated
fundamental changes to our business model, including the
decision to transition to an agency model, which became fully
operational in July 2007. |
|
(2) |
|
Financial statements at December 31, 2006 and 2005 and for
the year then ended were prepared on a combined basis. |
59
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements in this discussion regarding industry trends,
our expectations regarding the future performance of our
business, and the other non-historical statements in this
discussion are forward-looking statements. These forward-looking
statements are subject to numerous risks and uncertainties,
including, but not limited to, the risks and uncertainties
described in the Risk Factors section. You should
read the following discussion together with the section entitled
Risk Factors and our consolidated financial
statements and notes thereto included elsewhere in this
prospectus.
The historical financial information discussed in this
Managements Discussion and Analysis of Financial
Condition and Results of Operations reflects the
historical results of operations and financial position of FXCM
Holdings, LLC. This historical financial information does not
give effect to our acquisition of ODL or to the completion of
this offering. See Organizational Structure,
Unaudited Pro Forma Financial Information and
Acquisition of ODL.
OVERVIEW
Business
We are a leading online provider of foreign exchange, or FX,
trading and related services to over 165,000 retail and
institutional customers globally. We offer our customers access
to
over-the-counter,
or OTC, FX markets through our proprietary technology platform.
In a FX trade, a participant buys one currency and
simultaneously sells another, a combination known as a
currency pair. Our platform presents our FX
customers with the best price quotations on up to 56 currency
pairs from up to 17 global banks, financial institutions
and market makers, or FX market makers, which we believe
provides our customers with an efficient and cost-effective way
to trade FX. We utilize what is referred to as agency execution
or an agency model. When our customer executes a trade on the
best price quotation offered by our FX market makers, we act as
a credit intermediary, or riskless principal, simultaneously
entering into offsetting trades with both the customer and the
FX market maker. We earn fees by adding a markup to the price
provided by the FX market makers and generate our trading
revenues based on the volume of transactions, not trading
profits or losses. We believe we are one of the largest retail
FX brokers in the world based on transaction volume, number of
customers and annual revenue, and the largest FX broker that
operates almost exclusively using the agency model.
Industry
Trends
Economic Environment Customer FX trading
volumes are impacted by the volatility levels in markets
including foreign currency and cash equities. Over the past
12 months to June 30, 2010, we have experienced
periods of low and high volatility. The recent fiscal crises in
Greece and other European Union (E.U.) nations elevated FX
market volatility levels across multiple markets, resulting in
an increase in our trading activity during the second quarter of
2010. It is difficult to predict volatility in the FX market.
Competitive Environment The retail FX trading
market is fragmented and highly competitive. Our competitors in
the retail market can be grouped into several broad categories
based on size, business model, product offerings, target
customers and geographic scope of operations. These include
U.S. based retail FX brokers, international multi-product
trading firms, other online trading firms, and international
banks and other financial institutions with significant FX
operations. We expect competition to continue to remain strong
for the foreseeable future.
Regulatory Environment Our business and
industry are highly regulated. Our operating subsidiaries are
regulated in a number of jurisdictions, including the United
States, the United Kingdom (where regulatory passport rights
have been exercised to operate in a number of European Economic
Area jurisdictions), Hong Kong, Australia and Dubai. Upon
the completion of our acquisition of ODL, which is expected to
close in September 2010, we will also be regulated in Japan.
These government regulators and self-regulatory organizations
oversee the conduct of our business in many ways and several
conduct regular examinations to
60
monitor our compliance with applicable statutes and regulations.
For example, recently, in the United States and other
jurisdictions there have been a series of changes to how retail
FX firms are regulated. These changes included substantial
increases in minimum regulatory capital requirements, increased
oversight of third-party solicitors (such as referring brokers)
and increased transparency in the execution of trades. We
believe that regulators across major international markets will
continue to increase the minimum regulatory requirements for
capital, protection of customer assets and transparency of
trading. Examples of recently adopted or currently proposed
regulations from various jurisdictions include limits on the
amount of leverage a customer may use, requiring referring
brokers to be registered, and precluding providers of trading
services from using customer funds to support open positions.
We expect that increased regulatory compliance requirements will
cause some competing firms to leave individual markets or exit
the FX industry and believe that this will present additional
opportunities for the remaining firms, especially agency model
firms like us, to increase market share organically or through
acquisitions. As the industry consolidates, scale will become
increasingly important and may present advantages to larger
firms, such as us, that can meet the stricter requirements,
invest in better technology and promote their brand. However, to
the extent the regulatory environment is less beneficial for us
or our customers or that we cannot capitalize on opportunities,
our business, financial condition and operating results could be
negatively affected.
Business
Strategy
We believe that we can build on our competitive strengths by
implementing the following strategies:
|
|
|
|
|
Continue to use our global brand and marketing to drive organic
customer growth;
|
|
|
|
Make selected acquisitions to expand our customer base or add
presence in markets where we currently have low penetration;
|
|
|
|
Expand our range of products to add new customers and increase
revenues from existing customers; and
|
|
|
|
Capture market share from competitors who are unable to keep
pace with the changing and demanding regulatory landscape while
capitalizing on the long-term benefits associated with a more
transparent financial marketplace and improved industry
reputation among retail investing communities.
|
Primary
Sources of Revenues
Most of our revenues are derived from fees charged as a
commission or markup when our retail or institutional customers
execute trades on our platform with our FX market makers. This
revenue is primarily a function of the number of active
accounts, the volume those accounts trade and the fees we earn
on that volume.
Retail Trading Revenue Retail trading revenue
is our largest source of revenue and is primarily driven by:
(i) the number of active accounts and the mix of those
accounts, such as low versus high volume accounts; (ii) the
volume these accounts trade which is driven by the amount of
funds customers have on deposit and the overall volatility of
the FX market; (iii) the size of the markup we receive
which is a function of the mix of currency pairs traded, the
spread we add to the prices supplied by our FX market makers and
the interest differential between major currencies and the
markup we receive on interest paid and received on customer
positions held overnight; and (iv) the amount of additional
retail revenues earned, including revenues from contracts-for
difference (CFD) trading, fees earned through white label
relationships and payments we receive for order flow from FX
market makers.
Institutional Trading Revenue We generate
revenue by executing spot foreign currency trades on behalf of
institutional customers through our institutional trading
segment, FXCM Pro, enabling them to obtain optimal prices
offered by our FX market makers. The counterparties to these
trades are external financial institutions that hold customer
account balances and settle these transactions. We receive
commissions for these services without incurring credit or
market risk.
61
Other We are engaged in various ancillary FX
related services and joint ventures, including use of our
platform and trading facilities, providing technical expertise,
and earning fees from data licensing.
Referring Broker Fees Referring broker fees
consist primarily of compensation paid to our referring brokers
and white labels. We generally provide white labels access to
our platform, systems and back-office services necessary for
them to offer FX trading services to their customers. We also
establish relationships with referring brokers that identify and
direct potential FX trading customers to our platform. Referring
brokers and white labels generally incur advertising, marketing
and other expenses associated with attracting the customers they
direct to our platform. Accordingly, we do not incur any
incremental sales or marketing expense in connection with
trading revenue generated by customers provided through our
referring brokers
and/or white
labels. We do, however, pay a portion of the FX trading revenue
generated by the customers of our referring brokers
and/or white
labels and record this under referring broker fees.
Primary
Expenses
Compensation and Benefits Compensation and
benefits expense includes employee and member salaries, bonuses,
benefits and employer taxes. Changes in this expense are driven
by fluctuations in the number of employees, increases in wages
as a result of inflation or labor market conditions, changes in
rates for employer taxes and other cost increases affecting
benefit plans. In addition, this expense is affected by the
composition of our work force. The expense associated with our
bonus plans can also have a significant impact on this expense
category and may vary from year to year.
As described in Management IPO Date Stock
Option Awards to Employees, at the time of this offering
we intend to grant awards of stock options to purchase an
aggregate
of shares
of our Class A common stock pursuant to the Long-Term
Incentive Plan to certain of our employees. Each stock option to
purchase our Class A common stock will have an exercise
price equal to the initial public offering price per share in
this offering and, subject to the option holders continued
employment, vest in equal annual installments over a four year
period. As a result, we expect to record deferred stock-based
compensation equal to the grant-date fair value of the stock
options issued of $ million,
which will be recognized over the four year vesting period and
recorded into the expense category in accordance with the manner
in which the option holders other compensation is recorded.
Advertising and Marketing Advertising and
marketing expense consists primarily of electronic media, print
and other advertising costs, as well as costs associated with
our brand campaign and product promotion.
Communications and Technology Communications
and technology expense consists primarily of costs for network
connections to our electronic trading platforms;
telecommunications costs; and fees paid for access to external
market data. This expense is affected primarily by the growth of
electronic trading, our network/platform capacity requirements
and by changes in the number of telecommunication hubs and
connections which provide our customers with direct access to
our electronic trading platforms.
General and Administrative We incur general
and administrative costs to support our operations, including:
|
|
|
|
|
Professional fees and outside services
expenses consisting primarily of legal,
accounting and outsourcing fees;
|
|
|
|
Bank processing fees consisting of service
fees charged by banks primarily related to our customer deposits
and withdrawals;
|
|
|
|
Regulatory fees consisting primarily of fees
from regulators overseeing our businesses which are largely tied
to our overall trading revenues; and
|
|
|
|
Occupancy and building operations expense
consisting primarily of costs related to leased
and/or owned
property including rent, maintenance, real estate taxes,
utilities and other related costs. Our
|
62
|
|
|
|
|
company headquarters are located in New York, NY, with other
U.S. offices in Plano, TX and San Francisco, CA.
Outside the United States, we have offices in London, Paris,
Berlin, Hong Kong, Dubai, and Sydney. Following the completion
of our acquisition of ODL, which is expected to close in
September 2010, we will have office space in Tokyo.
|
We expect that our general and administrative expenses will
increase as a result of the additional legal, accounting,
insurance and other expenses associated with being a public
company. Among other things, we expect that compliance with the
Sarbanes-Oxley Act and related rules and regulations will result
in a significant increase in legal and accounting costs.
Depreciation and Amortization Depreciation
and amortization expense results from the depreciation of
long-lived assets purchased and internally developed software
that has been capitalized. Amortization of purchased intangibles
primarily includes amortization of intangible assets obtained in
our acquisitions of customer relationships from our competitors.
Income Taxes We are currently, and will until
consummation of the Offering Transactions be, treated as a
partnership for the purposes of U.S. federal and most
applicable state and local income tax. As a partnership, our
taxable income or loss is currently passed through to, and
included in the tax returns of our members. Accordingly, the
accompanying consolidated financial statements of FXCM Holdings,
LLC do not include a provision for federal and most state and
local income taxes. However, we generally make distributions to
our members, as required by the terms of our limited liability
company agreement, related to such taxes. We are subject to
entity level taxation in New York City, and certain foreign
subsidiaries are subject to entity level foreign income taxes.
As a result, the accompanying consolidated statements of income
include tax expense related jurisdictions where those
subsidiaries operate.
After consummation of the Offering Transactions, FXCM Inc. will
become subject to U.S. federal, state, local and foreign
income taxes with respect to its allocable share of any taxable
income of FXCM Holdings, LLC at the prevailing corporate tax
rates.
Other
Non-Controlling Interest After consummation
of the Offering Transactions, FXCM Inc. will be a holding
company, and its sole material asset will be a controlling
equity interest in FXCM Holdings, LLC. As the sole managing
member of FXCM Holdings, LLC, FXCM Inc. will operate and control
all of the business and affairs of FXCM Holdings, LLC and,
through FXCM Holdings, LLC and its subsidiaries, conduct our
business. FXCM Inc. will consolidate the financial results of
FXCM Holdings, LLC and its subsidiaries, and the ownership
interest of the other members of FXCM Holdings, LLC will be
reflected as a non-controlling interest in the consolidated
financial statements of FXCM Inc.
Segment
Information
The FASB establishes standards for reporting information about
operating segments. Operating segments are defined as components
of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating
decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. FXCMs
operations relate to foreign exchange trading and related
services and operate in two segments retail and
institutional, with different target markets with separate sales
forces, customer support and trading platforms.
63
RESULTS
OF OPERATIONS
Consolidated
Results
Six
Months Ended June 30, 2010 and 2009
The following table sets forth our consolidated statement of
operations and comprehensive income for the six months ended
June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Retail trading revenue
|
|
$
|
154,823
|
|
|
$
|
155,217
|
|
Institutional trading revenue
|
|
|
13,589
|
|
|
|
11,012
|
|
Interest income
|
|
|
1,005
|
|
|
|
638
|
|
Other income
|
|
|
4,205
|
|
|
|
4,837
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
173,622
|
|
|
|
171,704
|
|
Referring broker fees
|
|
|
37,073
|
|
|
|
44,004
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
|
136,549
|
|
|
|
127,700
|
|
Expenses
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
34,499
|
|
|
|
29,292
|
|
Advertising and marketing
|
|
|
11,315
|
|
|
|
16,911
|
|
Communications and technology
|
|
|
12,798
|
|
|
|
12,283
|
|
General and administrative
|
|
|
17,614
|
|
|
|
11,775
|
|
Depreciation and amortization
|
|
|
3,461
|
|
|
|
3,104
|
|
Interest expense
|
|
|
51
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
79,738
|
|
|
|
73,416
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
56,811
|
|
|
|
54,284
|
|
Income tax provision
|
|
|
4,966
|
|
|
|
3,870
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
51,845
|
|
|
|
50,414
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
(144
|
)
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
51,701
|
|
|
$
|
50,698
|
|
|
|
|
|
|
|
|
|
|
Highlights
|
|
|
|
|
For the six months ended June 30, 2010 compared to the six
months ended June 30, 2009, we experienced strong growth in
customer balances with a 38% increase in customer equity to
$425.5 million and a 21% increase in active accounts to
131,778. Retail trading volume declined 11%, however, primarily
from lower trading activity from South Korean referring brokers
as a result of regulatory changes in that market that occurred
in 2009.
|
|
|
|
Total revenues less referring broker fees increased 7% to
$136.5 million for the six months ended June 30, 2010
compared to the six months ended June 30, 2009. This
increase was due primarily to increases in institutional trading
revenue and decreases in referring broker fees, partially offset
by a small decrease in retail trading revenue. Retail trading
revenues were slightly lower based on the decline in volume that
was largely offset by the inclusion of CFD trading, a new
product offering introduced in September 2009, increased
payments for order flow and higher fees from our white labels.
|
64
|
|
|
|
|
Net income increased 3% to $51.8 million for the six months
ended June 30, 2010 compared to the six months ended
June 30, 2009 as increases in revenues were partially
offset by increases in total expenses and our effective tax rate.
|
|
|
|
In May 2010, we signed a stock purchase agreement to acquire
ODL, a leading broker of retail FX, CFDs, spread betting, and
equity options headquartered in the U.K. Our acquisition of ODL
is intended to increase our profile in the U.K. market and
accelerate our growth in continental Europe, utilizing
ODLs relationships and sales force. We expect to close our
acquisition of ODL in September 2010.
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Retail trading revenue
|
|
$
|
154,823
|
|
|
$
|
155,217
|
|
Institutional trading revenue
|
|
|
13,589
|
|
|
|
11,012
|
|
Interest income
|
|
|
1,005
|
|
|
|
638
|
|
Other income
|
|
|
4,205
|
|
|
|
4,837
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
173,622
|
|
|
|
171,704
|
|
|
|
|
|
|
|
|
|
|
Referring broker fees
|
|
|
37,073
|
|
|
|
44,004
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
$
|
136,549
|
|
|
$
|
127,700
|
|
|
|
|
|
|
|
|
|
|
Customer equity
|
|
$
|
425,549
|
|
|
$
|
307,894
|
|
Tradeable accounts
|
|
|
165,287
|
|
|
|
126,489
|
|
Active accounts
|
|
|
131,778
|
|
|
|
109,150
|
|
Total retail trading volume(1) (billions)
|
|
$
|
1,566
|
|
|
$
|
1,750
|
|
Retail trading revenue per million traded(1)
|
|
$
|
99
|
|
|
$
|
89
|
|
|
|
|
(1) |
|
Volumes translated into equivalent U.S. dollars |
Retail trading revenue decreased $0.4 million or 0.3% to
$154.8 million for the six months ended June 30, 2010
compared to the six months ended June 30, 2009. Retail
trading volume decreased by 11%, 90% of the decline was due to
lower trading activity from our South Korean referring brokers.
In April 2009, new regulations were introduced that required
South Korean referring brokers to trade with at least two FX
brokers or market makers resulting in less trading activity from
referring brokers with which we had previously an exclusive
relationship. In September 2009 margin requirements were
increased, which also had a negative impact on volume. As a
percentage of total volume traded, South Korean customers, which
had accounted for 18% of our volume for the six months ended
June 30, 2009, declined to 11% for the six months ended
June 30, 2010.
This decline in trading volume was almost completely offset by
an 10% increase in markup or retail trading revenue per million
traded, due primarily to the inclusion of revenues from CFD
trading, a new product offering introduced in September 2009,
increased payments for order flow and higher fees from our white
label relationships.
Institutional trading revenue increased $2.6 million or 23%
to $13.6 million for the six months ended June 30,
2010 compared to the six months ended June 30, 2009. Our
institutional business grew through continuing expansion of its
customer base and a reduction in the number of competitors in
2009.
Interest income increased by $0.4 million or 58% to
$1.0 million for the six months ended June 30, 2010
compared to the six months ended June 30, 2009 due
primarily to cash balances which increased by 38% at
June 30, 2010 versus June 30, 2009. In addition, the
average interest rate received on our cash balances
65
increased to 0.4% for the six months ended June 30, 2010
compared to 0.3% for the six months ended June 30, 2009.
Other income decreased by $0.6 million or 13% to
$4.2 million for the six months ended June 30, 2010
compared to the six months ended June 30, 2009 due
primarily to the elimination of $1.0 million in trading
execution and support fees from FXCM Japan, Inc., or FXCM Japan,
a third party, partially offset by $0.6 million in
increased data licensing fees. Effective June 2009, we
renegotiated our business arrangement with FXCM Japan from a
fixed fee arrangement to a variable fee arrangement.
Referring broker fees decreased $6.9 million or 16% to
$37.1 million for the six months ended June 30, 2010
compared to the six months ended June 30, 2009. In the
first six months of 2010, there was a decrease in the proportion
of volume attributable to South Korean referring brokers which
typically are large and have higher-cost commission arrangements.
Expenses
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
34,499
|
|
|
$
|
29,292
|
|
Advertising and marketing
|
|
|
11,315
|
|
|
|
16,911
|
|
Communications and technology
|
|
|
12,798
|
|
|
|
12,283
|
|
General and administrative
|
|
|
17,614
|
|
|
|
11,775
|
|
Depreciation and amortization
|
|
|
3,461
|
|
|
|
3,104
|
|
Interest expense
|
|
|
51
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
79,738
|
|
|
$
|
73,416
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits expense increased by $5.2 million
or 18% to $34.5 million for the six months ended
June 30, 2010 compared to the six months ended
June 30, 2009, due primarily to an 11% increase in
headcount from 652 to 726 employees, mostly in our sales
and operations departments reflecting our higher level of
business activity.
Advertising and marketing expense decreased by $5.6 million
or 33% to $11.3 million for the six months ended
June 30, 2010 compared to the six months ended
June 30, 2009 as advertising purchases returned to more
normalized levels. In the six months ended June 30, 2009,
we incurred higher advertising and marketing expense as we took
advantage of attractive pricing of electronic media as well as
initiated a campaign to increase customer account balances that
had declined in the second half of 2008 with the difficult
trading environment resulting from the global financial crisis.
Communications and technology expense increased by
$0.5 million or 4% to $12.8 million for the six months
ended June 30, 2010 compared to the six months ended
June 30, 2009 due to enhanced network capacity requirements.
General and administrative expense increased by
$5.8 million or 50% to $17.6 million for the six
months ended June 30, 2010 compared to the six months ended
June 30, 2009, due primarily to $2.5 million of
professional fees and other expenses resulting from our
acquisition of ODL, $0.8 million of expenses relating to
the write-off of advances made to a software developer,
$0.5 million due to the expansion of operations support
activities, and $0.4 million due to increased rent and
occupancy expenses resulting from additional branch office
openings in Europe and the move of our Hong Kong office.
Depreciation and amortization expense increased by
$0.4 million or 12% to $3.5 million for the six months
ended June 30, 2010 compared to the six months ended
June 30, 2009 as we financed a portion of our server and
technology upgrades through capital expenditures as opposed to
financing through operating leases.
66
Interest expense was primarily unchanged at $0.1 million
for the six months ended June 30, 2010 compared to the six
months ended June 30, 2009 as interest bearing customer
accounts remained nominal.
Income
Taxes
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
June 30,
|
|
|
2010
|
|
2009
|
|
|
(In thousands, except percentages)
|
|
Income before income taxes
|
|
$
|
56,811
|
|
|
$
|
54,284
|
|
Income tax provision
|
|
$
|
4,966
|
|
|
$
|
3,870
|
|
Effective tax rate
|
|
|
8.7
|
%
|
|
|
7.1
|
%
|
Income tax provision increased $1.1 million or 28% to
$5.0 million for the six months ended June 30, 2010
compared to the six months ended June 30, 2009, due to a 5%
increase in our income before taxes and an increase in our
effective tax rate from 7.1% to 8.7%. The effective tax rate
increased for the six months ended June 30, 2010 compared
to June 30, 2009 respectively, due to a shift throughout
2009 and the first half of 2010 of trading activity from the
United States to the U.K., increasing the level of business
activity in the U.K. and the provision for income taxes in the
U.K. We are currently treated as a partnership for
U.S. federal and certain state income tax purposes.
Accordingly, shifts in the proportion of income derived in the
United States, generally not subject to federal, state or local
income taxes with the exception of certain unincorporated
business taxes, to the U.K. with a 28% statutory rate, result in
increases in our effective tax rate.
Acquisition
of ODL
In May 2010, we signed a stock purchase agreement to acquire
ODL, a leading broker of retail FX, CFDs, spread betting and
equity options headquartered in the U.K. Our acquisition of ODL
is intended to increase our profile in the U.K. market and
accelerate our growth in continental Europe, utilizing
ODLs relationships and sales force. As consideration we
will issue upon closing to ODL shareholders a 3.5% interest in
FXCM Holdings, LLC and a potential to earn an additional 3.5%
interest in FXCM Holdings, LLC subject to performance to be
measured in the twelve month period ending June, 2011. The
closing of the acquisition is expected to occur in September
2010. To improve ODLs capital, we expect to invest
approximately $11 million shortly thereafter.
We will be recording the assets acquired, measured at their fair
values as pursuant to Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC)
No. 820, Fair Value Measurements and Disclosures
(ASC 820). We expect the acquisition will result in a
significant increase in goodwill and intangible assets in our
statement of financial condition. Intangible assets that we will
be acquiring as part of the transaction include non-compete
agreements, retail customer relationships, institutional
customer relationships, trade name and other items. We expect
the acquisition will result in a significant increase in
amortization of intangible assets in our statement of operations
as these intangible assets are amortized over their estimated
useful lives.
67
Year
Ended December 31, 2009 and 2008
The following table sets forth FXCMs consolidated
statement of operations and comprehensive income for the years
ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Retail trading revenue
|
|
$
|
291,668
|
|
|
$
|
281,385
|
|
Institutional trading revenue
|
|
|
21,107
|
|
|
|
18,439
|
|
Interest income
|
|
|
1,289
|
|
|
|
9,085
|
|
Other income
|
|
|
8,666
|
|
|
|
13,731
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
322,730
|
|
|
$
|
322,640
|
|
Referring broker fees
|
|
|
76,628
|
|
|
|
64,567
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
|
246,102
|
|
|
|
258,073
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
62,588
|
|
|
|
54,578
|
|
Advertising and marketing
|
|
|
29,355
|
|
|
|
24,629
|
|
Communications and technology
|
|
|
24,026
|
|
|
|
21,311
|
|
General and administrative
|
|
|
26,453
|
|
|
|
20,247
|
|
Depreciation and amortization
|
|
|
6,542
|
|
|
|
6,095
|
|
Interest expense
|
|
|
125
|
|
|
|
2,168
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
149,089
|
|
|
|
129,028
|
|
Income before income taxes
|
|
|
97,013
|
|
|
|
129,045
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
10,053
|
|
|
|
8,872
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
86,960
|
|
|
|
120,173
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
452
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
87,412
|
|
|
$
|
120,174
|
|
|
|
|
|
|
|
|
|
|
Highlights
|
|
|
|
|
The year ended December 31, 2009 experienced strong growth
in customer balances with a 40% increase in customer equity to
$353.8 million and a 36% increase in active accounts to
116,919, in large part due to a successful marketing campaign in
the first half of 2009. Total volume in 2009 increased 21%
despite the comparison to the volume levels of 2008 which
benefited from extraordinarily high volatilities and the
significant increases in customer trading volumes brought on by
the global financial crisis of the second half of 2008.
|
|
|
|
Total revenues less referring broker fees decreased 5% to
$246.1 million for the year ended December 31, 2009
compared to the year ended December 31, 2008 due primarily
to increases in retail trading revenues and institutional
trading revenues being more than offset by decreases in interest
income, other income and increases in referring broker fees. The
year ended December 31, 2009 saw continuing declines in
short term interest rates and our referring broker expense
increased due to a shift in the year in volumes derived by some
of our larger referring brokers with higher-cost commission
arrangements.
|
|
|
|
For the year ended December 31, 2009, net income declined
by 28% to $87.0 million due to lower revenues, higher
expenses and a higher effective tax rate.
|
68
Revenues
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Retail trading revenue
|
|
$
|
291,668
|
|
|
$
|
281,385
|
|
Institutional trading revenue
|
|
|
21,107
|
|
|
|
18,439
|
|
Interest income
|
|
|
1,289
|
|
|
|
9,085
|
|
Other income
|
|
|
8,666
|
|
|
|
13,731
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
322,730
|
|
|
|
322,640
|
|
Referring broker fees
|
|
|
76,628
|
|
|
|
64,567
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
$
|
246,102
|
|
|
$
|
258,073
|
|
|
|
|
|
|
|
|
|
|
Customer equity
|
|
$
|
353,825
|
|
|
$
|
253,391
|
|
Tradeable accounts
|
|
|
140,565
|
|
|
|
106,708
|
|
Active accounts
|
|
|
116,919
|
|
|
|
86,149
|
|
Total retail trading volume(1) (billions)
|
|
$
|
3,504
|
|
|
$
|
2,901
|
|
Retail trading revenue per million traded(1)
|
|
$
|
83
|
|
|
$
|
97
|
|
|
|
|
(1) |
|
Volumes translated into equivalent U.S. dollars |
During the year ended December 31, 2009 compared to the
year ended December 31, 2008, retail trading revenue
increased $10.3 million or 4% to $291.7 million as
volumes increased 21%, partially offset by a 14% decline in
retail trading revenue per million traded or retail trading
revenue per million. For the year ended December 31, 2009,
trading volume growth was led by a 40% increase in customer
equity and a 36% increase in active accounts as we initiated a
significant marketing campaign in the first half of 2009 to grow
customer accounts and balances. The decline in markup was due
primarily to declines in income we earn on rollover as the
carry trade, a strategy of buying a currency that
offers a higher interest rate while selling a currency that
offers a lower interest rate, significantly declined with the
narrowing of interest rate differentials globally as well as
lower volatilities in 2009 as compared to 2008.
Institutional trading revenues rose by $2.7 million or 14%
to $21.1 million for the year ended December 31, 2009
compared to the year ended December 31, 2008. Our
institutional business benefited from increases in institutional
demand for trading FX as well as continuing momentum from 2008
where a number of competitors experienced significant
disruptions as they had been using American International Group
(AIG) or Lehman Brothers as their sole prime broker, both of
which faltered in second half of 2008. Our institutional
business maintains multiple prime brokerage relationships for
risk management purposes.
The low interest rate environment caused interest income to fall
$7.8 million or 86% to $1.3 million for the year ended
December 31, 2009 compared to the year ended
December 31, 2008 as short term interest rates continued
their declines to near-zero levels precipitated by the global
financial crisis of the second half of 2008. The average annual
interest rate received on our cash balances declined to 0.3% for
the year ended December 31, 2009 compared to 2.2% for the
year ended December 31, 2008.
Other income decreased 37% or $5.1 million to
$8.7 million for the year ended December 31, 2009
compared to the year ended December 31, 2008 due primarily
to the renegotiation of our arrangement with FXCM Japan,
resulting in $2.0 million lower trading execution and
support fees from, and a one-time recovery of $2.1 million
in bad debt from a former shareholder and white label of FXCM in
2008.
Referring broker fees increased $12.1 million or 19% to
$76.6 million for the year ended December 31, 2009
compared to the year ended December 31, 2008 due to a 4%
increase in retail trading revenue and a shift in volumes during
the year ended December 31, 2009 to some of our larger
referring brokers which have higher-cost commission arrangements.
69
Expenses
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
62,588
|
|
|
$
|
54,578
|
|
Advertising and marketing
|
|
|
29,355
|
|
|
|
24,629
|
|
Communications and technology
|
|
|
24,026
|
|
|
|
21,311
|
|
General and administrative
|
|
|
26,453
|
|
|
|
20,247
|
|
Depreciation and amortization
|
|
|
6,542
|
|
|
|
6,095
|
|
Interest expense
|
|
|
125
|
|
|
|
2,168
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
149,089
|
|
|
$
|
129,028
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits expense increased $8.0 million or
15% to $62.6 million for the year ended December 31,
2009 compared to the year ended December 31, 2008 due
primarily to an increase in staffing levels of 13% from 610 to
687 employees, mostly in our sales and operations
departments reflecting our higher level of business activity as
well as our expansion into new markets including Australia and
France.
Advertising and marketing expense increased $4.7 million or
19% to $29.4 million for the year ended December 31,
2009 compared to the year ended December 31, 2008 as we
took advantage of attractive pricing of electronic media as well
as initiated a campaign to increase customer account balances
that had declined in the second half of 2008 with the difficult
trading environment resulting from the global financial crisis.
Communications and technology expense increased
$2.7 million or 13% to $24.0 million for the year
ended December 31, 2009 compared to the year ended
December 31, 2008 due principally to $1.1 million in
higher service provider fees relating to the growth in our
institutional trading volumes and $1.0 million in expense
relating to capacity increases of our relational database
software.
General and administrative expense increased $6.2 million
or 31% to $26.5 million for the year ended
December 31, 2009 compared to the year ended
December 31, 2008. This was due primarily to
$1.9 million in the write-off of advances made to a
software developer, $1.5 million increase in prime
brokerage fees relating to new prime broker relationships
entered into during the year to enhance our risk and cash
management processes, a $1.1 million increase in bank fees,
$0.8 million for the expansion of operations support
activities of our Israel office and $0.4 million in
increased rent expense attributable to the expansion of our
office in New York and the opening of offices in Dubai and
Australia.
Depreciation and amortization expense rose $0.5 million or
7% to $6.5 million during the year ended December 31,
2009 compared to the year ended December 31, 2008 as we
financed a portion of our server and technology upgrades through
capital expenditures as opposed to financing through operating
leases.
Interest expense declined $2.0 million or 94% to
$0.1 million during the year ended December 31, 2009
compared to the year ended December 31, 2008, due primarily
to the repayment of a note payable to a member as well as lower
interest rates.
Income
Taxes
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
(In thousands, except percentages)
|
|
Income before income taxes
|
|
$
|
97,013
|
|
|
$
|
129,045
|
|
Income tax provision
|
|
$
|
10,053
|
|
|
$
|
8,872
|
|
Effective tax rate
|
|
|
10.4
|
%
|
|
|
6.9
|
%
|
Income tax provision increased $1.2 million or 13% to
$10.1 million for the year ended December 31, 2009
compared to the year ended December 31, 2008. While income
before taxes decreased 25%, our effective
70
tax rate increased from 6.9% to 10.4% due primarily to a shift
throughout 2009 of trading activity from the United States to
the U.K., increasing the level of business activity in the U.K.
and the provision for income taxes in the U.K. We are currently
treated as a partnership for U.S. federal and certain state
income tax purposes. Accordingly, changes in the proportion of
income derived in the United States, generally not subject to
federal, state or local income taxes with the exception of
certain unincorporated business taxes, to the U.K. with a 28%
statutory rate, result in increases in our effective tax rate.
Year
Ended December 31, 2008 and 2007
The following table sets forth our consolidated statement of
operations and comprehensive income for the years ended
December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Retail trading revenue
|
|
$
|
281,385
|
|
|
$
|
144,935
|
|
Institutional trading revenue
|
|
|
18,439
|
|
|
|
11,695
|
|
Interest income
|
|
|
9,085
|
|
|
|
16,357
|
|
Other income
|
|
|
13,731
|
|
|
|
11,535
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
322,640
|
|
|
|
184,522
|
|
Referring broker fees
|
|
|
64,567
|
|
|
|
33,211
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
|
258,073
|
|
|
|
151,311
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
54,578
|
|
|
|
53,575
|
|
Advertising and marketing
|
|
|
24,629
|
|
|
|
27,846
|
|
Communications and technology
|
|
|
21,311
|
|
|
|
17,836
|
|
General and administrative
|
|
|
20,247
|
|
|
|
17,037
|
|
Depreciation and amortization
|
|
|
6,095
|
|
|
|
7,364
|
|
Interest expense
|
|
|
2,168
|
|
|
|
1,374
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
129,028
|
|
|
|
125,032
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
129,045
|
|
|
|
26,279
|
|
Income tax provision
|
|
|
8,872
|
|
|
|
3,120
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
120,173
|
|
|
|
23,159
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
120,174
|
|
|
$
|
23,159
|
|
|
|
|
|
|
|
|
|
|
Highlights
|
|
|
|
|
The global financial crisis of the second half of 2008 resulted
in a highly favorable operating environment for us with
extraordinarily high volatilities and significant increases in
customer trading volumes. In contrast, 2007 was a transition
year for us as we completed our migration to the agency model
from the principal model.
|
|
|
|
During the year ended December 31, 2008, total revenues
increased by 75%, due primarily to a 94% increase in retail
trading revenues and a 58% increase in institutional trading
revenues. Total revenues less referring broker fees increased
71% for the year ended December 31, 2008.
|
71
|
|
|
|
|
Net income increased by 419% during the year ended
December 31, 2008 compared to the year ended
December 31, 2007, due primarily to the 71% increase in
total revenues less referring broker fees as compared to only a
3% increase in total expenses.
|
|
|
|
Customer balances declined by 20% to $253.4 million during
the year ended December 31, 2008 in large part due to the
difficult trading environment brought on by the global financial
crisis.
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Retail trading revenue
|
|
$
|
281,385
|
|
|
$
|
144,935
|
|
Institutional trading revenue
|
|
|
18,439
|
|
|
|
11,695
|
|
Interest income
|
|
|
9,085
|
|
|
|
16,357
|
|
Other income
|
|
|
13,731
|
|
|
|
11,535
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
322,640
|
|
|
|
184,522
|
|
Referring broker fees
|
|
|
64,567
|
|
|
|
33,211
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
$
|
258,073
|
|
|
$
|
151,311
|
|
|
|
|
|
|
|
|
|
|
Customer equity
|
|
$
|
253,391
|
|
|
$
|
315,440
|
|
Tradeable accounts
|
|
|
106,708
|
|
|
|
49,885
|
|
Active accounts
|
|
|
86,149
|
|
|
|
59,541
|
|
Total retail trading volume(1) (billions)
|
|
$
|
2,901
|
|
|
$
|
1,729
|
|
Retail trading revenue per million traded(1)
|
|
$
|
97
|
|
|
$
|
84
|
|
|
|
|
(1) |
|
Volumes translated into equivalent U.S. dollars |
Retail trading revenues increased by $136.5 million or 94%
to $281.4 million for the year ended December 31, 2008
compared to the year ended December 31, 2007. Trading
revenues significantly increased in the latter part of 2008 as a
result of the high volatility brought on by the global financial
crisis. In addition, 2007 revenues were depressed in the first
half of the year as the firm was completing its migration from
the principal model to the agency model.
Institutional trading revenues increased by $6.7 million or
58% to $18.4 million for the year ended December 31,
2008 compared to the year ended December 31, 2007. Our
institutional platform gained significant momentum in 2008 as it
benefited from the large volume increases brought on by the
global financial crisis as well as disruptions a number of
competitors experienced who had been using AIG or Lehman
Brothers as their sole FX prime brokers, both of which faltered
in the second half of 2008. Our institutional business maintains
multiple prime brokerage relationships for risk management
purposes.
Interest income decreased by $7.3 million or 44% to
$9.1 million for the year ended December 31, 2008
compared to the year ended December 31, 2007 as a result of
declines in short term interest rates. The average annual
interest rate received on our cash balances declined to 2.1% for
the year ended December 31, 2008 compared to 4.3% for the
year ended December 31, 2007.
Other income increased by 19% or $2.2 million to
$13.7 million for the year ended December 31, 2008
compared to the year ended December 31, 2007 due to the
one-time recovery in 2008 of $2.1 million in bad debt from
a former shareholder and white label of FXCM.
72
Expenses
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
54,578
|
|
|
$
|
53,575
|
|
Advertising and marketing
|
|
|
24,629
|
|
|
|
27,846
|
|
Communications and technology
|
|
|
21,311
|
|
|
|
17,836
|
|
General and administrative
|
|
|
20,247
|
|
|
|
17,037
|
|
Depreciation and amortization
|
|
|
6,095
|
|
|
|
7,364
|
|
Interest expense
|
|
|
2,168
|
|
|
|
1,374
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
129,028
|
|
|
$
|
125,032
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits expense increased $1.0 million or
2% to $54.6 million for the year ended December 31,
2008 compared to the year ended December 31, 2007. Though
we experienced a 19% increase in general staffing levels from
514 to 610 employees during the year, mostly in our sales,
operations, finance and administration departments reflecting
our higher level of business activity, the increase was largely
offset by a reduction in the compensation for certain of our
senior management. Additionally, we transitioned more back
office operations and sales functions to our Texas office which
operates in a lower cost environment.
Advertising and marketing expense decreased $3.2 million or
12% to $24.6 million in the year ended December 31,
2008 compared to the year ended December 31, 2007 as
certain marketing campaign inefficiencies were identified during
the year and reliance on larger, more expensive digital sites
was reduced.
Communications and technology expense increased
$3.5 million or 19% to $21.3 million for the year
ended December 31, 2008 compared to the year ended
December 31, 2007 principally due to enhanced capacity and
infrastructure.
General and administrative expense increased $3.2 million
or 19% to $20.2 million for the year ended
December 31, 2008 compared to the year ended
December 31, 2007 due primarily to $1.6 million in
increased bank charges as we initiated acceptance of credit
cards resulting in growth in customer deposits and a
$1.2 million increase in NFA fees due to the inception late
in 2007 of regulatory fees by the agency based on customer
volume.
Depreciation and amortization expense decreased
$1.3 million or 17% to $6.1 million for the year ended
December 31, 2008 compared to the year ended
December 31, 2007 due primarily to the termination of a
capital lease and associated amortization relating to our
relational database software.
Interest expense increased $0.8 million or 58% to
$2.2 million for the year ended December 31, 2008
compared to the year ended December 31, 2007 due primarily
to an increase in the interest rate of a promissory note held by
one of the founding members that was amended in 2008.
Income
Taxes
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands,
|
|
|
|
except percentages)
|
|
|
Income before income taxes
|
|
$
|
129,045
|
|
|
$
|
26,279
|
|
Income tax provision
|
|
$
|
8,872
|
|
|
$
|
3,120
|
|
Effective tax rate
|
|
|
6.9
|
%
|
|
|
11.9
|
%
|
Income tax provision increased $5.8 million or 184% to
$8.9 million for the year ended December 31, 2008
compared to the year ended December 31, 2007. This was due
to an increase of $102.8 million or 391% in income before
taxes, partially offset by a reduction in the effective tax rate
from 11.9% to 6.9%. The decrease in the effective tax rate was
due to a higher proportion of our income in 2008 compared to
2007
73
from our U.S. operations relative to our foreign
operations, principally in the U.K. and Hong Kong. We are
currently treated as a partnership for U.S. federal and
certain state income tax purposes. Accordingly, changes in the
proportion of income derived in the United States, generally not
subject to federal, state or local income taxes with the
exception of certain unincorporated business taxes, from the
U.K. and Hong Kong with a 28% and 17% statutory rate
respectively, result in decreases in our effective tax rate.
Segment
Results
Six
Months Ended June 30, 2010 and 2009
Retail Trading Retail Trading is our largest
segment and consists of providing FX trading and related
services to over 165,000 retail customers globally as of
June 30, 2010.
Revenues less referring broker fees, operating expenses and
income before income taxes of the Retail Trading segment for the
six months ended June 30, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Revenues less referring broker fees
|
|
$
|
123,212
|
|
|
$
|
116,933
|
|
Operating expenses
|
|
|
39,164
|
|
|
|
37,243
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
84,048
|
|
|
$
|
79,690
|
|
|
|
|
|
|
|
|
|
|
Revenues less referring broker fees for our Retail Trading
segment increased $6.3 million or 5% to $123.2 million
for the six months ended June 30, 2010 compared to the six
months ended June 30, 2009. While retail trading volume
decreased by 11%, due primarily to decreases in trading from our
South Korean referring brokers as a result of changes in
regulations, declines in volume were offset in part by an 11%
increase in markup or retail trading revenue per million traded,
due primarily to the inclusion of revenues from CFD trading, a
new product segment that was introduced September 2009,
increased payments for order flow and higher fees from our white
labels. In addition, referring broker fees decreased
$7.0 million or 16% to $36.8 million for the six
months ended June 30, 2010 compared to the six months ended
June 30, 2009 as there was a decrease in the proportion of
volume attributable to large referring brokers which typically
have higher-cost commission arrangements.
Operating expenses for our Retail Trading segment increased
$1.9 million or 5% to $39.2 million for the six months
ended June 30, 2010 compared to the six months ended
June 30, 2009 due primarily to higher compensation and
benefits expense partly offset by lower advertising and
marketing expense. Income before income taxes for the Retail
Trading segment increased $4.4 million or 6% to
$84.0 million for the six months ended June 30, 2010
compared to the six months ended June 30, 2009.
Institutional Trading Our Institutional
Trading segment operates under the name FXCM Pro and generates
revenue by executing spot foreign currency trades on behalf of
institutional customers, enabling them to obtain optimal prices
offered by our FX market makers. The counterparties to these
trades are external financial institutions that hold customer
account balances and settle these transactions. We receive
commissions for these services without incurring credit or
market risk.
Revenues less referring broker fees, operating expenses and
income before income taxes of the Institutional Trading segment
for the six months ended June 30, 2010 and 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Revenues less referring broker fees
|
|
$
|
13,265
|
|
|
$
|
10,767
|
|
Operating expenses
|
|
|
8,642
|
|
|
|
8,106
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
4,623
|
|
|
$
|
2,661
|
|
|
|
|
|
|
|
|
|
|
74
Institutional Trading revenue increased $2.5 million or 23%
to $13.3 million for the six months ended June 30,
2010 compared to the six months ended June 30, 2009. The
Institutional Trading segment grew through continuing expansion
of its customer base and an increase in institutional FX trading
volumes.
Operating expenses increased $0.5 million or 7% to
$8.6 million for the six months ended June 30, 2010
compared to the six months ended June 30, 2009 due
primarily to higher compensation and benefits expense resulting
from the increase in business profitability. A significant
portion of compensation and benefits of our Institutional
Trading business is linked to unit profitability.
Corporate Loss before income taxes of the
Corporate segment for the six months ended June 30, 2010
and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Revenues less referring broker fees
|
|
$
|
72
|
|
|
$
|
|
|
Operating expenses
|
|
|
31,932
|
|
|
|
28,067
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
31,860
|
|
|
$
|
28,067
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes increased $3.8 million or 14% to
$31.9 million for the six months ended June 30, 2010
compared to the six months ended June 30, 2009 due
primarily to higher general and administrative costs resulting
from $2.5 million of professional fees and other expenses
relating to our acquisition of ODL, $0.8 million of
expenses relating to expenses relating to the write-off of
advances made to a software developer, $0.5 million due to
the expansion of operations support activities of our Israel
office, and $0.4 million due to increased rent and
occupancy expenses resulting from additional branch office
openings in Europe and the move of our Hong Kong office.
Years
Ended December 31, 2009, 2008 and 2007
Retail Trading Revenues less referring broker
fees, operating expenses and income before income taxes of the
Retail Trading segment for the years ended December 31,
2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Revenues less referring broker fees
|
|
$
|
225,492
|
|
|
$
|
240,505
|
|
Operating expenses
|
|
|
75,723
|
|
|
|
62,714
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
149,769
|
|
|
$
|
177,791
|
|
|
|
|
|
|
|
|
|
|
Revenues less referring broker fees for the Retail Trading
segment declined $15.0 million or 6% for the year ended
December 31, 2009 compared to the year ended
December 31, 2008 as volumes increased 21% but were more
than offset by a 14% decline in markup from $97 per million to
$83 per million as well as an increase in referring broker fees.
For the year ended December 31, 2009, trading volume growth
was led by a 40% increase in customer equity and a 36% increase
in active accounts as the Company initiated a significant
marketing campaign in the first half of 2009 to grow customer
accounts and balances. The decline in markup was due primarily
to declines in income we earn on rollover as the carry
trade significantly declined with the narrowing of
interest rate differentials globally as well as lower
volatilities in 2009 as compared to 2008. The increase in
referring broker fees was due to a shift in volumes during the
year ended December 31, 2009 compared to the year ended
December 31, 2008 to some of our larger referring brokers
which have higher-cost commission arrangements.
Operating expenses increased $13.0 million or 21% to
$75.7 million for the year ended December 31, 2009
compared to the year ended December 31, 2008 due primarily
to an increase in compensation and benefits, as our sales and
operations departments grew with our higher level of business
activity, as well as increases in advertising and marketing
expense as we took advantage of attractive pricing of electronic
media as well as initiated a major campaign to increase customer
account balances. Income before tax provision
75
decreased $28.0 million or 16% to $149.8 million for
the year ended December 31, 2009 compared to the year ended
December 31, 2008 due to the 6% higher revenues less
referring broker fees being more than offset by the 16% increase
in operating expenses.
Revenues less referring broker fees, operating expenses and
income before income taxes of the Retail Trading segment for the
years ended December 31, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Revenues less referring broker fees
|
|
$
|
240,505
|
|
|
$
|
140,055
|
|
Operating expenses
|
|
|
62,714
|
|
|
|
66,531
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
177,791
|
|
|
$
|
73,524
|
|
|
|
|
|
|
|
|
|
|
Revenues less referring broker fees for the Retail Trading
segment increased by $100.5 million or 72% to
$240.5 million for the year ended December 31, 2008
compared to the year ended December 31, 2007. Trading
revenues significantly increased in the latter part of 2008 as a
result of the high volatility brought on by the global financial
crisis. In addition, 2007 revenues were depressed in the first
half of the year as the firm was completing its migration from
the principal model to the agency model.
Operating expenses decreased $3.8 million or 6% to
$62.7 million for the year ended December 31, 2008
compared to the year ended December 31, 2007 due primarily
to decreases in advertising and marketing as certain marketing
campaign inefficiencies were identified during the year and
reliance on larger, more expensive digital sites was reduced.
Income before tax provision increased $104.3 million or
142% to $177.8 million for the year ended December 31,
2008 compared to the year ended December 31, 2007 due to
the increase in revenues coupled with a decrease in operating
expenses.
Institutional Trading Revenues less
referring broker fees, operating expenses and income before
income taxes of the Institutional Trading segment for the years
ended December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Revenues less referring broker fees
|
|
$
|
20,610
|
|
|
$
|
17,568
|
|
Operating expenses
|
|
|
12,594
|
|
|
|
10,717
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
8,016
|
|
|
$
|
6,851
|
|
|
|
|
|
|
|
|
|
|
Revenues less referring broker fees for our Institutional
Trading segment increased $3.0 million or 17% to
$20.6 million for the year ended December 31, 2009
compared to the year ended December 31, 2008. Our
Institutional Segment benefited from continued momentum begun in
2008 when a number of our competitors experienced disruptions as
they had been using AIG or Lehman Brothers as their sole FX
prime brokers, both of which faltered in the second half of
2008. Our institutional business maintains multiple prime
brokerage relationships for risk management purposes.
Operating expenses increased $1.9 million or 18% to
$12.6 million for the year ended December 31, 2009
compared to the year ended December 31, 2008 due primarily
to higher prime brokerage fees as we transitioned one of our
prime broker relationships. Income before tax provision
increased $1.2 million or 17% to $8.0 million for the
year ended December 31, 2009 compared to the year ended
December 31, 2008 due to the increase in revenues,
partially offset by the increase in expenses.
76
Revenues less referring broker fees, operating expenses and
income before income taxes of the Institutional Trading segment
for the years ended December 31, 2008 and 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Revenues less referring broker fees
|
|
$
|
17,568
|
|
|
$
|
11,256
|
|
Operating expenses
|
|
|
10,717
|
|
|
|
7,260
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
6,851
|
|
|
$
|
3,996
|
|
|
|
|
|
|
|
|
|
|
Revenues less referring broker fees for our Institutional
Trading segment increased $6.3 million or 56% to
$17.6 million for the year ended December 31, 2008
compared to the year ended December 31, 2007, due to the
significant increase in volumes brought by the global financial
crisis in the second half of 2008 as well as the business
benefiting from the disruptions a number of competitors
experienced who had been using AIG or Lehman Brothers as their
sole prime broker.
Operating expenses increased $3.5 million or 48% to
$10.7 million for the year ended December 31, 2008
compared to the year ended December 31, 2007 due primarily
to higher compensation, a proportion of which is paid out upon
increases of unit profitability which increased significantly.
Income before tax provision increased $2.9 million or 71%
to $6.9 million for the year ended December 31, 2008
compared to the year ended December 31, 2007 due primarily
to the increase in revenues offset only partially by an increase
in operating expenses.
Corporate Loss before tax provision of the
Corporate segment for the years ended December 31, 2009 and
2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Revenues less referring broker fees
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
60,772
|
|
|
$
|
55,597
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
60,772
|
|
|
$
|
55,597
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes increased $5.2 million or 9% to
$60.8 million for the year ended December 31, 2009
compared to the year ended December 31, 2008, due primarily
to $3.3 million in higher compensation and benefits expense
and $1.9 million in higher general and administrative
expense, resulting from the write-off of advances made to a
software developer.
Loss before income taxes of the Corporate segment for the years
ended December 31, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Revenues less referring broker fees
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
55,597
|
|
|
$
|
51,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
55,597
|
|
|
$
|
51,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes increased $4.4 million or 9% to
$55.6 million for the year ended December 31, 2008
compared to the year ended December 31, 2007. The loss
before income taxes was due primarily to higher general and
administrative expense and an increase in communications and
technology expense resulting from higher network infrastructure
costs.
77
Quarterly results of operations and comprehensive income for
the three months ended March 31, 2008 through June 30,
2010
The following table sets forth our unaudited quarterly results
of operations and comprehensive income for the three-months
ended March 31, 2008 through June 30, 2010. The
unaudited quarterly consolidated information has been prepared
on the same basis as our audited consolidated financial
statements, and, in the opinion of management, the statement of
operations and comprehensive income data includes all
adjustments, consisting of normal recurring adjustments,
necessary for the fair presentation of the results of operations
and comprehensive income for these periods. You should read this
table in conjunction with our financial statements and the
related notes included elsewhere in this prospectus. The results
of operations and comprehensive income for any quarter are not
necessarily indicative of the results of operations and
comprehensive income for any future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail trading revenues
|
|
$
|
87,197
|
|
|
$
|
67,626
|
|
|
$
|
66,437
|
|
|
$
|
70,014
|
|
|
$
|
74,709
|
|
|
$
|
80,508
|
|
|
$
|
77,023
|
|
|
$
|
96,977
|
|
|
$
|
58,287
|
|
|
$
|
49,098
|
|
Institutional trading revenues
|
|
|
7,402
|
|
|
|
6,187
|
|
|
|
5,740
|
|
|
|
4,355
|
|
|
|
5,807
|
|
|
|
5,205
|
|
|
|
5,192
|
|
|
|
4,185
|
|
|
|
3,616
|
|
|
|
5,446
|
|
Interest income
|
|
|
489
|
|
|
|
516
|
|
|
|
367
|
|
|
|
284
|
|
|
|
304
|
|
|
|
334
|
|
|
|
1,023
|
|
|
|
2,549
|
|
|
|
2,364
|
|
|
|
3,149
|
|
Other income
|
|
|
1,574
|
|
|
|
2,631
|
|
|
|
2,085
|
|
|
|
1,744
|
|
|
|
2,356
|
|
|
|
2,481
|
|
|
|
3,123
|
|
|
|
2,711
|
|
|
|
2,871
|
|
|
|
5,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
96,662
|
|
|
|
76,960
|
|
|
|
74,629
|
|
|
|
76,397
|
|
|
|
83,176
|
|
|
|
88,528
|
|
|
|
86,361
|
|
|
|
106,422
|
|
|
|
67,138
|
|
|
|
62,719
|
|
Referring broker fees
|
|
|
21,418
|
|
|
|
15,655
|
|
|
|
15,841
|
|
|
|
16,783
|
|
|
|
21,658
|
|
|
|
22,346
|
|
|
|
21,604
|
|
|
|
19,346
|
|
|
|
13,610
|
|
|
|
10,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
|
75,244
|
|
|
|
61,305
|
|
|
|
58,788
|
|
|
|
59,614
|
|
|
|
61,518
|
|
|
|
66,182
|
|
|
|
64,757
|
|
|
|
87,076
|
|
|
|
53,528
|
|
|
|
52,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
17,608
|
|
|
|
16,891
|
|
|
|
16,645
|
|
|
|
16,651
|
|
|
|
14,783
|
|
|
|
14,509
|
|
|
|
15,841
|
|
|
|
13,709
|
|
|
|
12,798
|
|
|
|
12,230
|
|
Advertising and marketing
|
|
|
5,979
|
|
|
|
5,336
|
|
|
|
5,004
|
|
|
|
7,440
|
|
|
|
8,906
|
|
|
|
8,005
|
|
|
|
7,834
|
|
|
|
5,620
|
|
|
|
5,477
|
|
|
|
5,698
|
|
Communications and data processing
|
|
|
7,260
|
|
|
|
5,538
|
|
|
|
6,429
|
|
|
|
5,314
|
|
|
|
5,845
|
|
|
|
6,438
|
|
|
|
6,178
|
|
|
|
4,689
|
|
|
|
5,084
|
|
|
|
5,360
|
|
General and administrative
|
|
|
9,181
|
|
|
|
8,433
|
|
|
|
7,903
|
|
|
|
6,775
|
|
|
|
6,280
|
|
|
|
5,495
|
|
|
|
6,428
|
|
|
|
4,947
|
|
|
|
4,782
|
|
|
|
4,090
|
|
Depreciation and amortization
|
|
|
1,718
|
|
|
|
1,743
|
|
|
|
1,742
|
|
|
|
1,696
|
|
|
|
1,647
|
|
|
|
1,457
|
|
|
|
1,327
|
|
|
|
1,352
|
|
|
|
1,665
|
|
|
|
1,751
|
|
Interest expense
|
|
|
25
|
|
|
|
26
|
|
|
|
25
|
|
|
|
49
|
|
|
|
22
|
|
|
|
29
|
|
|
|
539
|
|
|
|
563
|
|
|
|
714
|
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
41,771
|
|
|
|
37,967
|
|
|
|
37,748
|
|
|
|
37,925
|
|
|
|
37,483
|
|
|
|
35,933
|
|
|
|
38,147
|
|
|
|
30,880
|
|
|
|
30,520
|
|
|
|
29,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
33,473
|
|
|
|
23,338
|
|
|
|
21,040
|
|
|
|
21,689
|
|
|
|
24,035
|
|
|
|
30,249
|
|
|
|
26,610
|
|
|
|
56,196
|
|
|
|
23,008
|
|
|
|
23,231
|
|
Income tax provision
|
|
|
2,358
|
|
|
|
2,608
|
|
|
|
2,420
|
|
|
|
3,763
|
|
|
|
1,642
|
|
|
|
2,228
|
|
|
|
3,231
|
|
|
|
2,996
|
|
|
|
1,212
|
|
|
|
1,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
31,115
|
|
|
|
20,730
|
|
|
|
18,620
|
|
|
|
17,926
|
|
|
|
22,393
|
|
|
|
28,021
|
|
|
|
23,379
|
|
|
|
53,200
|
|
|
$
|
21,796
|
|
|
$
|
21,798
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
(186
|
)
|
|
|
42
|
|
|
|
614
|
|
|
|
(446
|
)
|
|
|
273
|
|
|
|
11
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
30,929
|
|
|
$
|
20,772
|
|
|
$
|
19,234
|
|
|
$
|
17,480
|
|
|
$
|
22,666
|
|
|
$
|
28,032
|
|
|
$
|
23,380
|
|
|
$
|
53,200
|
|
|
$
|
21,796
|
|
|
$
|
21,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIQUIDITY
AND CAPITAL RESOURCES
We have historically financed, and plan to continue to finance,
our operating liquidity and capital needs with funds generated
from operations. We primarily invest our cash in short-term
demand deposits at various financial institutions. In general,
we believe all our deposits are with institutions of high credit
quality and we have sufficient liquidity to conduct the
operations of our businesses.
As a holding company, almost all of the funds generated from our
operations are earned by our operating subsidiaries. We access
these funds through receipt of dividends from these
subsidiaries. Some of our subsidiaries are subject to
requirements of various regulatory bodies relating to liquidity
and capital standards, which may limit the funds available for
the payment of dividends to us.
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010
|
|
|
Regulatory
|
|
Minimum Regulatory
|
|
Capital Levels
|
|
Excess Net
|
|
|
Jurisdiction
|
|
Capital Requirements
|
|
Maintained
|
|
Capital
|
|
|
(In thousands)
|
|
Forex Capital Markets, LLC
|
|
USA
|
|
$
|
24,460
|
|
|
$
|
62,023
|
|
|
$
|
37,563
|
|
Forex Capital Markets, Ltd.
|
|
U.K.
|
|
|
8,366
|
|
|
|
27,235
|
|
|
|
18,869
|
|
FXCM Asia, Ltd.
|
|
Hong Kong
|
|
|
4,093
|
|
|
|
18,644
|
|
|
|
14,551
|
|
FXCM Canada, Ltd.
|
|
Canada
|
|
|
564
|
|
|
|
2,348
|
|
|
|
1,784
|
|
FXCM Australia, Ltd.
|
|
Australia
|
|
|
180
|
|
|
|
2,142
|
|
|
|
1,962
|
|
Credit
Facility
We are in the process of negotiating a $100 million
unsecured credit facility with a syndicate of financial
institutions that we expect to be put in place at or about the
time of our initial public offering. We anticipate that the
credit facility, if successfully concluded, will be used
primarily to bridge short term cash requirements, for example,
in connection with acquisitions, with more permanent capital.
Cash
Flow and Capital Expenditures
Six
Months Ended June 30, 2010 and 2009
The following table sets forth a summary of our cash flow for
the six months ended June 30, 2010 and June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
June 30,
|
|
|
2010
|
|
2009
|
|
|
(In thousands)
|
|
Cash provided by operating activities
|
|
$
|
57,329
|
|
|
$
|
40,920
|
|
Cash used for investing activities
|
|
|
(3,538
|
)
|
|
|
(7,011
|
)
|
Cash used for financing activities
|
|
|
(40,722
|
)
|
|
|
(90,000
|
)
|
Effect of foreign currency exchange rate changes on cash and
cash equivalents
|
|
|
83
|
|
|
|
1,244
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
13,152
|
|
|
|
(54,847
|
)
|
Cash and cash equivalents end of period
|
|
$
|
153,010
|
|
|
$
|
125,120
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities was $57.3 million for
the six months ended June 30, 2010 compared to
$40.9 million for the six months ended June 30, 2009,
an increase of $16.4 million. This increase was due to
$1.4 million higher net income and $15.0 million
higher adjustments to reconcile net income to net cash provided
by operating activities in the six months ended June 30,
2010 compared to the six months ended June 30, 2009. The
higher adjustments to reconcile net income to net cash provided
by operating activities was a result primarily of a $7.1 million
increase in due to brokers, representing losses on unsettled
trades with brokers, versus a decrease of $1.4 million, a
$1.1 million increase in accounts payable and accrued
expenses versus a decrease of $1.8 million for the six
months ended June 30, 2010 and June 30, 2009,
respectively.
Cash used in investing activities was $3.5 million for the
six months ended June 30, 2010 compared to
$7.0 million for the six months ended June 30, 2009, a
decrease of $3.5 million. The reason for the decrease in
cash used was $2.2 million less in capital expenditures for
the six months ended June 30, 2010 compared to the six
months ended June 30, 2009, due primarily to a
$3.2 million purchase of a license of relational database
software in the first half of 2009, and $1.3 million of
purchases of intangible assets in the first half of 2009, which
represents the excess over fair value we paid for customer
balances and relationships from certain acquisitions we made.
Cash used in financing activities was $40.7 million for the
six months ended June 30, 2010, compared to $90.0 million
for the six months ended June 30, 2009, a decrease of
$49.3 million. The decrease of cash used
79
in financing activities was due to lower distributions to
members in 2010 and the repayment of $10.7 million of a
note payable to a member in 2009.
Capital expenditures were $3.5 million for the six months
ended June 30, 2010, compared to $5.8 million for the six
months ended June 30, 2009. The decrease in capital expenditures
was related to $3.2 million purchase of a license of
relational database software in the first half of 2009.
Years
Ended December 31, 2009 and 2008
The following table sets forth a summary of our cash flow for
the years ended December 31, 2009 and December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
(In thousands)
|
|
Cash provided by operating activities
|
|
$
|
79,146
|
|
|
$
|
123,881
|
|
Cash used for investing activities
|
|
|
(11,105
|
)
|
|
|
(9,104
|
)
|
Cash used for financing activities
|
|
|
(110,778
|
)
|
|
|
(65,045
|
)
|
Effect of foreign currency exchange rate changes on cash and
cash equivalents
|
|
|
2,628
|
|
|
|
(1,564
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
(40,109
|
)
|
|
|
48,168
|
|
Cash and cash equivalents end of year
|
|
$
|
139,858
|
|
|
$
|
179,967
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities was $79.1 million for
the year ended December 31, 2009 compared to
$123.9 million for the year ended December 31, 2008, a
decrease of $44.8 million, due to $33.2 million lower
net income and $11.6 million lower adjustments to reconcile
net income to net cash provided by operating activities. The
lower adjustments to reconcile net income to net cash provided
by operating activities was a result primarily of a
$1.7 million decrease in accounts payable and accrued
expenses versus an increase of $11.4 million partially
offset by a $2.4 million decrease in due to brokers versus
a decrease of $10.2 million, for the years ended
December 31, 2009 and December 31, 2008 respectively.
Cash used in investing activities was $11.1 million for the
year ended December 31, 2009, compared to $9.1 million
for the year ended December 31, 2008, an increase of
$2.0 million. The reason for the increase in cash used was
primarily due to $2.0 million higher capital expenditures,
a $3.2 million purchase of a license of relational database
software in the 2009.
Cash used in financing activities was $110.8 million for
the year ended December 31, 2009, compared to $65.0 million
for the year ended December 31, 2008, an increase of
$45.8 million. The increase of cash used was due primarily
to $34.9 million in higher distributions to members in 2009
to cover higher taxes payable and a $10.7 million repayment
of a note payable to a member in 2009.
Capital expenditures were $8.0 million for the year ended
December 31, 2009, compared to $6.0 million for the
year ended December 31, 2008. The increase in capital
expenditures in 2009 was primarily related to the purchase of a
$3.2 million license for relational database software in
2009.
80
Years
Ended December 31, 2008 and 2007
The following table sets forth a summary of our cash flow for
the year ended December 31, 2008 and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Cash provided by operating activities
|
|
$
|
123,881
|
|
|
$
|
56,886
|
|
Cash provided by (used for) investing activities
|
|
|
(9,104
|
)
|
|
|
6,612
|
|
Cash used for financing activities
|
|
|
(65,045
|
)
|
|
|
(1,159
|
)
|
Effect of foreign currency rate changes on cash and cash
equivalents
|
|
|
(1,564
|
)
|
|
|
1,829
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
48,168
|
|
|
|
64,168
|
|
Cash and cash equivalents end of year
|
|
$
|
179,967
|
|
|
$
|
131,799
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities was $123.9 million
for the year ended December 31, 2008 compared to
$56.9 million for the year ended December 31, 2007, an
increase of $67.0 million, due to $97.0 million higher
net income and $30.0 million lower adjustments to reconcile
net income to net cash provided by operating activities. The
lower adjustments to reconcile net income to net cash provided
by operating activities resulted primarily of a
$6.0 million decrease in deferred revenue versus an
increase of $24.0 million for the years ended
December 31, 2008 and December 31, 2007, respectively.
In January 2007, we received a $30.0 million payment to
provide trading execution services to FXCM Japan. The payment
amount was recorded as deferred revenue and is being amortized
in five annual installments of $6.0 million.
Cash used in investing activities was $9.1 million for the
year ended December 31, 2008, compared to cash provided by
investing activities of $6.6 million for the year ended
December 31, 2007, a decrease of $15.7 million. This
was primarily due to $12.1 million realized from the sale
of FXCM Japan to GCI Capital Co. Ltd in 2007.
Cash used in financing activities was $65.0 million for the
year ended December 31, 2008, compared $1.2 million
for the year ended December 31, 2008, an increase of
$63.8 million. The increase of cash used was due primarily
to $65.2 million in distributions to members in 2008
compared to none in 2007.
Capital expenditures were $6.0 million for the year ended
December 31, 2008, compared to $5.3 million for the
year ended December 31, 2007, representing higher hardware
purchases for network infrastructure.
Contractual
Obligations and Commercial Commitments
The following tables reflect a summary of our contractual cash
obligations and other commercial commitments at June 30, 2010
and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Lease obligations
|
|
$
|
6,104
|
|
|
$
|
1,464
|
|
|
$
|
4,640
|
|
|
|
|
|
|
|
|
|
Vendor obligations
|
|
|
506
|
|
|
|
298
|
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,610
|
|
|
$
|
1,762
|
|
|
$
|
4,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Lease obligations
|
|
$
|
4,131
|
|
|
$
|
1,812
|
|
|
$
|
2,319
|
|
|
|
|
|
|
|
|
|
Vendor obligations
|
|
|
824
|
|
|
|
616
|
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,955
|
|
|
$
|
2,428
|
|
|
$
|
2,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
As described in Organizational Structure
Offering Transactions, we intend to use a portion of the
proceeds from this offering to purchase Holdings Units from our
existing owners, including members of our senior management. In
addition, the unitholders of FXCM Holdings, LLC (other than FXCM
Inc.) may (subject to the terms of the exchange agreement)
exchange their Holdings Units for shares of Class A common
stock of FXCM Inc. on a
one-for-one
basis. The purchase of Holdings Units and subsequent exchanges
are expected to result in increases in the tax basis of the
assets of FXCM Holdings, LLC that otherwise would not have been
available. These increases in tax basis may reduce the amount of
tax that FXCM Inc. would otherwise be required to pay in the
future. These increases in tax basis may also decrease gains (or
increase losses) on future dispositions of certain capital
assets to the extent tax basis is allocated to those capital
assets. We will enter into a tax receivable agreement with our
existing owners that will provide for the payment by FXCM Inc.
to our existing owners of 85% of the amount of the benefits, if
any, that FXCM Inc. is deemed to realize as a result of these
increases in tax basis and certain other tax benefits related to
our entering into the tax receivable agreement, including tax
benefits attributable to payments under the tax receivable
agreement. These payment obligations are obligations of FXCM
Inc. and not of FXCM Holdings, LLC. See Certain
Relationships and Related Person Transactions Tax
Receivable Agreement.
Off-Balance
Sheet Arrangements
As of June 30, 2010, we did not have any significant
off-balance sheet arrangements as defined by the regulations of
the SEC.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The notes to our consolidated financial statements include
disclosure of our significant accounting policies and estimates.
In establishing these policies within the framework of
accounting principles generally accepted in the United States,
management must make certain assessments, estimates and choices
that will result in the application of these principles in a
manner that appropriately reflects our financial condition and
results of operations. Critical accounting policies are those
policies that we believe present the most complex or subjective
measurements and have the most potential to affect our financial
position and operating results. While all decisions regarding
accounting policies are important, there are certain accounting
policies and estimates that we consider to be critical. These
critical policies, which are presented in detail in the notes to
our consolidated financial statements, relate to revenue
recognition, cash and cash equivalents, held for customers, fair
value measurements valuation and office, communication and
computer equipment.
A summary of our significant accounting policies and estimates
follows:
Revenue
Recognition
We make foreign currency markets for customers trading in
foreign exchange spot markets. Transactions are recorded on the
trade date and positions are marked to market daily with related
gains and losses, including gains and losses on open spot
transactions, recognized currently in income.
Retail
Trading Revenue
Retail trading revenue is earned by adding a markup to the price
provided by FX market makers generating trading revenue based on
the volume of transactions and is recorded on trade date. The
retail trading revenue is earned utilizing an agency model.
Under the agency model, when a customer executes a trade on the
best price quotation presented by the FX market maker, we act as
a credit intermediary, or a riskless principal, simultaneously
entering into a trade with the customer and the FX market maker.
This agency model has the effect of automatically hedging our
positions and eliminating market risk exposure. Retail trading
revenues principally represent the difference of our realized
and unrealized foreign currency trading gains or losses on our
positions with customers and the systematic hedge gains and
losses from the trades entered into with the FX market makers.
Retail trading revenue also includes fees earned from
arrangements with other financial institutions to provide
platform, back office and other trade execution services. This
service is generally referred to as a white label arrangement.
We earn a percentage of the
82
markup charged by the financial institutions to their customers.
Fees from this service are recorded when earned on a trade date
basis. Additionally, we earn income from trading in contracts
for difference (CFDs), payments for order flow and
rollovers. Our policy is to hedge our CFD positions with other
financial institutions based on internal guidelines. Income or
loss on CFDs represents the difference between our realized and
unrealized trading gains or losses on our positions and the
hedge gains or losses with the other financial institutions.
Income or loss on CFDs is recorded on a trade date basis. Income
or loss on rollovers is the interest differential customers earn
or pay on overnight currency pair positions held and the markup
that we receive on interest paid or received on these customer
positions held overnight. Income or loss on rollovers is
recorded on a trade date basis. We recognize payments for order
flow as earned.
Institutional
Trading Revenue
Institutional trading revenue relates to commission income
generated by facilitating spot foreign currency trades on behalf
of institutional customers through the services provided by the
FXCM Pro division. FXCM Pro allows these customers to obtain the
best execution price from external banks and routes the trades
to outside financial institutions for settlement. The
counterparties to these trades are external financial
institutions that also hold customer account balances. We
receive commission income for customers use of FXCM Pro
without taking any market or credit risk. Institutional trading
revenue is recorded on a trade date basis.
Other
Income
Other income includes revenue related to an agreement to provide
trade execution services to GCI Capital Co. Ltd. As
consideration for the services, we received an upfront non
refundable fee in addition to a fixed monthly fee which
subsequently changed to a variable service fee on a per trade
basis. The upfront fee is being recognized on a straight line
basis over the estimated period of performance of 5 years.
In arriving at the estimated period of performance, we
considered the nature of the services to be provided and its
historical experience. The monthly fixed fees were recognized
when earned. Variable fees are recognized on trade date as
services are rendered.
Cash
and Cash Equivalents, held for customers
Cash and cash equivalents, held for customers represents cash
held to fund customer liabilities in connection with foreign
currency and CFD transactions. The balance arises primarily from
cash deposited by customers, customer margin balances, and cash
held by FX market makers related to hedging activities. We
record a corresponding liability in connection with this amount
that is included in customer account liabilities in the
consolidated statement of financial condition. A portion of the
balance is not available for general use due to legal
restrictions in accordance with the FSA, the SFC and the ASIC
regulations.
Fair
Value Measurements
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Fair value measurement establishes a fair value hierarchy that
prioritizes the inputs of valuation techniques used to measure
fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets
or liabilities and the lowest priority to unobservable inputs.
These two inputs create the following fair value hierarchy:
Level I: Quoted prices in active
markets for identical assets or liabilities, accessible by the
Company at the measurement date.
Level II: Quoted prices for
similar assets or liabilities in active markets, or quoted
prices for identical or similar assets or liabilities in markets
that are not active, or other observable inputs other than
quoted prices.
Level III: Unobservable inputs for
assets or liabilities.
As of June 30, 2010 and December 31, 2009,
substantially all of our financial instruments are carried at
fair value based on spot exchange rates broadly distributed in
active markets, or amounts approximating fair
83
value. Assets, including due from brokers and others, are
carried at cost or contracted amounts, which approximates fair
value. Similarly, liabilities, including customer account
liabilities, due to brokers and payables to others are carried
at fair value or contracted amounts, which approximates fair
value.
Office,
Communication and Computer Equipment
Office, communication and computer equipment consist of
purchased technology hardware and software, internally developed
software, leasehold improvements, furniture and fixtures,
computer equipment and communication equipment. Office,
communication and computer equipment are recorded at historical
cost, net of accumulated depreciation. Additions and
improvements that extend the lives of assets are capitalized,
while expenditures for repairs and maintenance are expensed as
incurred. Certain costs of software developed or obtained for
internal use are capitalized. Depreciation is computed using the
straight-line method. We depreciate these assets using the
following useful lives:
|
|
|
Computer equipment
|
|
3 to 5 years
|
Software
|
|
2 to 5 years
|
Leasehold improvements
|
|
Lesser of the estimated economic useful life or the term of the
lease
|
Furniture and fixtures
|
|
3 to 5 years
|
Communication equipment
|
|
3 to 5 years
|
RECENT
ACCOUNTING PRONOUNCEMENTS
Recently
Adopted Accounting Pronouncements
Accounting Standards Codification (ASC or
the Codification) In June 2009, the
Financial Accounting Standards Board (FASB) issued
new guidance establishing the ASC and revising the hierarchy of
generally accepted accounting principles. The ASC is the single
source of authoritative nongovernmental U.S. GAAP. The
provisions in this guidance do not change current
U.S. GAAP, but are intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. All
existing accounting standard documents were superseded and all
other accounting literature that is not included in the FASB
Codification is considered non-authoritative. This guidance is
effective for financial statements issued for interim and annual
periods ending after September 15, 2009. We adopted the
guidance effective with the issuance of its December 31,
2009 consolidated financial statements. As the guidance is
limited to disclosure in the financial statements and the manner
in which we refer to U.S. GAAP authoritative literature,
there was no material impact on our consolidated financial
statements.
Uncertainty in Income Taxes In July 2006, the
FASB issued guidance clarifying the accounting for uncertainty
in income taxes recognized in an enterprises financial
statements. The guidance prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
on a tax return. The guidance also provides guidance on
derecognition of tax benefits, classification on the balance
sheet, interest and penalties, accounting in interim periods,
disclosure and transition. In December 2008, the FASB provided
for a deferral of the effective date of the interpretation for
certain nonpublic enterprises to annual financial statements for
fiscal years beginning after December 15, 2008. We adopted
the guidance on January 1, 2009. The adoption of the
interpretation did not have a material impact on the
consolidated financial statements.
In September 2009, the FASB updated its uncertainty in income
taxes guidance. The updated guidance considers an entitys
assertion that it is a tax-exempt
not-for-profit
or a pass-through-entity as a tax position that requires
evaluation. The revised guidance is effective for periods ending
after September 15, 2009. The adoption of the revised
guidance did not have a material impact on our consolidated
financial statements.
Fair Value Measurements In April 2009, the
FASB issued guidance for determining fair value for an asset or
liability if there has been a significant decrease in the volume
and level of activity in relation to normal market activity. In
that circumstance, transactions or quoted prices may not be
determinative of fair value. Significant adjustments may be
necessary to quoted prices or alternative valuation techniques
may be
84
required in order to determine the fair value of the asset or
liability under current market conditions. The guidance is
effective for financial statements issued for interim or annual
periods ending after June 15, 2009. We adopted the guidance
upon its issuance in April 2009, and it did not have a material
impact on our consolidated financial statements.
Subsequent Events In May 2009 and February
2010, the FASB issued guidance on subsequent events. The
guidance is intended to establish general standards of
accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or
are available to be issued. SEC filers must continue to evaluate
subsequent events through the date the financial statements are
issued but are not required to disclose the date through which
an entity has evaluated subsequent events. The guidance is
effective for interim or annual financial periods ending after
June 15, 2009. We adopted the guidance upon its issuance in
June 2009. See Note 15, Subsequent Events, for
further discussion of the subsequent events that occurred after
June 30, 2010.
Business Combinations Effective
January 1, 2009, we adopted accounting guidance issued by
the FASB which established principles and requirements for the
acquirer in a business combination, including the recognition
and measurement of the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the
acquired entity as of the acquisition date; the recognition and
measurement of the goodwill acquired in the business combination
or gain from a bargain purchase as of the acquisition date; and
additional disclosures related to the nature and financial
effects of the business combination. Under this guidance, nearly
all acquired assets and liabilities assumed are recorded at fair
value at the acquisition date. Other significant changes include
recognizing transaction costs and most restructuring costs as
expenses when incurred. These accounting requirements are
applied on a prospective basis for all transactions completed
after the effective date. As disclosed in Note 15,
Subsequent events, in May 2010 we signed a purchase
agreement to acquire ODL, a broker of retail FX, CFDs, spread
betting and retail equity options headquartered in the United
Kingdom. The closing of the acquisition is expected to occur in
September 2010. We will apply the new business combination
guidance upon the closing of the acquisition.
Variable Interest Entities Effective
January 1, 2010, we adopted accounting guidance issued by
the FASB related to variable interest entities. This guidance
replaces a quantitative-based risks and rewards calculation for
determining which entity, if any, has both (a) a
controlling financial interest in a variable interest entity
with an approach focused on identifying which entity has the
power to direct the activities of a variable interest entity
that most significantly impact the entitys economic
performance and (b) the obligation to absorb losses of the
entity or the right to receive benefits from the entity that
could potentially be significant to the variable interest
entity. This guidance requires reconsideration of whether an
entity is a variable interest entity when any changes in facts
or circumstances occur such that the holders of the equity
investment at risk, as a group, lose the power to direct the
activities of the entity that most significantly impact the
entitys economic performance. It also requires ongoing
assessments of whether a variable interest holder is the primary
beneficiary of a variable interest entity. The adoption of this
guidance did not have a material impact on the consolidated
financial statements.
Fair Value Measurements Disclosures Effective
January 1, 2010, we adopted fair value measurement disclosure
guidance issued by the FASB. The amended guidance requires new
disclosures as follows:
|
|
|
|
|
Amounts related to transfers in and out of Levels I
and II shall be disclosed separately and the reasons for
the transfers shall be described.
|
|
|
|
In the reconciliation for fair value measurements using
significant unobservable inputs (Level III), a reporting
entity should present separately information about purchases,
sales, issuances, and settlements on a gross basis.
|
The guidance also provides amendments that clarify existing
disclosures related to the following:
|
|
|
|
|
Reporting fair value measurement disclosures for each class of
assets and liabilities.
|
|
|
|
Providing disclosure surrounding the valuation techniques and
inputs used to measure fair value for both Level II and
Level III fair value measurements.
|
85
This disclosure guidance was effective for us beginning on
January 1, 2010, except for the disclosure requirements
surrounding the reconciliation of Level III fair value
measurements, which will be effective for us on January 1,
2011. The adoption of the guidance does not have a material
impact on our fair value measurements disclosures.
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Currency
risk
Currency risk arises from the possibility that fluctuations in
foreign exchange rates will impact the value of our assets
denominated in foreign currencies as well as our earnings due to
the translation of our statement of financial condition and
statement of operations from local currencies to
U.S. dollars. We currently have limited exposure to
currency risk as we utilize an agency model and automatically
hedge almost all of the currency exposures brought by our
customers positions. As of June 30, 2010, 91% of our
net assets (assets less liabilities) were denominated in
U.S. dollars or were hedged.
Interest
rate risk
Interest rate risk arises from the possibility that changes in
interest rates will impact our financial statements.
Our cash and customer cash (on which we do not pay interest) is
held primarily in short-term demand deposits at banks and at our
FX market makers. Interest rates earned on these deposits and
investments affects our interest revenue. We currently derive a
minimal amount of interest income on our cash balances as
interest rates are near-zero. Based on cash and customer cash
held at June 30, 2010, we estimate that a 50 basis
point change in interest rates would increase our annual pretax
income by approximately $2.9 million.
We also earn a spread on overnight position financing
(rollovers) and the interest differential our customers earn or
pay depends on whether they are long a higher or lower yielding
currency relative to the currency they borrowed. Currently
interest rate differentials globally are at low levels and we
earn a minimal amount of income from our spread on rollover.
Credit
risk
Credit risk is the risk that a borrower or counterparty will
fail to meet their obligations. We are exposed to credit risk
from our retail and institutional customers as well as
institutional counterparties.
All retail customers are required to deposit cash collateral in
order to trade on our platforms. Our policy is that retail
customers are not advanced credit in excess of the cash
collateral in their account and our systems are designed so that
each customers positions are revalued on a real-time basis
to calculate the customers useable margin. Useable margin
is the cash the customer holds in the account after adding or
deducting real-time gains or losses, less the margin
requirement. The retail customers positions are
automatically closed once his or her useable margin falls to
zero. Exposure to credit risk from customers is therefore
minimal. While it is possible for a retail customer account to
go negative in rare circumstances, for example, due to system
failure, a final stop loss on the account is automatically
triggered which will execute the closing of all positions. For
the six months ended June 30, 2010 and the year ended
December 31, 2009, we incurred $0.5 million and
$0.2 million, respectively, in losses from customer
accounts that had gone negative.
Institutional customers are permitted credit pursuant to limits
set by the prime brokers that we use. As part of our arrangement
with our prime brokers, they incur the credit risk regarding the
trading of our institutional customers.
In addition, we are exposed to the following institutional
counterparties: clearing and prime brokers as well as banks with
respect to our own deposits and deposits of customer funds. We
are exposed to credit risk in the event that such counterparties
fail to fulfill their obligations. We manage the credit risk
arising from institutional counterparties by setting exposure
limits and monitoring exposure against such limits, carrying out
periodic credit reviews, and spreading credit risk across a
number of different institutions to diversify risk. As
86
of June 30, 2010, our exposure to our four largest
institutional counterparties, all major global banking
institutions, was 73% of total assets and the single largest
within the group was 30% of total assets.
Market
risk
Market risk is the risk of losses in on- and off-balance sheet
positions arising from movements in market prices. As we operate
predominantly on an agency model with the exception of certain
trades of our CFD customers and until recently our Micro
customers, we are not exposed to the market risk of a position
moving up or down in value. Beginning in July 2010, we
automatically hedge the positions of our Micro customers and
intend as soon as practicable to automatically hedge the
positions of our CFD customers. As of June 30, 2010, our
net unhedged exposure to CFD customer positions was 6% of total
assets. A 1% change in the value of our unhedged CFD positions
as of June 30, 2010 would result in a $0.4 million
decrease in pre-tax income.
Liquidity
risk
In normal conditions, our business of providing online FX
trading and related services is self financing as we generate
sufficient cash flows to pay our expenses as they become due. As
a result, we generally do not face the risk that we will be
unable to raise cash quickly enough to meet our payment
obligations as they arise. Our cash flows, however, are
influenced by customer trading volume and the income we derive
on that volume. These factors are directly impacted by domestic
and international market and economic conditions that are beyond
our control. In an effort to manage this risk, we maintain a
substantial pool of liquidity. As of June 30, 2010, cash
and cash equivalents were 25% of total assets.
Operational
risk
Our operations are subject to various risks resulting from
technological interruptions, failures, or capacity constraints
in addition to risks involving human error or misconduct.
Regarding technological risks, we are heavily dependent on the
capacity and reliability of computer and communications systems
supporting our operations. We have established a program to
monitor our computer systems, platforms and related technologies
and to address issues that arise promptly. We have also
established disaster recovery facilities in strategic locations
to ensure that we can continue to operate with limited
interruptions in the event that our primary systems are damaged.
As with our technological systems, we have established policies
and procedures designed to monitor and prevent both human
errors, such as clerical mistakes and incorrectly placed trades,
as well as human misconduct, such as unauthorized trading,
fraud, and negligence. In addition, we seek to mitigate the
impact of any operational issues by maintaining insurance
coverage for various contingencies.
Regulatory
capital risk
Various domestic and foreign government bodies and
self-regulatory organizations responsible for overseeing our
business activities require that we maintain specified minimum
levels of regulatory capital in our operating subsidiaries. If
not properly monitored or adjusted, our regulatory capital
levels could fall below the required minimum amounts set by our
regulators, which could expose us to various sanctions ranging
from fines and censure to the imposition of partial or complete
restrictions on our ability to conduct business. To mitigate
this risk, we continuously evaluate the levels of regulatory
capital at each of our operating subsidiaries and adjust the
amounts of regulatory capital in each operating subsidiary as
necessary to ensure compliance with all regulatory capital
requirements. These may increase or decrease as required by
regulatory authorities from time to time. We also maintain
excess regulatory capital to provide liquidity during periods of
unusual or unforeseen market volatility, and we intend to
continue to follow this policy. In addition, we monitor
regulatory developments regarding capital requirements to be
prepared for increases in the required minimum levels of
regulatory capital that may occur from time to time in the
future. As of June 30, 2010, we had $37.8 million in
regulatory capital requirements at our regulated subsidiaries
and $112.5 million of capital on a consolidated basis.
87
Regulatory
risk
We operate in a highly regulated industry and are subject to the
risk of sanctions from U.S., federal and state, and
international authorities if we fail to comply adequately with
regulatory requirements. Failure to comply with applicable
regulations could result in financial and operational penalties.
In addition, efforts to comply with applicable regulations may
increase our costs
and/or limit
our ability to pursue certain business opportunities. Federal
and state regulations significantly limit the types of
activities in which we may engage. U.S. and international
legislative and regulatory authorities change these regulations
from time to time. See Risk Factors.
88
INDUSTRY
The foreign exchange, or FX, market is the largest and most
liquid financial market in the world. According to the Bank for
International Settlements, average daily turnover in the global
FX market in April 2010 was $4.0 trillion. Executions in
the FX market always involve buying one currency and selling
another. The first currency noted in the pair is the base
currency and the second is the counter currency. According to
the most recent publicly available information from April 2010,
the U.S. dollar is the most common currency traded, with
approximately 84% of all FX trades involving the
U.S. dollar. The volume of trading in the EUR/USD currency
pair alone, the most highly traded currency pair, exceeds the
volume of all global equity markets.
The FX market has emerged from its previous role of currency
hedging to become an investable asset class. Historically,
access to the FX market was only available to commercial banks,
corporations and other large financial institutions. In the last
decade, retail investors have gained increased access to this
market, largely through the emergence of online retail FX
brokerages, like our firm. According to 2010 analysis by the
Aite Group, a financial services market research firm, retail FX
trading volumes have grown from average daily volumes of
approximately $10 billion in 2001 to approximately
$125 billion in 2009 representing a CAGR of 37%. The retail
FX trading volumes were forecasted to be $158 billion as of
June 30, 2010.
Estimated
Average Daily Trade Volume in Retail FX
(US $ Billions)
While online retail trading of FX has many similarities with
online retail trading of equities, there are a number of key
differences:
Retail FX is a truly global market unlike that for equity
securities trading: Trading of equities varies by
country, often involving different lists of equities, different
trading venues or exchanges and different regulators. To trade
equities globally, a brokerage firm generally must establish
significant infrastructure in each major market. As a result,
most online equity brokers source customers primarily from pools
of investors within their own country. Unlike equities, spot FX
contracts FX trades for immediate, rather than
future, delivery are neither traded on local
exchanges nor cleared through a local clearing agent, and FX
trading is generally similar around the world. A retail FX
brokerage firm does not need to build unique infrastructure in
each market to offer trading services. In addition, instead of
stocks unique to each country, the seven most popular currency
pairs are traded by investors in many countries and represent
over 69% of global FX trading volume. Because the retail FX
market is essentially global, we believe the potential market
that is addressable by an online retail FX broker is larger than
that addressable by an online provider of retail equities
trading.
The FX market is open 24 hours a day, five days per
week, driving extensive participation and more frequent
trading: The FX market is open 24 hours a
day, five days a week. We believe that this creates a number of
advantages for the retail FX market over the market for trading
equity securities. Unlike equity markets which limit investors
to trading during market hours, retail FX participants have the
convenience of trading FX at any time throughout the day. In
addition,
24-hour
accessibility of the FX market five days a week allows investors
globally to place their trades immediately, rather than waiting
until the equity markets reopen the next day, which we
89
believe allows the FX market to operate with less volatility.
The FX market is also active 24 hours a day, five days per
week, as the center of trading activity moves from Asian markets
to European markets and finally North American markets. The
result is effectively more than fifteen equity trading
days a week. We believe that the convenience,
accessibility and continued activity of the retail
FX market is evident in the average activity levels of the
retail FX investor relative to an equity investor. For example,
our average account traded 3.4 times per day in 2009 and 2.6
times per day in the first six months of 2010, which we believe
is significantly more frequent than the trades per day of the
average online equity account.
Retail FX offers investors the opportunity to trade on higher
levels of margin, and many FX brokers utilize features on their
platforms to provide that customers will not lose more than
their deposit: As a result of the deep liquidity,
low relative volatility and
24-hour
access to markets, FX market makers have historically allowed
investors to trade on higher levels of margin than those
available to traders of other assets, such as equity securities.
These margin levels vary by the currency pair, account size,
volatility levels and regulatory jurisdiction. For example, in
the United States, effective October 18, 2010, retail FX
brokers will be permitted to offer customers
50-to-1
leverage on the most commonly traded currency pairs and
20-to-1
leverage on exotic currency pairs. Margin requirements vary
widely across different countries and are consistently under
review by regulators in a number of jurisdictions, and the NFA
is required to review and may adjust the margin requirements in
the United States annually. Unlike other retail products that
can be traded on margin, such as equity securities, options and
futures, many retail FX brokers utilize features on their
platforms that provide that their customers will not lose more
than the funds they deposit.
The FX market is non-directional in nature and not highly
correlated to other assets, like equities: Unlike
equities, fixed income, real estate and many other asset
classes, FX markets do not experience periods where all assets
move in one direction or another. As FX trading involves a
currency pair, if one currency in a pair is losing value, the
other currency in the pair will gain in value. As a result, the
FX market is not highly correlated to other assets popular with
online investors, such as equities or options. We believe that
retail investors can utilize FX as a way to increase portfolio
diversification.
Retail FX brokers need to build their own technology, which
requires large investments of time and money but can result in
points of competitive differentiation not available to retail
equity brokers: The technology required
throughout the lifecycle of a FX trade is different from that
for equities. Because FX is traded
over-the-counter
among large banks, FX market makers and other financial
institutions instead of on an exchange, it does not have a
common trading infrastructure. Accordingly, most of the
established retail FX brokers, including us, have built
most, if not all, of their trade processing technology
themselves. Standardized and inexpensive third-party
infrastructure solutions are generally not available on a per
trade basis, as in online equities. Although we believe this
increases the costs for a FX broker to enter and remain in the
retail FX business, we believe this differentiation enables
retail FX brokers to compete on the basis of the quality of
their platform rather than merely on commissions per trade. As a
result, we believe our average annual revenue per account is
significantly higher than that of major retail U.S. online
equity brokers.
Retail FX
vs. Equities (2009)
(In thousands, except annual data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Equity
|
|
|
Retail Equity
|
|
|
|
FXCM
|
|
|
Brokers(1)
|
|
|
Brokers(2)
|
|
|
Ending customer accounts
|
|
|
141
|
|
|
|
46-134
|
|
|
|
2,600-9,900
|
|
DARTs
|
|
|
347
|
|
|
|
90-347
|
|
|
|
197-371
|
|
Annual trades per average account
|
|
|
727
|
|
|
|
510-711
|
|
|
|
8-19
|
|
Annual revenue per account
|
|
$
|
2,363
|
|
|
$
|
2,736-2,881
|
|
|
$
|
103-212
|
|
|
|
|
(1) |
|
Interactive Brokers, TradeStation |
|
(2) |
|
TD Ameritrade, E*Trade, Charles Schwab |
The retail FX industry is not as mature and does not offer
customers the same sense of safety or price transparency as
retail equities: We believe that two factors that
influence the growth of the retail FX market are the
customers perceptions of the safety of their funds and the
transparency and fairness of the prices they
90
receive. Retail equity investors in the United States can rely
on the fact that their deposits are insured by the Securities
Investor Protection Corporation, or SIPC, for up to $500,000. In
the event of a broker bankruptcy, the assets that the broker
holds for investors are segregated from the operating funds of
such broker. Retail FX brokers do not have SIPC insurance
protection and, in the United States, cannot segregate customer
funds in the event of a bankruptcy. We believe this is a factor
in customers tending to keep smaller amounts of their funds on
deposit at FX brokers as compared to equity brokers. As a means
to overcome this, larger retail FX brokers may seek to
reassure customers by publishing selected information on the
strength of their financial situation. To date, no retail FX
broker in the United States is subject to the reporting
requirements of the Exchange Act. We believe that the increased
financial reporting and disclosure we will be required to
provide as a public company may increase the confidence of our
current and future customers regarding our financial strength
and stability and lead to increased average balances per
customer account.
Because equities are traded on exchanges, the prices are set by
the best bid and offer on each exchange. Since 2005, regulations
in the United States and Europe have required that equity
brokers must present investors with the national best bids and
execute those trades at prices that reflect the optimal mix of
price improvement, speed and likelihood of execution. In
contrast, the prices that retail FX investors see will vary from
broker to broker, depending on whether the broker uses a
principal or an agency model. Principal model brokers set their
own prices, whereas agency model brokers, like FXCM, present
their customers with the best buy and sell quotes from their
pool of competing FX market makers. Execution of retail FX
orders is also different from retail equities and, within retail
FX, from broker to broker. For example, our agency model
executes trades at the best available price provided by our FX
market makers, including any price improvements that may occur
between order placement and execution. We believe that the
agency model execution we offer provides retail FX customers
more transparent pricing and execution than that offered by our
competitors utilizing the principal model.
Similarities between the evolution of online retail FX and
online retail equities: We believe that the
forces driving the growth of the online retail FX industry are
similar to those that shaped the evolution of the online retail
equity industry. According to the Aite Group, since online
equity trading started in 1994, that industry has grown to an
estimated 110 million investors worldwide. Increased
broadband internet access enabled a surge in online brokerage
firms, which offered convenient ways for self- directed traders
to open accounts and trade stocks at reduced commissions.
Further, between 1998 and 2005, a series of regulatory changes
in the United States heightened the regulatory requirements for
brokerage firms, such as imposing rules to ensure the best
execution of trades for their customers. We believe that such
heightened regulatory requirements helped increase investor
confidence in the industry as a whole.
We believe that the online retail FX industry is undergoing a
similar evolution. For example, in the last three years, in the
United States, increased regulation has resulted in increased
minimum net capital requirements, which require a regulated
entity to keep a specific minimum amount in relatively liquid
form, enhanced protection of customer funds, restrictions on the
solicitation of business and, most recently, trade execution.
Increases in regulation have also been implemented in other
countries. We believe that, as a result of these tightened
regulatory requirements, the number of retail FX providers has
dropped considerably even as the number of retail investors
trading FX and trading volume has increased significantly. We
expect that regulators across the major global jurisdictions
will continue to introduce additional regulations to ensure that
investors receive fair and consistent pricing and execution and
that FX brokers have sufficient capital resources to protect
customer funds. We believe such regulations may further narrow
the field of firms offering retail FX and may help to
increase investor confidence in the industry as a whole.
We believe that retail FX trading will continue to grow at high
rates as retail investors seek new asset choices, become more
knowledgeable about FX markets through frequent media coverage
of global economic issues and recognize the advantages of online
FX trading over online trading of other assets, such as
equities. We also believe that retail FX investors globally are
becoming more sophisticated and demanding more transparency,
better execution and better customer service. We believe our
agency model, scale, proprietary technology platform, network of
FX market makers and award-winning customer service will
continue to attract a diverse and experienced base of customers
who use a wide range of trading strategies, trade more
frequently and generally maintain long term relationships with
our firm.
91
BUSINESS
Overview
We are a leading online provider of FX trading and related
services to over 165,000 retail and institutional customers
globally. We offer our customers access to
over-the-counter,
or OTC, FX markets through our proprietary technology platform.
In a FX trade, a participant buys one currency and
simultaneously sells another, a combination known as a
currency pair. Our platform presents our
FX customers with the best price quotations on up to 56
currency pairs from up to 17 global banks, financial
institutions and market makers, or FX market makers, which we
believe provides our customers with an efficient and
cost-effective way to trade FX. We utilize what is referred to
as agency execution or an agency model. When our customer
executes a trade on the best price quotation offered by our FX
market makers, we act as a credit intermediary, or riskless
principal, simultaneously entering into offsetting trades with
both the customer and the FX market maker. We earn fees by
adding a markup to the price provided by the FX market makers
and generate our trading revenues based on the volume of
transactions, not trading profits or losses. We believe we are
one of the largest retail FX brokers in the world based on
transaction volume, number of customers and annual revenue, and
the largest FX broker that operates almost exclusively using the
agency model.
Our agency model is fundamental to our core business philosophy
because we believe that it aligns our interests with those of
our customers, reduces our risks and provides distinct
advantages over the principal model used by the majority of
retail FX brokers. In the principal model, the retail FX broker
sets the price it presents to the customer and may maintain its
trading position if it believes the price may move in its favor
and against the customer. We believe this creates an inherent
conflict between the interests of the customer and those of the
principal model broker. Principal model brokers revenues
typically consist primarily of trading gains or losses, and are
more affected by market volatility than those of brokers
utilizing the agency model. We also believe that regulators in
certain jurisdictions have been implementing requirements in a
manner that may be more favorable to FX brokers utilizing the
agency model as compared to those utilizing the principal model.
We operate our business through two segments: retail trading and
institutional trading. Our retail trading segment accounted for
92% and 90% of our total revenues less referring broker fees in
2009 and the six months ended June 30, 2010, respectively.
Our institutional trading segment, FXCM Pro, offers FX trading
services to banks, hedge funds and other institutional customers
on an agency model basis and accounted for 8% and 10% of our
total revenues less referring broker fees in 2009 and the six
months ended June 30, 2010, respectively. Our revenues less
referring broker fees have grown from $9.5 million in 2001
to $246.1 million in 2009, a CAGR, of 50%. Our income
before income taxes has grown from $5.4 million in 2001 to
$97.0 million in 2009, a CAGR of 43.5%. Our revenues less
referring broker fees were $136.5 million and our income
before income taxes were $56.8 million in the six months
ended June 30, 2010, as compared to $127.7 million and
$54.3 million, respectively, in the six months ended
June 30, 2009.
Our operating subsidiaries are regulated in a number of
jurisdictions, including the United States, the United Kingdom
(where regulatory passport rights have been exercised to operate
in a number of European Economic Area jurisdictions), Hong Kong,
Australia and Dubai. Upon the completion of our acquisition of
ODL Group Limited, or ODL, a U.K.-based FX broker, which is
expected to close in September 2010, we will also be regulated
in Japan. We maintain offices in these jurisdictions, among
others. We offer our trading software in 16 languages,
produce FX research and content in 12 languages and provide
customer support in 13 languages. For the six months ended
June 30, 2010, approximately 76% of our customer trading
volume were derived from customers residing outside the United
States. We believe our global footprint provides us with access
to emerging markets, diversifies our risk from regional economic
conditions and allows us to draw our employees from a broad pool
of talent.
92
Our
opportunities
Continued
growth of the retail FX market
Despite the strong growth of the retail FX market, online retail
FX investors still represent a small fraction of the total
population of online investors. The Aite Group estimates that,
as of July 2010 there were over 110 million retail online
investors globally, but only 1.1 million retail investors
who traded FX. Our own surveys reveal that in the United States,
over 87% of retail FX investors started by trading equities
online before they began trading FX. We believe this existing
pool of online, self-directed investors represents a large
opportunity as they begin to trade retail FX in increasing
volumes.
Overall awareness of FX continues to grow among investors,
driven in part by increased media coverage and the central role
FX plays in the global economy. Also, since retail FX is an
asset class that can be traded 24 hours per day, five days
a week, it is convenient to trade for many online investors as
they can trade at any time of the day.
With the expansion of broadband internet access globally, larger
numbers of investors will have access to the technology that
enables online trading, thereby growing the pool of online
investors who are candidates to trade retail FX in the future.
Unlike equities, fixed income, real estate and many other asset
classes, FX markets do not experience periods where all assets
move in one direction or another. As a result, the FX market is
not necessarily correlated to other assets popular with online
investors, such as equities or options, and we believe that as
an increasing number of investors realize this, retail FX will
attract more attention as a way to increase portfolio
diversification.
Increasing
sophistication of FX customers and awareness of the agency model
will drive increased market share for agency model brokers like
FXCM
We believe that as retail investors grow in sophistication, they
will recognize the advantages of placing trades with an agency
model broker with a robust technology platform. We believe these
investors value competitive prices, deep liquidity, reliable
execution and the ability to use any trading strategy they
choose without fear of price requotes, unfilled orders or
trading slowdowns that may occur when they are trading with a
principal model FX broker. For instance, we believe
sophisticated customers, such as automated traders, one of the
fastest growing and highest volume segments of the retail FX
market, value an agency model broker who will not place
restrictions on the frequency or style of trading and offers
access to deep pools of liquidity and rapid execution at
attractive prices.
Expanding
our presence in Europe, a large market for retail FX
trading
We believe the retail FX market in Europe presents a significant
growth opportunity for us due to our agency model. According to
Greenwich Associates, a financial services market research firm,
57% of global FX trading volume in 2009 was conducted in Europe.
We believe that awareness of the advantages of the agency model
is growing among European customers and regulators, despite the
current prominence of principal model brokers in Europe. We
believe we can significantly expand our share of this large
market through our existing operations in Europe and our pending
acquisition of ODL.
Regulatory
changes will continue to narrow the pool of providers authorized
to offer retail FX, enhancing the standing of the industry
overall and of the FX brokers like us that can meet the higher
regulatory standards
Regulators in the United States and other jurisdictions have
made a series of changes that impact retail FX brokers,
including substantial increases in minimum required regulatory
capital, increased oversight of third-party referring brokers
and, more recently, regulations regarding the execution of
trades. While these regulations may increase our costs, we
believe that an effect of these regulations has been to
significantly reduce the number of firms offering retail FX,
even as the number of customers and the volume traded has grown.
Many firms did not have the resources to meet higher net capital
requirements, to handle the loss of
93
unlicensed solicitors or to make the necessary changes to their
technology platforms. As a result, a number of these firms left
these regulated jurisdictions, while others exited the business
entirely and sold either their customer accounts or their entire
business to other FX brokers. Recent examples include the
acquisitions of Direct FX, Hamilton Williams and SNC Investments
by Gain Financial; Astmax, Synthesis, FF Returns and Catosa by
Saxo Bank; and HotSpot, iTradeFX and the pending acquisition of
ODL by us.
We believe that regulators across major international markets
will continue to enact regulations in these areas. For example,
in the United Kingdom, proposed rules may require financial
institutions to place additional protections on customer funds,
prohibiting their use as collateral with counterparties. In the
United States, the CFTC adopted regulations in August 2010,
which become effective October 18, 2010, requiring
referring brokers to either meet certain minimum net capital
requirements or enter into a guarantee agreement with a
CFTC-regulated FX broker whereby such broker would guarantee the
referring brokers compliance with applicable regulatory
requirements.
We expect increased regulatory compliance burdens may cause
certain retail FX brokers to leave individual markets or exit
the industry altogether. As the industry consolidates, scale
will become increasingly important, presenting opportunities to
larger firms, such as us, that can meet the more stringent
regulatory requirements. We also believe that regulators in
certain jurisdictions have been implementing requirements in a
manner that is more favorable to agency model retail FX brokers,
like us, as compared to those utilizing the principal model. We
believe that this trend will present additional opportunities
for us to increase market share organically or through
acquisitions.
Continued
expansion in institutional market
The institutional FX market is comprised of banks, hedge funds,
and corporate treasury departments that trade with each other
predominantly through electronic communication networks, or
ECNs, and single bank platforms. We believe that we can use our
agency model to continue to expand our institutional FX segment
by offering these institutions the deep liquidity of multiple FX
market makers while preserving the anonymity that they value.
Our
competitive strengths
Differentiated
agency model that aligns our interests with our customers
interests, produces a better customer trading experience,
generates more stable revenues and exposes us to less market,
regulatory and reputational risk
We believe our agency model aligns our interests with those of
our customers. Our list of products is largely limited to those
we are now, or in the future will be, able to offer on an agency
model basis. Because we earn our fees based on transaction
volume, we design our products and services to make it easier
for our customers to trade. For example, we offer research on
aggregate trading trends and one-click trading to help our
customers trade more profitably. To support customers using
rapid trading strategies, we also offer services to help them
establish automated trading systems, connect these to our
platform and host them. In addition, we offer customers price
improvements for price changes that may occur between order
placement and execution on all order types.
In contrast, we believe a principal model broker generates
revenues from customer losses and may, in certain cases, have
features in their products that prevent or hinder trading
techniques that consistently generate profits for their
customers. These include restrictions on how close stops and
limits can be placed to the order price, requoting prices to
slow the pace of rapid trading strategies and rejecting trades
if they might result in a customer receiving price improvements.
We believe our agency model offers a better customer experience
that attracts more retail FX investors who maintain longer term
relationships with us.
Further, we believe our transaction volume-based revenue is more
stable and predictable than revenue derived from trading against
customers. In addition, because we do not take market risk and
do not extend credit to our customers unless they are fully
collateralized, our regulatory capital requirements are
significantly lower than those applicable to principal model
brokers. As a result, we have more cash we can use to pursue
94
our growth plans. Further, we believe our exposure to regulatory
and reputational risk is reduced by avoiding the inherent
conflict between the interests of the customer and those of the
principal model broker.
Business
model and proprietary technology designed to minimize risk and
free capital for ongoing operations and expansion
One of our core business philosophies is to seek to minimize
risk. In addition to the reduction of risk exposure that we
believe results directly from utilizing an agency model, this
philosophy is exemplified by the development and implementation
of our margin monitoring technology. This technology reduces the
risk that customers trading on margin could lose more than they
have on deposit with us by checking their margins four times per
second and automatically closing open positions if a customer
becomes at risk of going into a negative account balance. In
addition, our platform receives prices from up to 17 FX market
makers. By distributing our trading activity across multiple
counterparties, we reduce the risk that the failure of an
individual market maker will significantly impact the trading
services we offer.
Proprietary
and scalable technology platform and award-winning
products
In the retail FX industry, the technology and infrastructure
required to implement the agency model from customer trading
screen through settlement is not widely available. We have built
our proprietary technology platform over the last 11 years
to handle the complete lifecycle of a FX trade, as well as
customized connections to our network of FX market makers and a
full suite of back office and administrative systems. We have
developed an award-winning single technology platform that
provides over 600 prices per second for 81 currency
pairs/contracts-for-difference, or CFDs, and processes over
500,000 trades per day from a pool of over
165,000 customers who can access the system in
16 languages. Third-party alternatives to provide the
agency model for FX trading were principally designed for the
institutional market and have significant limitations when used
for retail FX. This generally increases the cost and time a
principal broker is forced to spend if they were to try to make
a conversion to an agency model.
Our platform is scalable and can handle sudden changes in the
number of trades and increases in the number of customers. The
prices provided by our network of up to 17 FX market makers
are frequently lower than the wholesale prices offered on
institutional platforms, such as EBS, due to the large volume we
transact, the direct access we provide to over 165,000 retail
traders, our longstanding relationships and the competition that
results from multiple market makers. Our platform is also
flexible, enabling us to add new instruments. For example, in
2009, we added trading in gold, silver, oil and five other CFDs.
In the first six months of 2010, we have added seven new FX
currency pairs and 11 new CFDs. In addition, our platform
reflects our approach to risk management through our margin
monitoring technology which is designed to check customer margin
four times per second to prevent them from going into a negative
balance. Our policy is generally not to pursue claims for
negative equity against our customers. We believe our
proprietary technology platform is a significant competitive
advantage.
We offer our customers various trading alternatives based on
customer sophistication, from beginner to expert, and on mode of
access, from smart phones to web-based interfaces to
downloadable desktop applications. These applications provide
retail FX customers with tools, including charts, analytics,
research and online training. An example of this is DailyFX, our
independent news and research service offered on our platform
and through DailyFX.com, which produces unique analysis,
articles and quantitative research for our customers, including
data on customer sentiment and aggregate retail trading activity
using our large pool of real-time trading data. Our primary
trading application is award-winning Trading Station II, a
desktop application that has been named FX Weeks
Best Retail Trading Platform for 2009 and 2010. We
also offer Active Trader, an internet application which provides
our high-volume customers information about depth of market and
allows them to deploy more sophisticated trading strategies.
Active Trader is particularly targeted at active equity traders
providing them with Level II depth of market
views for retail FX that are similar to their professional
equity trading systems. Level II trading systems not only
provide the best buy and sell price but also provide additional
levels of pricing beyond the highest buy and lowest sell price.
Our Active Trader platform can display up to 10 levels of prices
for each currency pair. We have also introduced a trading
application designed for customers who create automated trading
strategies, a growing and more active
95
segment of the retail FX trading population. Additionally, we
offer our customers services to help them automate their trading
strategies, connect their automated trading systems to our
platform and to host their strategies on our platform.
Widely
recognized brand and an industry leading in-house marketing
organization driving new customer growth
We believe that we have built a
best-in-class
in-house online marketing organization that has fueled
consistent organic growth in customers at low acquisition costs
through a combination of web properties and internet
advertising. We believe that the FXCM brand is one of the most
well-known, global brands in the retail FX industry, built
through over $146 million in brand advertising expenditure
since 2005. In 2009, our web properties attracted over
2.2 million unique visitors and 19 million page views
per month, as measured by Omniture, a web analytics application
service. Among our most popular web properties is DailyFX.com,
our research and news site that is staffed by a team of nine
full-time analysts who produce over 30 articles a day in three
languages which are syndicated on over 80 sites globally,
including Thomson Reuters and
Yahoo!®
Finance. DailyFX is one of the top three FX news and analysis
websites, measured by Alexa, a website which provides traffic
information for websites.
We handle all aspects of the marketing process in-house,
including strategy, design, placement, execution and performance
measurement, allowing us to accurately measure the effectiveness
of each campaign and optimize the use of our marketing and
advertising expenses.
International
reach and significant scale
As measured by volume, revenue and number of customer accounts,
we believe we are the largest provider of retail FX in the
United States. Nonetheless, for the six months ended
June 30, 2010, we generated approximately 76% of our
customer trading volume from customers outside the United
States. We are continuing to expand our presence globally,
especially in Europe and the Middle East where we believe retail
FX investors are growing increasingly aware of the
advantages of the agency model.
As one of the largest retail FX firms in the world as measured
by volume, revenue and customer accounts, we believe our scale
gives us a significant competitive advantage over other retail
FX brokers. For example, we believe scale is a significant
factor in a retail FX investors choice of broker and the
amount of funds such investor is willing to deposit. As of
June 30, 2010, total customer equity was
$425.5 million, representing an increase of 38% over that
as of June 30, 2009. In addition, we are among the largest
sources of volume for many of our FX market makers which enables
us to receive lower prices that we then pass on to our
customers. Our scale in online advertising allows us to lock up
coveted advertising inventory at favorable rates, lowering our
customer acquisition costs. Further, our balance sheet scale
enables us to meet minimum regulatory capital requirements
across all of our jurisdictions. Our technology platform enables
us to add customers organically or through acquisitions and
service them from a single infrastructure with minimal
additional costs.
Experienced
leadership team and innovative culture
Our leadership team is comprised of experienced executives that
have averaged over eight years of service with us and have been
active contributors to the growth of our company since its
founding in 1999 and to the growth of the online retail FX
industry generally. In the late 1990s, current members of our
technology leadership team played key roles in developing the
electronic trading systems for other early FX pioneers. Our
leadership team, led by co-founder and chief executive officer
Drew Niv, has built a global presence to address the
international market for retail FX while successfully leading
the firm through the strong growth of the industry and our
transition to an agency model.
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Our
Growth Strategy
Continue
to use our global brand and marketing to drive organic customer
growth
We intend to continue to use our brand and our sales and
marketing efforts to increase penetration of the growing retail
FX market. We believe that our direct marketing, which is aimed
at driving potential customers to our web properties, such as
DailyFX.com, and our free trading accounts, or demo
accounts, contributed to our generation of 328,851 leads among
new FX traders, experienced traders and high volume automated
traders for the six months ended June 30, 2010. Our
integrated sales and marketing information systems will continue
to be used to measure the effectiveness of campaigns and
optimize sales and marketing expenditures. In existing markets,
where we believe the FXCM brand is widely recognized, we are
increasing the effectiveness of our campaigns and lowering the
costs of acquisition per account. In markets where our
penetration is low, such as Europe, we are increasing our
marketing expenditure and expanding our physical presence with
sales offices. Adding a physical presence can have a significant
impact on customer acquisition in some markets. For example, in
Australia, new accounts per month have grown from 130 to 500 per
month in the 18 months since we opened our office in
Sydney. Similarly, new accounts per month in France have grown
from 28 to 180 per month in the 24 months since we opened
our office in Paris. Since April 2009, we have opened offices in
Athens, Berlin, Dubai and Milan to accelerate our penetration in
these markets.
Make
selected acquisitions to expand our customer base or add
presence in markets where we have low penetration
We plan to make selected acquisitions of firms with established
presence in attractive markets and distribution channels to
accelerate our growth. We are in the process of acquiring ODL, a
leading broker of retail FX, CFDs, spread betting and equity
options headquartered in London. Our acquisition of ODL is
designed to increase our profile in the U.K. market and
accelerate our growth in continental Europe, utilizing
ODLs relationships and sales force. We expect the retail
industry to continue to consolidate, providing us with
additional acquisition opportunities.
Expand
our range of products to add new customers and increase revenues
from existing customers
We have an established history of introducing new products. For
instance, we introduced our Active Trader platform for our high
volume customers in February 2009, the trading of CFDs in
September 2009, mobile trading in March 2010 and Strategy Trader
in August 2010. We plan to introduce additional products in the
future. We are also making investments in our technology
platform to meet the demands of our customers that we believe
will increase our share of the trading volumes of active and
institutional FX customers.
Capture
market share from competitors who are unable to keep pace with
increasingly demanding regulatory requirements and reap benefits
from improved industry reputation and customer
confidence
Over the past three years, regulatory changes have reduced the
number of retail FX brokers and, we believe, improved the
reputation of retail FX as an asset class and the standing of
the industry as a whole. We expect that increased regulatory
compliance requirements will cause additional firms to leave
individual markets or exit the industry and believe that this
will present additional opportunities for the remaining firms,
especially agency model firms like us, to increase market share
organically or through acquisitions. For example, if proposed
regulatory changes in the United States relating to trade
execution and price improvements are implemented, we believe
that additional
non-U.S. FX
customers desiring superior execution of their trades may seek
to become customers of U.S. regulated retail FX brokers. We
believe we are the largest retail FX broker licensed in the
United States based on transaction volume, revenue and number of
customer accounts and, accordingly, would be well positioned to
capture a significant share of these new accounts.
Overview
of a FX Trade
In a spot FX trade, currencies are listed in pairs. An investor
speculates that one currency will appreciate in relation to the
other currency in the pair. We facilitate these trades by
providing our customers with an
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online trading system, through the internet, which allows them
to buy and sell up to 56 currency pairs from up to 17 FX market
makers.
Throughout this process, our platform is completely automated,
matching the customer order request with the price provided by
the FX market maker. We do not intervene in the trade, other
than to apply our fixed markup. Our markup does not change based
on how the customer trade is executed. The same process is used
when a customer liquidates a position. Our platform processes
the trade using the best buy and sell price from our FX market
makers. Our markup does not change based on whether the trade
was profitable or not for the customer.
Retail FX trades are rolling spot contracts that settle in two
days. At the end of the trading day, trades are automatically
rolled over to the next day taking into account the interest
rate differential for each currency pair. Investors who are long
the currency with the higher yield are credited the interest
rate differential while investors who are short the currency
with the higher yield are debited the difference. We refer to
these credits and debits as rollover revenue. We apply a fixed
markup to the interest rate credited and debited generating its
own rollover.
Our
Products and Services
We offer three types of accounts, each designed for a particular
type of retail FX trader. For those new to FX trading, we offer
Micro accounts which enable new traders to open accounts with as
little as $25 and trade in very small lot sizes. Our Standard
accounts are designed for the majority of our traders and
require an opening deposit of $2,000. Our Active Trader accounts
are designed for experienced, high volume traders and require an
opening deposit of $50,000.
We also offer trading in a growing number of instruments. While
some customers may choose a retail FX broker based on the
breadth of products they offer, we limit the products we offer
to those that meet our risk, regulatory and technology criteria.
If an instrument cannot be traded on an agency model now or
moved to an agency model with reasonable effort and within a
reasonable period of time, we will not offer it.
Spot
FX Pairs
We offer spot FX trading in up to 56 currency pairs. Of these
pairs, our most popular seven currency pairs represent over 87%
of all trading volume, with the EUR/USD currency pair being the
most popular, representing over 31% of our trading volume in
2009. We add new currencies to our list provided they meet our
risk and regulatory standards. We do not allow trading in
currencies from nations that have prohibitions on the trading of
their own currency.
Contracts-for-Difference
We offer our
non-U.S. customers
the ability to trade CFDs, which are agreements to exchange the
difference in value of a particular asset such as a stock index
or oil or gold contract, between the time at which a contract is
opened and the time at which it is closed. Our CFD offerings,
which we began offering in September 2009, currently include 25
CFDs, including contracts for metals, energy and stock indices.
We will continue to introduce new products as permitted by
applicable laws and regulations. Due to U.S. regulatory
requirements, we do not and our affiliates do not trade or offer
CFDs in the United States or to U.S. residents.
CFD trading is offered through our Trading Station II, or TSII,
and Meta Trader 4, or MT4, products similar to our currency
pairs. As our FX market makers cannot process agency model
trades for CFDs, these products are not offered on an agency
basis. We stream the best bid and offer to customers but we do
not offset each trade automatically.
Spread
Betting
We offer spread betting trading to our U.K. customers,
which is where customers take a position against the value of an
underlying financial instrument moving either upwards or
downwards in the market. Customers can make spread betting
trades on FX pairs, stock indices, gold, silver and oil.
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Equities
and Equity Options
Upon the completion of our acquisition of ODL, we will offer
equity and equity option trading through ODL. ODL offers
customers outside of the United States the ability to trade
equities and options on a variety of U.K., continental Europe
and U.S. markets. These products do not currently represent
a material source of revenue for us.
Our
Trading Systems
We offer a number of trading systems, all of which are supported
by our sophisticated, proprietary technology infrastructure. Our
technology tracks the balances, positions, profits and losses
and margin levels for all account holders in real time. The back
office systems real time margin-watcher feature
automatically closes out open positions if a customers
account is at risk of going into a negative balance as a result
of a trading position losing value and reaching the minimum
margin threshold. These features ensure that the customers
cannot lose more than what they deposited into their account.
Trading Station II (TSII) is our proprietary
flagship technology platform. Over 215,000 trades a day are
placed using TSII. TSII has been named FX Weeks Best
Retail Trading Platform for 2009 and 2010.
TSII combines power and functionality and is accessible
through a user-friendly interface. TSII is designed to serve the
needs of our retail FX customers, but also offers advanced
functionalities often used by professional money managers and
our institutional customers. TSII is a Windows-based platform
with a wide variety of customization options for users to choose
from including a choice of 16 languages. The platform
provides an advanced chart offering called Marketscope which
offers a wide array of customization features, technical
analysis indicators, signal and alert functionality, as well as
the ability to place trades directly from the chart.
Active Trader Platform, also a proprietary
technology platform, was built and designed for our higher
volume customers. The platform is web-based, making it easily
and quickly accessible by users without requiring a download.
The platform features most of the same capabilities as the TSII
platform but also adds the ability to display up to 10 tiers of
market depth information. While TSII streams the best bid and
best offer from up to 17 FX market makers to the customer, our
Active Trader Platform displays not only the best bid and best
offer but also the next nine bids and offers. Our customers can
use this information to determine where market liquidity is
heavier and therefore which direction the more immediate moves
may likely be. This market depth information is similar to
Level II information displayed on the more professionally
geared equity trading systems, but is not common for retail FX.
Meta Trader 4 (MT4) is a third-party platform
built and maintained by MetaQuotes Software Corp, and we have
licensed the rights to offer it to our customer base. MT4 has a
loyal and global user group and the platform caters towards
customers with automated trading systems that they have either
developed themselves or have purchased from other developers.
Our MT4 platform utilizes all the features of our back office
system and order execution logic that are provided to users of
our proprietary technology platforms. We have integrated MT4
into the same pricing engine as TSII, enabling its users to get
the same pricing and execution.
FXCM Pro is our institutional level FX
offering that allows banks, hedge funds, professional money
managers and other such entities to trade anonymously, similar
to an ECN. We currently license the technology platform for FXCM
Pro from Currenex. Our added value comes from connecting
institutional customers to our top tier FX market makers to
gain access to preferred pricing. Customers using FXCM Pro can
both take and make prices on the platform. We earn revenue
through markups on those prices
and/or
commissions charged to the customer.
Other
Platforms
Our Trading Station Gateway, or Gateway platform, is
similar to TSII but is web-based. The Gateway platform allows
customers to access their account from any computer without
downloading any files. Gateway is also easy to use and has most
of the customization options of the TSII.
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Strategy Trader is a platform that provides an
alternative to customers who prefer to automate trading
strategies that they have either built themselves or bought from
other developers. Strategy Trader users will have the ability to
code and share C#-based trading systems and run them
automatically through the platform.
FX System Selector is a platform that allows customers to
scan and review dozens of pre-programmed and pre-filtered
trading systems and over 1,000 automated strategies. Customers
can then select the systems that match their trading and risk
preferences and apply them to their trading account. FX System
Selector is an ideal option for customers that follow general
market trends but may not prefer to execute trades themselves.
We also offer mobile platforms for multiple mobile devices,
including
Blackberry®
and the
iPhone®/iTouch®.
These platforms include a majority of the functionality found on
the TSII and allow customers to log in and trade anywhere in the
world.
Sales and
Marketing
Our sales and marketing strategy is focused on attracting and
educating new customers, increasing the trading activity of
existing customers and retaining existing customers. We divide
our accounts for measurement purposes into two categories:
tradeable accounts and active accounts. We consider an account
tradeable if it has sufficient funds to make a trade
in accordance with firm policies. We consider an account
active if it meets the criteria for a tradeable
account and has executed at least one trade within the last
twelve months. Our tradeable customer accounts have grown from
49,885 for the year ended December 31, 2007 to 140,565 for
the year ended December 31, 2009, a CAGR of 68%, and our
active customer accounts have grown from 59,541 for the year
ended December 31, 2007 to 116,919 for the year ended
December 31, 2009, a CAGR of 40%.
Our sales and marketing strategy focuses on three diverse
customer acquisition channels to expand our customer base.
Direct
Marketing Channel
Our direct marketing channel, through which we seek to attract
new customers is our most important marketing channel. In
executing our direct marketing strategy, we use a mix of online,
television and radio advertising, search engine marketing, email
marketing, educational FX expos and strategic public and media
relations, all of which are aimed at driving prospective
customers to our web properties, DailyFX.com and fxcm.com. In
those jurisdictions in which we are not regulated by
governmental bodies
and/or
self-regulatory organizations, however, we are generally
restricted from utilizing our direct marketing channel. See
Business Regulation.
While our platform is available in 16 languages and we have
websites available in 12 languages, the majority of our
direct marketing efforts have historically been focused on North
America, our home market, and Asia, due to its high rate of
growth. We did not focus on Europe as we believed the
competition there was stronger, with several established retail
FX brokers. In the last two years, we have focused on expanding
our global footprint by opening new international offices in
Europe and the Middle East and supporting them with marketing
campaigns. An international office provides us many benefits,
including the ability to hold in-person seminars, a location for
customers to visit, the ability to accept deposits at a regional
bank and native speakers performing sales and support.
Currently, we maintain sales offices in the United States, the
United Kingdom, France, Germany, Italy, Greece, Hong Kong,
Australia and Dubai. Our pending acquisition of ODL will expand
our presence in the European and Middle East markets, as well as
a local office in Japan. The acquisition will add a recognized
brand in the U.K. and European markets, which we will promote
through our direct marketing efforts. The acquisition will also
provide us with a direct sales force that will focus on
leveraging ODLs existing network of customers in Europe
and the Middle East as well as promoting our expanded technology
platform.
The primary objective of our marketing is to encourage
prospective customers to register for free trading accounts or
tradable accounts. Free registered practice trading accounts or
demo accounts are our principal lead generation
tool. We believe the demo account serves as an educational tool,
providing prospective
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customers with the opportunity to try FX trading in a risk-free
environment, without committing any capital. Additionally, it
allows prospective customers to evaluate our technology
platform, tools and services. The demo account is identical to
the platform used by our active trading customers, including the
availability of live real-time streaming quotes. However, trades
are not actually executed with our FX market makers.
The ease of the registration process for a demo account
maximizes lead generation. Prospective customers are only
required to enter a minimal amount of registration information.
This results in a large number of demo accounts. In 2009,
713,048 demo accounts were opened, a growth rate of 89% over
377,150 demo accounts opened in 2008. Of these demo accounts,
107,648 or 15% were converted into tradeable accounts.
During the trial period for the demo account, we provide
customers with information about our firms advantages,
educational resources and trading tools. To complement these
efforts, a team of Series 3 licensed sales representatives
contacts prospective customers by telephone to provide
individualized assistance.
Indirect
Marketing Channels
Our second marketing channel is our indirect channel that
utilizes a network of referring brokers. Referring brokers are
third parties that advertise and sell our services in exchange
for performance-based compensation. Many referring brokers offer
services that are complementary to our brokerage offering, such
as trading education and automated trading software. While
referring brokers are not permitted to use our name in their
advertising, accounts originating from referring brokers are
legally opened with a FXCM-owned entity. In most cases, the
sales function is performed by the referring broker and customer
service is provided by our staff.
Our white label channel is the smallest of three new customer
acquisition channels. We enable regulated financial institutions
to offer retail FX trading services to its customers using one
or more of the following services: (1) our technology,
(2) our sales and support staff or (3) our access to
liquidity. White labels can add value to our core offering
through increased positive name recognition on a regional or
global scale and access to a large existing customer base.
Customer accounts are opened directly with the white label, who
has responsibility for regulatory oversight. We are a party to
an agreement with Deutsche Bank AG (DB) for us to provide sales,
trade execution, processing and other back office services to DB
in relation to DBs offering of its retail foreign currency
trading platform. This platform operates under the trade name
dbFX.
Institutional
sales and marketing
FXCM Pro is targeted at institutional customers, principally
banks, hedge funds, corporate treasury departments and commodity
trading advisors. These customers trade using a variety of
tools. Some trade directly on the FXCM Pro system, using its
graphic user interface. Most, however, trade using automated
systems that receive price streams from FXCM Pro, as well as
other institutional FX providers such as banks and ECNs. The
sales process involves identifying a customer, receiving credit
approval from one of our prime brokers, signing them to a
contract and then connecting them to our network. Our revenues
are principally determined by the number of trades where we
provided the customer with the price and execution size they
desired.
We service this customer base with a small experienced
institutional sales force located in our New York and London
offices. As the customer base is much smaller compared to that
in our retail marketplace, we are able to provide customized
service and attention to each account. The institutional sales
force is compensated on a commission basis.
Marketing
expertise
We believe that our in-house marketing organization provides us
with a competitive advantage. We do not rely on outside
marketing agencies to provide services because our marketing
team acts as an in-house agency. Our marketing team handles
functions such as creative, media buying,
price-per-click
advertising, website development, email and database marketing,
and corporate communications. These staff members have all been
with FXCM for multiple years and have developed an internal
knowledgebase at FXCM that would
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probably not otherwise be available. This expertise has enabled
us to assemble a tightly integrated digital marketing platform
which encompasses our CRM (salesforce.com), Trading Back Office,
Ad Serving, and Website Analytics. As a result, we can calculate
the value of any media purchase with a high level of precision
on a cost per lead and cost per account basis. We believe this
analysis enables us to make intelligent media buying decisions.
Our marketing team has been responsible for numerous
initiatives. In 2003, we launched DailyFX.com, one of the top
three FX news and analysis websites, measured by Alexa, a
website which provides traffic information for websites. There
are nine full-time analysts that author content for DailyFX,
creating over 30 articles per day. DailyFX.com received
over 500,000 unique visitors per month and over six million page
views per month. Content from DailyFX is syndicated to over 80
websites, including
Yahoo!®
Finance. After search advertising, DailyFX is our largest single
source of new leads.
In addition, our sponsorship of the CNBC Million Dollar
Portfolio Challenge since 2007 has enabled us to further
enhance our brand and promote FX trading in general to a large
audience of potential customers.
Customer
Service
We provide customer service 24 hours a day, seven days a
week in English, handling customer inquiries via telephone,
email and online chat. As of June 30, 2010, we employed 167
individuals in our customer service department. To provide
efficient service to our growing customer base, we have
segmented our customer demographic into three main categories.
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New to FX: We cater to new customers
seeking to open accounts by providing low barrier account
minimums and in-depth educational resources on the FX market. We
believe that education is an important factor for new customers,
and we have a team dedicated to educate our customers the
fundamentals of FX trading, application of technical analysis to
FX and the use of risk management. We offer over 60 online
videos for educating new customers on the FX market. In
addition, we have a dedicated staff of instructors who conduct
live webinars and answer questions posted by customers in forums.
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Experienced Customers: We offer our
experienced customers value-added resources and trading
functionality. DailyFX Plus is a proprietary secure portal that
provides trading signals and high touch education. As many
experienced customers are technical traders, we also provide
them with the ability to trade directly from the charts.
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High Volume/Algorithmic Trading: In
2009, we formed our Active Trader sales group which caters to
customers with account balances above $50,000 generating over
$10 million in trading volume per month. Active Trader
customers receive price incentives for trading higher volumes.
This enables us to offer attractive pricing to our customers
that generate the most volume. Automated trading has increased
in popularity in the FX market. We have a dedicated programming
services team that can code automated trading strategies on
behalf of customers. Additionally, we offer multiple automated
programming interfaces that allow customers with automated
trading systems to connect to our execution system.
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We utilize tools that allow prospective and existing customers
to contact us through an online chat feature which allows our
sales and support staff to engage multiple customers at once. In
addition to live support, we are introducing more self-service
tools to customers to decrease inbound requests into our
customer service team, enabling them to focus more on pro-active
customer communication, including education and product
upgrades. We believe this will lead to increased deposits and
higher customer retention rates.
Our retail sales and customer service teams are not compensated
on a commission basis. All customers receive the same level of
service, regardless of the FXCM representative. We believe this
is a key differentiator for us compared to other retail FX firms
that employ commission based sales forces who may not be
motivated to provide support to smaller customers.
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Technology
and Infrastructure
Proprietary
technology platform
Our FX technology platform has been designed using proprietary
technologies to deliver high standards in performance,
flexibility and reliability. Our platform can be divided into
three main groups: front-end technology platforms and trading
decision support tools, agency model technology platform and
back office applications for account management, operations,
reporting and reconciliation processes.
We offer our customers a wide variety of proprietary, as well as
third-party, front-end platforms and trading decision support
tools. Our proprietary offerings include our primary trading
interface, FX Trading Station, a stable, market-tested,
downloadable application based on C++ that runs directly on a
customers personal computer. We also offer Active Trader
and the Trading Station Gateway, which are browser-based
products based on C and C++ that capitalize on Flash technology.
Each of these applications provides fully integrated charting
and analytical software to assist customers in their trading
decisions. We also offer Application Programming Interfaces in
FIX, Java, C++ and C# to our users so they can automate their
trading strategies. Our Strategy Trader product combines
proprietary components where we own the source code exclusively,
as well as other features where we have a perpetual,
non-exclusive license to the source code. Third-party front-end
platforms include MT4, a well-known, turnkey trading platform
which we license from MetaQuotes Software Corp. We do not own
the source code to MT4 but we have built proprietary interfaces
which enable it to access our agency model platform. We also
license technology to provide our mobile applications which run
on
iPhone®,
iPod
Touch®
and
Blackberry®
smart phones.
Our proprietary technology platform has been developed using
standard programming languages, such as Java, C++, and PL/SQL.
While we use standard, well-known protocols and software, such
as FIX, TCP, HTTP, Reliable Multicast, and Oracle, we have
designed the system with open interfaces so that we can easily
and seamlessly integrate new technologies.
We believe that our technology and infrastructure platform
provides us with a competitive advantage and enables us to
provide innovative solutions to our customers and partners. As
examples, we introduced the concept of real-time rebate
calculation for referring brokers and automation of basic
operations and account management routines to reduce processing
time.
Scalability
Our agency model system has been designed to meet the demands of
our growing customer base with a focus on speed, accuracy and
reliability. Within our network, we process orders in under 10
milliseconds during peak load periods, and have processed over
1,200 orders per second during volatile market conditions, 240
times our average volume over the last two years. At any given
time, we believe our technology platform has adequate capacity
to support customer activity. On average, we have approximately
58,000 customers logged on our technology platform at any given
time. We believe our current platform has the capacity of scale
to meet our growth expectations for the foreseeable future.
Reliability
and Availability
Our hardware infrastructure is hosted at collocation facilities
run by Equinix and DBSi. The two datacenters, located in New
Jersey and Pennsylvania, are over 90 miles apart, on
separate power grids and separate fiber connectivity. Each
facility has N+1 (or greater) uninterruptible power supply
systems, generator systems, public utility power feeds, cooling
systems, internet providers and private network providers.
Locations on the eastern coast of the United States were chosen
to achieve both optimal networking latency to price providers
and required geographic distance separation.
Applications, servers, network, storage devices, power and
temperature are monitored 24 hours a day, seven days a week
by support personnel through a combination of industry standard
monitoring and alerting tools, including SolarWinds, Nagios,
Cacti and FlowMon. Custom written applets and scripts are used
to report key resource usage in near real-time.
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Personnel are distributed across five major office locations
with key operations, such as dealing, customer support and
technology support, staffed at multiple locations. Each office
location utilizes redundant network connections to access
datacenter resources.
Security
Data security is of critical importance to us. We use industry
standard products and practices throughout our facilities. We
have strict policies and procedures with a minimal set of
employees retaining access to customer data. Physical security
at our datacenters is handled by security staff present
24 hours a day, seven days a week, in addition to biometric
and card access systems, man traps which refers to a
small space having two sets of interlocking doors such that the
first set of doors must close before the second set opens and
identification may be required for each door, and video
surveillance. Physical access at our corporate headquarters is
also handled by security staff present 24 hours a day,
seven days a week, turnstiles and card access systems.
Our systems and policies are tested annually for Payment Card
Industry, or PCI compliance. Additionally, we engaged a public
accounting firm to perform an audit of our internal controls and
issue a SAS 70 audit report.
Business
Continuity/Disaster Recovery
We have established a business continuity management team to
prepare and maintain business continuity plans and procedures
designed to ensure a prompt recovery following the loss or
partial loss of any of our infrastructure, systems or locations.
Our recovery plans are tested on a regular basis in order to
verify their effectiveness. Plans are maintained and updated
based upon results of the tests and as business needs change.
Risk
management
From 1999 through July 2007, we utilized the principal model,
setting the prices we displayed and serving as the sole
counterparty to our customers trades. In 2005, discussions
with certain of our customers and regulators led us to believe
that an agency model has significant advantages over the
principal model. We believed that if we remained a principal
model broker, we would be required to take on increasing amounts
of market risk and would require increasing amounts of capital
in order to achieve our growth objectives. Therefore, we
commenced building an agency model platform, which required a
significant investment in technology, as well as the cooperation
of several of our market makers who were required to change
their systems to accommodate our new trading model. We began
moving customers onto agency execution in November of 2006, and
in July 2007, completed the transition. We have continued to
invest in our agency platform, adding additional FX market
makers, improving execution and adding features to enhance the
trading experience of our customers.
Converting to an agency model is one example of our core
business philosophy to reduce risks. We believe that this is
also evident in:
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our list of products, which is principally limited to those we
are now, or can soon be, trading using our agency model;
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our margin monitoring technology, which reduces the risk that
customers trading on margin could lose more than they deposit by
checking our customers margins four times per second;
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our network of multiple FX market makers and prime brokers,
which we believe reduces our counterparty risk in the event one
of our business partners fails; and
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our commitment to strong internal compliance procedures and
compliance organization staffing, which we believe reduces our
operational risk.
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We believe our approach to risk management not only protects us
from potential losses but also delivers financial benefits. As
we do not hold positions on agency trades, we do not have to use
our balance sheet to
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manage market risk or to meet the larger regulatory capital
requirements that accompany those risks. This allows us instead
to use our capital to:
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enhance our global technology platform which services over
165,000 accounts from customers in 184 countries;
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introduce new products at an accelerated pace;
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enhance our global brand through digital marketing campaigns
developed by our in-house marketing organization; and
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selectively acquire other retail FX brokers.
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Agency execution represented 85% of our retail trading volume in
2009 and 91.5% for the six months ended June 30, 2010. All
Standard and Active Trader account trading is done on an agency
model basis. Prior to August 2010, our FX market makers did not
accept trade lot sizes smaller than $1,000, the size of some
trades executed by our Micro accounts. Although we always
offered the best buy and sell quotes from our FX market
makers to all accounts regardless of size, we did not
immediately offset certain Micro account trades with our FX
market makers. For these transactions, we acted as the principal
to the trade. Starting in August 2010, all Micro account FX
trades, regardless of size, are executed on an agency basis.
Similarly, market makers for CFDs are not yet capable of
processing orders in sizes required for agency execution. We
currently act as the principal on all CFD trades. We are working
with our network of market makers with the goal of moving our
CFD volume to agency model execution.
For our agency trades, we are not subject to market risk as
every trade is hedged immediately at the market price offered to
our customer. For the remainder of our volume for which we do
not create an offsetting hedge trade automatically, we are
exposed to a degree of risk on each trade that the market price
of our position will move against us. While our exposure is
minimal relative to the size of our balance sheet, we have
established policies and procedures to manage our exposure.
These policies are reviewed regularly by our executive
management team and include quantitative analyses by currency
pair, as well as assessment of a range of market inputs,
including trade size, dealing rate, customer margin and market
liquidity. Our risk management procedures require monitoring
risk exposure on a continuous basis and determining appropriate
hedging strategies in order to maximize revenue and minimize
risk.
In addition, we are subject to a degree of market risk in our
spread betting trading. We may fully hedge our spread bet
position exposure by purchasing or selling the underlying
financial instrument in the spread bet or we may elect to enter
into a spread bet contract with our customer unhedged. We have
also established policies and procedures to manage our exposure
to such market risk.
Our FX trading operations require a commitment of our capital
and involve risk of loss due to the potential failure of our
customers to perform their obligations under these transactions.
In order to minimize the incidence of a customers losses
exceeding the amount of cash in their account, which we refer to
as negative equity, we require that each trade must be
collateralized in accordance with our collateral risk management
policies. Each customer is required to have minimum funds in
their account for opening positions, referred to as the initial
margin, and for maintaining positions, referred to as
maintenance margin, depending on the currency pair being traded.
Margin requirements are expressed as a percentage of the
customers total position in that currency, and the
customers total margin requirement is based on the
aggregated margin requirement across all of the positions that a
customer holds at any time. Each net position in a particular
currency pair is margined separately. Because we do not net
across different currency pairs, we believe we produce a fairly
conservative margin policy. Our systems automatically monitor
each customers margin requirements in real-time and we
confirm that each of our customers has sufficient cash
collateral in their account before we execute their trades. If
at any point in time a customers trading position does not
comply with the applicable margin requirement because our
predetermined liquidation thresholds have been exceeded, the
position will be automatically liquidated in accordance with our
margin policies and procedures documented in our customer
agreement. We believe this policy protects both us and the
customer. We believe that as a result of implementing real-time
margining and liquidation processing, the incidence of customer
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negative equity has been insignificant. For the six months ended
June 30, 2010 and for the year ended December 31,
2009, negative equity balances resulted in losses of
$0.5 million and $0.2 million, respectively.
We are also exposed to potential credit risk arising from our
exposure to counterparties with which we hedge and financial
institutions with whom we deposit cash. By transacting with
several of the largest global financial institutions, we have
limited our exposure to any one institution. In the event that
our access to one or more financial institutions becomes
limited, our ability to hedge may be impaired.
Relationships
with wholesale FX market makers and prime brokers
Our global network of FX market makers includes, as of
June 30, 2010, Barclays Bank PLC, Citi, Credit Suisse,
Deutsche Bank, JPMorgan Chase and UBS, among others. We believe
that these relationships help us to meet the trading demands of
our retail and institutional customers. We generally maintain
collateral on deposit, which includes our funds and our
customers funds (outside of our U.K. subsidiary),
with our FX market makers with the average monthly balance for
the six months ended June 30, 2010 of $99 million.
Our liquidity relationships are legally formed pursuant to
International Swaps and Derivatives Association, or ISDA, form
agreements signed with each financial institution. These
standardized agreements are widely used in the interbank market
for establishing credit relationships and are typically
customized to meet the unique needs of each liquidity
relationship. Each ISDA agreement outlines the products
supported along with indicative bid/offer spreads and margin
requirements for each product. We have had a number of key
liquidity relationships in place for over five years and as such
we believe we have developed a strong track record of meeting
and exceeding the requirements associated with each
relationship. However, our FX market makers have no obligation
to continue to provide liquidity to us and may terminate our
arrangements with them at any time. We currently have effective
ISDA agreements and other applicable agreements.
In addition to the multiple direct relationships we have
established with FX market makers pursuant to the ISDA
agreements, we have also entered into prime brokerage agreements
with Citi and Deutsche Bank for our retail trading, and Citi and
RBS for our FXCM Pro institutional business, which we believe
allow us to maximize our credit relationships and activities
while improving efficiency. As our prime broker, these firms
operate as central hubs through which we transact with our FX
market makers. Our prime brokers allow us to source liquidity
from a variety of executing dealers, even though we maintain a
credit relationship, place collateral, and settle with a single
entity, the prime broker. We depend on the services of these
prime brokers to assist in providing us access to liquidity
through our wholesale FX market makers. In return for paying a
modest prime brokerage fee, we are able to aggregate our trading
exposures, thereby reducing our transaction costs and increasing
the efficiency of the capital we are required to post as
collateral. Our prime brokerage agreements may be terminated at
any time by either us or the prime broker upon complying with
certain notice requirements. We are also obligated to indemnify
our prime brokers for certain losses they may incur.
Intellectual
Property
We rely on a combination of trademark, copyright, trade secret
and fair business practice laws in the United States and other
jurisdictions to protect our proprietary technology,
intellectual property rights and our brand. We also enter into
confidentiality and invention assignment agreements with our
employees and consultants and confidentiality agreements with
other third parties and rigorously control access to proprietary
technology. Currently, we do not have any pending or issued
patents.
We use the following service marks that have been registered or
for which we have applied for registration with the
U.S. Patent and Trademark Office: Forex Capital Markets
(registered service mark), FXCMPRO (registered service mark),
FXCM (registered service mark) and StrategyTrader (pending
service mark).
Competition
The retail FX trading market is fragmented and highly
competitive. Our competitors in the retail market can be grouped
into several broad categories based on size, business model,
product offerings, target customers
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and geographic scope of operations. Competition in the
institutional market can be grouped by type, technology and
provider.
U.S. based retail FX brokers: In
the U.S. market, our primary competitors are Gain Capital
Holding LLC, Global Futures & FX, LLC and OANDA
Corporation. They are well capitalized, have their own
technology platforms and are recognizable brands. All of these
firms operate using the principal model. We also compete with
smaller retail FX brokers such as Capital Markets Services, LLC,
FXDirectDealer, LLC and InterbankFX, LLC. These firms, to date,
have not been our core competitors due to their smaller size,
technology and marketing limitations. With the exception of
InterbankFX, all of these firms operate using the principal
model.
International multi-product trading
firms: Outside the United States we compete
with firms such as Saxo Bank, CMC Group, IG Group Holdings plc
and City Index Limited. Other than Saxo Bank, the international
firms tend to focus on CFDs and spread betting and derive less
than 50% of their revenues from retail FX.
Other online trading firms: To a lesser
degree, we compete with traditional online equity brokers
OptionsXpress Holdings, Inc., E*TRADE Financial Corp., TD
Ameritrade, TradeStation and Interactive Brokers. These firms
generally tend to focus on listed products and may already, or
will in the future, provide retail FX principally as a
complementary offering. With the exception of Interactive
Brokers, the firms in this category that have entered the FX
market have generally done so through a relationship with a
retail FX broker who specializes in FX.
International banks and other financial institutions with
significant FX operations: We also compete
with international banks that have announced or launched retail
FX operations. Financial institutions generally choose to enter
into a joint venture with an independent retail currency firm in
lieu of building a retail operation. For example, we have a
white label relationship with dbFX, the online retail FX
offering from Deutsche Bank.
Competition in institutional market: In
the institutional market that our FXCM Pro segment competes, we
face competition from three principal sources. We compete with
other multi-bank ECNs such as State Street Banks
Currenex, Knight Capitals Hotspot FX and ICAPs EBS.
We also compete with single bank platforms such as Deutsche
Banks Autobahn, Barclays Barx and Citis
Velocity. The third source of competition are desktop
aggregators including Progress Softwares Apama, Flextrade
and Integral.
We attribute our competitive success to the quality of the
service we offer our customers and their confidence in our
agency business model and strong financial condition. We believe
that our expertise in product innovation, trading technology and
international scale will allow us to continue to compete
globally as we expand our presence in existing markets and enter
new ones.
Regulation
Overview
Our business and industry are highly regulated. Our operating
subsidiaries are regulated in a number of jurisdictions,
including the United States, the United Kingdom (where
regulatory passport rights have been exercised to operate in a
number of European Economic Area jurisdictions), Hong Kong,
Australia and Dubai. Upon the completion of our acquisition of
ODL, which is expected to close in September 2010, we will also
be regulated in Japan. These government regulators and
self-regulatory organizations oversee the conduct of our
business in many ways and several conduct regular examinations
to monitor our compliance with applicable statutes and
regulations. We are subject to statutes, regulations and rules
that cover all aspects of the FX business, including:
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sales practices, including our interaction with and solicitation
of customers and our marketing activities;
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trading practices, including restrictions on our execution of
certain FX transactions and surveillance to detect potential
regulatory violations;
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treatment of customer assets, including custody, control,
safekeeping and segregation of our customers funds and
securities;
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licensing for our operating subsidiaries and registration and
continuing education requirements for our employees;
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maintaining specified minimum amounts of capital and limiting
withdrawals of funds from our regulated operating subsidiaries;
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anti-money laundering practices;
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recordkeeping and making financial and other reports to
regulators; and
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supervision of our business, including the conduct of directors,
officers and employees.
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Our chief compliance officer oversees our compliance department
which currently consists of 21 individuals, including five
lawyers. The primary role of our compliance department is to
ensure that we conduct our business activities in accordance
with all statutory and regulatory requirements. Additionally,
the compliance department provides education, supervision,
surveillance, mediation and communication review. In addition,
in jurisdictions in which we are currently regulated, certain of
our subsidiaries are subject to minimum regulatory capital
requirements.
U.S.
Regulation
In the United States, we are regulated by the Commodities
Futures Trading Commission, or CFTC, and National Futures
Association, or NFA, a self-regulatory organization. These
regulatory bodies are charged with safeguarding the integrity of
the FX and futures markets and with protecting the interest of
customers participating in those markets. In recent years, the
financial services industry in the United States has been
subject to increasing regulatory oversight. In 2008, Congress
passed the CFTC Reauthorization Act, which amended the Commodity
Exchange Act and gave the CFTC the power to regulate the retail
FX industry. The CFTC subsequently passed rules in 2010 which
formalized FX as an instrument authorized by Congress for retail
trading and which recognized retail FX dealer managers as a new
category of regulated providers of FX. In August 2010, the CFTC
released final rules relating to retail FX regarding, among
other things, registration, disclosure, recordkeeping, financial
reporting, minimum capital and other operational standards. Most
significantly the regulations:
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impose an initial minimum security deposit amount of 2% of the
notional value for major currency pairs and 5% of the notional
value for all other retail FX transactions and provide that the
NFA will designate which currencies are major
currencies and review, at least annually, major currency
designations and security deposit requirements and adjust such
designations and requirements as necessary in light of changes
in the volatility of currencies and other economic and market
factors;
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provide that referring brokers must either meet the minimum net
capital requirements applicable to futures and commodity options
referring brokers or enter into a guarantee agreement with a
CFTC-regulated FX dealer member, along with a requirement that
such referring broker may be a party to only one guarantee
agreement at a time;
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require that the risk disclosure statement provided to every
retail FX customer include disclosure of the number of
non-discretionary accounts maintained by the FCM or RFED that
were profitable and those that were not during the four most
recent calendar quarters;
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require that, FCMs and RFEDs are obligated when requoting prices
to do so in a symmetrical fashion so that the requoted prices do
not represent an increase in the spread from the initially
quoted prices, regardless of the direction the market
moves; and
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prohibit the making of guarantees against loss to retail FX
customers by FCMs, RFEDs and referring brokers and require that
FCMs, RFEDs and referring brokers provide retail FX customers
with enhanced written disclosure statements that, among other
things, inform customers of the risk of loss.
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In July 2010, Congress passed the Dodd-Frank Wall Street Reform
and Consumer Protection Act, or the Dodd-Frank Act, which, among
other things, authorizes the CFTC and SEC to mandate central
clearing of
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OTC derivatives and may have broad effects on the derivatives
markets generally. For example, this legislation may affect the
ability of FX market makers to do business or affect the prices
and terms on which such market makers will do business with us.
Such legislation may also affect the structure, size, depth and
liquidity of the FX markets generally. These effects may
adversely impact our ability to provide FX transactions to our
customers and could have a material adverse affect on our
business and profitability. In addition, beginning in July 2011,
the Dodd-Frank Act will require us to ensure that our customers
resident in the United States have accounts with our
NFA-registered operating entity.
Firms operating in the financial services industry are subject
to a variety of statutory and regulatory requirements that
require them to know their customers and monitor their
customers transactions for suspicious financial and
trading activities. With the passage of the Patriot Act, we are
subject to more stringent requirements. As required by the
Patriot Act, we have established a comprehensive anti-money
laundering, or AML, and customer identification program, or CIP,
designated an anti-money laundering compliance officer, trained
employees as required and conducted an annual independent audit
of our AML program. Our CIP may include both a documentary and a
non-documentary review and analysis of the potential customer.
In addition to our internal review of a prospective
customers identity we also contract with a third party
global provider of background checks to perform extensive
non-documentary, database reviews on each prospective customer.
In addition to identity verification, we review any negative
information on customers that appears on the U.S. Treasury
Departments Office of Foreign Assets and Control,
Specially Designated Nationals and Blocked Persons lists. These
procedures and tools coupled with our periodic training assist
us in complying with the Patriot Act as well as all CFTC and NFA
requirements in this area.
On a global basis, our AML-CIP has been structured to comply
with applicable statutes and regulations in all the
jurisdictions where we operate. Additionally, we have developed
proprietary methods for risk control and continue to add
specialized processes, queries and automated reports designed to
identify potential money laundering, fraud and other suspicious
activities.
International
Regulation
Outside the United States, we are regulated by, among others:
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the Financial Services Authority in the United Kingdom;
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the Comité des Établissements de Credit et des
Entreprises dInvestissement in France;
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the Securities and Futures Commission in Hong Kong;
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the Australian Securities and Investment Commission in Australia;
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the Dubai Multi Commodities Centre and the Dubai Gold and
Commodities Exchange in Dubai; and
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upon the completion of the acquisition of ODL, the Kanto Local
Finance Bureau in Japan.
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Trading volume for 2009 with customers resident in jurisdictions
in which we are not regulated by governmental bodies
and/or
self-regulatory organizations was in the aggregate about 55% of
our total customer trading volume. In these jurisdictions we
conduct our business in a manner which we believe is in
compliance with applicable local law but which does not require
local registration, licensing or authorization. In any such
foreign jurisdiction, there is a possibility that a regulatory
authority could assert jurisdiction over our extraterritorial
activities and seek to subject us to the laws, rules and
regulations of that jurisdiction. We are commonly restricted
from direct marketing to retail investors including the
operation of a website specifically targeted to investors in a
particular foreign jurisdiction or we are restricted from
dealing with retail customers unless they can be classified as
professional, sophisticated or high net worth investors which
may limit our ability to grow our business in that jurisdiction.
We are also commonly restricted from maintaining a presence in a
foreign jurisdiction including computer servers, bank accounts
and the provision of local account process services which may
limit our ability to grow our business in that jurisdiction or
may result in increased overhead costs or degradation in service
provision to customers in that jurisdiction.
Although we may lose some potential revenue by adhering to this
policy, we have a general policy of trying to respect the wishes
of foreign nations, whether explicit or otherwise. For example,
we do not permit deposits in currencies from jurisdictions with
capital controls in an attempt to avoid circumventing the
capital control regime
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of such jurisdiction. We also do not offer trading in currencies
where the government of such jurisdiction does not desire
speculation in its currency for fears of destabilization or
manipulation, among others.
We have consulted with legal counsel in selected jurisdictions,
including each jurisdiction in which residents of such
jurisdiction account for one percent (1%) or greater of our
total retail customer trading volume, for advice regarding
whether we are operating in compliance with local laws and
regulations (including whether we are required to be licensed or
authorized) or, in some cases, where licensing or authorization
requirements could be read to be applicable to foreign dealers
without a local presence, whether such requirements are
generally not enforced. We have not similarly consulted with
legal counsel in each of the other jurisdictions in which our
customers reside, and trading volume from customers resident in
these latter jurisdictions accounts for approximately 20% of our
total retail customer trading volume. We are accordingly exposed
to the risk that we may be found to be operating in
jurisdictions without required licenses or authorizations or
without being in compliance with local legal or regulatory
requirements. Furthermore, where we have taken legal advice we
are exposed to the risk that our legal and regulatory analysis
is subsequently determined by a local regulatory agency or other
authority to be incorrect and that we have not been in
compliance with local laws or regulations (including local
licensing or authorization requirements) and to the risk that
the regulatory environment in a jurisdiction may change,
including in a circumstance where laws or regulations or
licensing or authorization requirements that previously were not
enforced become subject to enforcement. In any of these
circumstances, we may be subject to sanctions, fines and
restrictions on our business or other civil or criminal
penalties and our contracts with customers may be void or
unenforceable, which could lead to losses relating to
restitution of client funds or principal risk on open positions.
Any such action in one jurisdiction could also trigger similar
actions in other jurisdictions. We may also be required to cease
the conduct of our business with customers in any such
jurisdiction
and/or we
may determine that compliance with the laws or licensing,
authorization or other regulatory requirements for continuance
of the business are too onerous to justify making the necessary
changes to continue that business. In addition, any such event
could impact our relationship with the regulators or
self-regulatory organizations in the jurisdictions where we are
subject to regulation, including our regulatory compliance or
authorizations.
In Canada, where we generated approximately 6% of our customer
trading volume in the six months ended June 30, 2010, the
securities industry is governed locally by provincial or
territorial legislation, and there is no national regulator.
Local legislation differs from province to province and
territory to territory. For example, the provincial laws of
British Columbia would require us to register as an investment
dealer to offer our trading services directly. As such, we
currently conduct our business in British Columbia through an
arrangement with a registered investment dealer in Canada. In
other provinces and territories in Canada, where we conduct the
bulk of our Canadian business, we have historically provided our
services directly from our U.S. facilities, without
registering as a dealer; however, we have received letters from
local regulators in Quebec and Manitoba requesting information
about our customers resident in such provinces. We are aware
that local regulators in certain Canadian provinces and
territories have begun to determine that FX trading services
must be carried out through a registered investment dealer.
Accordingly, we are evaluating the restructuring of our Canadian
activities, including possible arrangements with registered
investment dealers, to address these regulatory developments. We
anticipate that our profitability in Canada will decrease
significantly due to the restructuring of our Canadian
activities because, among other things, we may have to share a
portion of our revenue. In addition to the potential adverse
effect on our results of operations as a result of a need to
restructure our Canadian activities, we may also be subject to
enforcement actions and penalties or customer claims in any
province or territory where our FX trading operations are deemed
to have violated local regulations in the past.
We evaluate our activities in relation to jurisdictions in which
we are not currently regulated by governmental bodies
and/or
self-regulatory organizations on an ongoing basis. As a result
of these evaluations we may determine to alter our business
practices in order to comply with legal or regulatory
developments in such jurisdictions and, at any given time, are
generally in various stages of updating our business practices
in relation to various jurisdictions, including jurisdictions
which account for one percent (1%) or less of our total retail
customer trading volume. Depending on the circumstances, such
changes to our business practices may result in increased costs
or reduced revenues and negatively impact our financial results.
In connection with our pending acquisition of ODL, we will add
regulated offices in Japan and the United Kingdom. ODL
Securities Limited is a registered with the U.K. FSA as a broker
dealer of FX, spread
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betting, CFDs, equities, exchange traded futures and options and
ODL Japan is registered with the Kanto Local Finance Bureau in
Japan.
Net
Capital Requirements
Certain of our subsidiaries are subject to jurisdictional
specific minimum net capital requirements, designed to maintain
the general financial integrity and liquidity of a regulated
entity. In general, net capital requirements require that at
least a minimum specified amount of a regulated entitys
assets be kept in relatively liquid form, usually cash or cash
equivalents. Net capital is generally defined as net worth,
assets minus liabilities, plus qualifying subordinated
borrowings and discretionary liabilities, and less mandatory
deductions that result from excluding assets that are not
readily convertible into cash and from valuing conservatively
other assets.
If a firm fails to maintain the minimum required net capital,
its regulator and the self-regulatory organization may suspend
or revoke its registration and ultimately could require its
liquidation. The net capital requirements may prohibit payment
of dividends, redemption of stock, prepayment of subordinated
indebtedness and issuance of any unsecured advance or loan to a
stockholder, employee or affiliate, if the payment would reduce
the firms net capital below minimum required levels.
Regulators in the United States continue to evaluate and modify
regulatory capital requirements in response to market events in
an effort to improve the stability of the international
financial system. As of June 30, 2010, on a separate
company basis, we were required to maintain approximately
$37.8 million of minimum capital in the aggregate across
all jurisdictions. As such, as of June 30, 2010, we had
approximately $74.7 million of excess adjusted net capital
over this required regulated capital. We do not anticipate that
the implementation of the regulations adopted by the CFTC in
August 2010 will require us to increase the amount of capital in
our U.S.-regulated operating entity. We believe that our excess
capital position enhances our capital position in light of
potential future increases in required minimum capital
requirements in the United States and globally. Additionally, we
believe that our capital position enhances our access to FX
liquidity, thereby improving our ability to provide customers
with attractive pricing and facilitating our trading and hedging
activities. Also, we believe that we have adequate capital
positions in all other regulated jurisdictions allowing us to
fulfill our intended business plans and increase our market
share. Our excess capital position allows us to provide capital
to our affiliates for business growth opportunities and meet
potential increases in minimum capital requirements.
Employees
As of June 30, 2010, we had a total of 678 full-time
employees and 57 full-time contractors, 515 of which were
based in the United States and 220 of which were based outside
the United States. We have assembled what we believe is a highly
talented group of employees many of whom have been with the firm
since our founding. Approximately 34% of our employees have been
with us for five or more years. We believe our culture promotes
a strong sense of loyalty, customer focus and high ethical
standards. None of our employees are covered by collective
bargaining agreements. We believe that our relations with our
employees are good.
Facilities
Our company headquarters are located in New York, NY, with other
U.S. offices in Plano, TX and San Francisco, CA.
Outside the United States, we have offices in London, Paris,
Berlin, Hong Kong, Dubai, Sydney and Tokyo. We lease each of
these facilities and do not own any real property. We believe we
have adequate office space or will be able to find additional
space on reasonable commercial terms to meet our projected
growth rates.
Legal
Proceedings
We may from time to time be involved in litigation and claims
incidental to the conduct of our business, including
intellectual property claims. We have also been named in various
judicial and arbitral cases brought by customers seeking damages
for trading losses. In addition, our business is also subject to
extensive regulation, which may result in regulatory proceedings
against us. We are not currently subject to any pending
judicial, administrative or arbitration proceedings that we
expect to have a material impact on our consolidated financial
statements.
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MANAGEMENT
Directors
and Executive Officers
The following table sets forth the names, ages and positions of
our directors and executive officers. Prior to this offering, we
expect that six additional directors who are independent in
accordance with the criteria established by the New York Stock
Exchange for independent board members will be appointed to the
board of directors.
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Name
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Age
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Position
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Drew Niv
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Director and Chief Executive Officer
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David Sakhai
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37
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Director and Chief Operating Officer
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William Ahdout
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44
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Director
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Kenneth Grossman
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38
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Director
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Eduard Yusupov
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39
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Director
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Brendan Callan
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31
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Managing Director of Sales and Client Services
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Robert Lande
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47
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Chief Financial Officer
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Ornit Niv
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34
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President International Operations
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Andreas Putz
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50
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Managing Director and Global Head of FXCM Pro
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James Sanders
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Chief Compliance Officer
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David S. Sassoon
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General Counsel
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Drew Niv has been the Chief Executive Officer of FXCM
since 1999 and is one of the original founding partners of the
firm. Prior to co-founding FXCM, Mr. Niv served as the
Director of Marketing for MG Financial Group. Mr. Niv
graduated from the University of Massachusetts at Amherst in
1995 and holds a B.S. in Accounting.
David Sakhai has been the Chief Operating Officer of FXCM
since 1999 and is one of the original founding partners of the
firm. Prior to co-founding FXCM, Mr. Sakhai worked in
real-estate management, holding several senior positions at Saks
Brothers Realty. Mr. Sakhai graduated magna cum laude
from the School of Management at Binghamton University in
1995.
William Ahdout has been a Chief Dealer and Managing
Director of FXCM since 1999 and is one of the original founding
partners of the firm. Prior to co-founding FXCM, Mr. Ahdout
served as a Vice President and Chief Dealer of the Tokyo desk at
Berisford Capital Markets, an institution specializing in
inter-bank currency option brokerage, during a period of
industry consolidation.
Kenneth Grossman has been a Managing Director of FXCM
since 1999 and is one of the original founding partners of the
firm. From 1999 to 2007, Mr. Grossman was also the Chief
Financial Officer of FXCM. Prior to co-founding FXCM,
Mr. Grossman served as Chief Financial Officer and in other
senior management roles at Berisford Capital Markets.
Mr. Grossman graduated from Brooklyn College in 1994 with a
B.S. in Accounting and received a J.D. with honors from Brooklyn
Law School in 1997.
Eduard Yusupov has been a Chief Dealer and Managing
Director of FXCM since 1999 and is one of the original founding
partners of the firm. Prior to co-founding FXCM,
Mr. Yusupov served as a Senior Dealer for MG Financial
Group.
Brendan Callan has been the Managing Director of Sales of
FXCM since 2005. Mr. Callan joined the firm in 2001 and
became the Managing Director of RefcoFX in 2003 prior to
becoming the Managing Director of Sales at FXCM in 2005.
Mr. Callan graduated from Rensselear Polytechnic Institute
with a B.S. in Finance/MIS in 2001 and is a Chartered Financial
Analyst (CFA).
Robert Lande is the Chief Financial Officer of FXCM and
joined the firm in January 2010. From December 2004 to December
2009, Mr. Lande was Managing Partner and Chief Operating
Officer of Riveredge Capital Partners, an investment management
firm. Previously Mr. Lande worked for over 16 years
within the BCE Group where his last position was Chief Financial
Officer of Telecom Americas, a joint
112
venture between Bell Canada International, AT&T (then SBC
Communications) and America Movil. Mr. Lande graduated from
McGill University with a B.A. in Economics in 1984, received a
M.B.A. in finance from the John Molson School of Business at
Concordia University in 1986 and is a Chartered Financial
Analyst (CFA).
Ornit Niv has been the President of International
Operations of FXCM since January 2008. From 2003 to 2007,
Ms. Niv was Managing Director of FXCM Asia. Ms. Niv
graduated from the University of Massachusetts at Amherst with a
B.A. in Political Science in 1997 and received a J.D. from
Villanova University School of Law in 2000.
Andreas Putz has been the Managing Director of FXCM Pro
since 2005 and has extensive experience in the FX industry.
Prior to joining the firm in 2005, Mr. Putz worked at
Credit Agricole in FX Trading & Sales, and Derivatives
Trading & Sales from 1999 to 2005. From 1997 to 1999,
Mr. Putz worked at Barclays Bank in FX Trading &
Sales and from 1996 to 1997 at Commerz Bank where he worked in
Emerging Markets and FX Trading & Sales. Mr. Putz
started his career at Deutsche Bank in 1980 after graduating
from the Oesterreichiesche Volksbank Banking Program in Austria
in 1979. Mr. Putz worked in Emerging Markets, Derivatives,
Bonds, and FX Trading & Sales for 16 years at
Deutsche Bank.
James Sanders has been the Chief Compliance Officer of
FXCM since 2005. Prior to joining FXCM in 2005, Mr. Sanders
worked as a Director and Counsel in the Legal and Compliance
Department of Credit Suisse from 2003 to 2005. Mr. Sanders
worked as Counsel in the Financial Institutions Practice Group
of Fulbright & Jaworski from 2001 to 2003.
Mr. Sanders also has extensive experience working in
government. In particular, he worked for the CFTC where he
served for five years in the Division of Enforcement. He left
the CFTC as a Senior Trial Attorney in 2001. Mr. Sanders
graduated from Binghamton University in 1982 with a B.A. in
English and received a J.D. from New York University School of
Law in 1985.
David S. Sassoon has been the General Counsel of FXCM
since 2002. From 2002 to 2005, Mr. Sassoon served as Chief
Compliance Officer of FXCM. In his role as General Counsel,
Mr. Sassoon is responsible for managing the legal and
corporate affairs of FXCM and its various affiliates. Prior to
joining FXCM in 2002, Mr. Sassoon was engaged in private
practice for several years. Mr. Sassoon graduated cum
laude from Queens College in 1993 with a B.A. in Political
Science and received a J.D. from Brooklyn Law School in 1996.
Mr. Sassoon is a member of the New York State Bar.
Drew Niv, a director and our chief executive officer, and Ornit
Niv, our president of international operations, are siblings.
David Sakhai, a director and our chief operating officer, and
William Ahdout, a director, are cousins. There are no other
family relationships among any of our directors or executive
officers.
Composition
of the Board of Directors After this Offering
Our board of directors currently consists of Messrs. Niv,
Sakhai, Ahdout, Grossman and Yusupov, with Mr. Niv serving
as chair. Prior to this offering, we expect that six additional
directors who are independent in accordance with the criteria
established by the New York Stock Exchange for independent board
members will be appointed to the board of directors.
Our board of directors will have discretion to determine the
size of the board of directors. Our directors will be elected at
each years annual meeting of stockholders.
Upon completion of this offering, our existing owners will
continue to control more than 50% of the voting power for the
election of directors of our outstanding common stock. However,
we do not intend to rely upon the exemptions available to a
controlled company under the New York Stock Exchange
corporate governance standards that would exempt us from the
obligation to comply with certain New York Stock Exchange
corporate governance requirements, including the requirements:
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that, within one year of the date of the listing of our
Class A common stock on the New York Stock Exchange, a
majority of our board of directors consists of independent
directors, as defined under the rules of the New York
Stock Exchange;
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that we have a compensation committee with a written charter
addressing the committees purpose and responsibilities
that is, within one year of the date of the listing of our
Class A common stock on the New York Stock Exchange,
composed entirely of independent directors; and
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that we have a corporate governance and nominating committee
with a written charter addressing the committees purpose
and responsibilities that is, within one year of the date of the
listing of our Class A common stock on the New York Stock
Exchange, composed entirely of independent directors.
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If we were to avail ourselves of such exemptions, you would not
have the same protections afforded to stockholders of companies
that are subject to all of the New York Stock Exchange corporate
governance requirements.
Director
Qualifications
When determining that each of Messrs. Niv, Sakhai, Ahdout,
Grossman and Yusupov is particularly well-suited to serve on our
board of directors and that each individual has the experience,
qualifications, attributes and skills, taken as a whole, to
enable our board of directors to satisfy its oversight
responsibilities effectively in light of our business and
structure, we considered the experience and qualifications
described above under Management Directors and
Executive Officers and noted that each of these directors
is a founding partner of our firm and has played an integral
role in our successful growth. We placed great emphasis on the
deep understanding of our business and insights into our
strategic development that each such individual has acquired by
participating as one of the original founding partners of our
firm and by serving as a member and director of FXCM Holdings,
LLC. Each of Messrs. Niv, Sakhai, Ahdout, Grossman and
Yusupov also owns a substantial equity interest in our company
and, as a consequence of such alignment of interests with our
other equityholders, has additional motivation to diligently
fulfill his oversight responsibilities as a member of our board
of directors. Furthermore, because of their additional roles as
executive officers, Mr. Niv, our Chief Executive Officer,
and Mr. Sakhai, our Chief Operating Officer, bring a
management perspective to board deliberations and provide
valuable information about the status of our
day-to-day
operations.
Board
Committees
Our board of directors will establish the following committees
prior to the completion of this offering: an audit committee, a
compensation committee and a corporate governance and nominating
committee. The composition and responsibilities of each
committee are described below. Members serve on these committees
until their resignation or until otherwise determined by our
board.
Audit
Committee
Upon the completion of this offering, our audit committee will
consist
of ,
and ,
with serving
as chair. Our audit committee will be responsible for, among
other things:
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selecting and hiring our independent auditors, and approving the
audit and non-audit services to be performed by our independent
auditors;
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evaluating the qualifications, performance and independence of
our independent auditors;
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monitoring the quality and integrity of our financial statements
and our accounting and financial reporting;
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assisting the board of directors and management in monitoring
our compliance with legal and regulatory requirements;
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reviewing the adequacy and effectiveness of our internal control
over financial reporting processes;
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discussing the scope and results of the audit with our
independent auditors;
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monitoring the performance of our internal audit function;
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reviewing with management and our independent auditors our
annual and quarterly financial statements;
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establishing procedures for the receipt, retention and treatment
of complaints received by us regarding accounting, internal
accounting controls or auditing matters and the confidential,
anonymous submission by our employees of concerns regarding
questionable accounting or auditing matters; and
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preparing the audit committee report that the SEC requires in
our annual proxy statement.
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The SEC rules and New York Stock Exchange rules require us to
have one independent audit committee member upon the listing of
our Class A common stock on the New York Stock Exchange, a
majority of independent directors within 90 days of the
effective date of the registration statement and all independent
audit committee members within one year of the effective date of
the registration statement.
Compensation
Committee
Upon completion of this offering, our compensation committee
will consist
of ,
and ,
with
serving as chair. The compensation committee will be responsible
for, among other things:
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reviewing and approving corporate goals and objectives relevant
to the compensation of our CEO, evaluating our CEOs
performance in light of those goals and objectives, and, either
as a committee or together with the other independent directors
(as directed by the board of directors), determining and
approving our CEOs compensation level based on such
evaluation;
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reviewing and approving, or making recommendations to the board
of directors with respect to, the compensation of our other
executive officers, including annual base salary, annual
incentive bonuses, specific goals, equity compensation,
employment agreements, severance and change in control
arrangements, and any other benefits, compensation or
arrangements;
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reviewing and recommending the compensation of our directors;
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reviewing and discussing annually with management our
Compensation Discussion and Analysis disclosure
required by SEC rules;
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preparing the compensation committee report required by the SEC
to be included in our annual proxy statement; and
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reviewing and making recommendations with respect to our equity
compensation plans.
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Corporate
Governance and Nominating Committee
Upon completion of this offering, our corporate governance and
nominating committee will consist
of , and ,
with
serving as chair. The corporate governance and nominating
committee is responsible for, among other things:
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assisting our board of directors in identifying prospective
director nominees and recommending nominees to the board of
directors;
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overseeing the evaluation of the board of directors and
management;
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reviewing developments in corporate governance practices and
developing and recommending a set of corporate governance
guidelines; and
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recommending members for each committee of our board of
directors.
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Compensation
Committee Interlocks and Insider Participation
We do not presently have a compensation committee. Decisions
regarding the compensation of our executive officers have
historically been made by Mr. Niv. Upon completion of this
offering, the members of
115
our compensation committee will
be ,
and .
None of these individuals is a current or former officer or
employee of us.
None of our executive officers serves as a member of the board
of directors or compensation committee (or other committee
performing equivalent functions) of any entity that has one or
more executive officers serving on our board of directors or
compensation committee.
Director
Compensation
During 2009, the directors of FXCM Holdings, LLC were Drew Niv,
David Sakhai, Eduard Yusupov, Kenneth Grossman, James Brown,
Michel Daher and William Ahdout. Directors of FXCM Holdings, LLC
receive no separate compensation for service on the board of
directors or on committees of the board of directors of FXCM
Holdings, LLC. Accordingly, we have not presented a Director
Compensation Table.
Following this offering, our employees who serve as directors of
FXCM Inc. will receive no separate compensation for service on
the board of directors or on committees of the board of
directors of FXCM Inc. However, we expect to establish
compensation practices for our outside directors that will be
aligned with creating and sustaining equityholder value whereby
such directors will receive customary compensation for their
service as members of the board of directors and of committees
of the board of directors of FXCM Inc. and be reimbursed for
reasonable
out-of-pocket
expenses incurred in connection with such service.
Executive
Compensation
Compensation
Discussion and Analysis
The following discussion and analysis of the compensation
arrangements of our named executive officers should be read
together with the compensation tables and related disclosures
regarding our current plans, considerations, expectations and
determinations regarding future compensation programs. Actual
compensation programs that we adopt may differ materially from
the programs summarized in this discussion and analysis.
Executive
Summary
The primary objectives of our executive compensation program are
to attract and retain talented executive officers to effectively
manage and lead our company and to create value for our
equityholders. Our executive compensation program is designed to
recognize and reward diligent, intelligent and effective
performance that enables our company to grow and to achieve our
financial goals. The discussion below includes a review of our
executive compensation decisions with respect to 2009. Our named
executive officers for 2009 are Drew Niv, our Chief
Executive Officer; Joseph Filko, our Senior Vice-President and
Controller and former principal financial officer; David Sakhai,
our Chief Operating Officer; Andreas Putz, one of our Managing
Directors and our Global Head of FXCM Pro; and David Sassoon,
our General Counsel. Because Robert Lande, our Chief Financial
Officer, joined us in January 2010, he is not a named executive
officer for 2009.
The compensation packages for our named executive officers,
other than the founders of our firm, generally include a base
salary, discretionary annual cash bonuses and other benefits and
perquisites. The compensation packages for Messrs. Niv and
Sakhai, our named executive officers who are also founders of
our firm and members of FXCM Holdings, LLC, generally include
guaranteed cash payments in lieu of a base salary and other
benefits and perquisites. In addition, Messrs. Niv and
Sakhai own substantial equity interests in our company and
participate on the same basis as our other equityholders in cash
distributions in respect of such ownership interests. We believe
that the significant equity ownership that each of Mr. Niv
and Mr. Sakhai have in our firm creates significant
alignment between the interests of these executives and those of
our other equity owners. Finally, contingent upon their
compliance with non-competition and non-solicitation covenants,
Messrs. Niv and Sakhai are eligible to receive guaranteed
cash payments and health insurance benefits for one year
following termination of their employment with us.
116
Compensation
Determination Process
The structure of our current compensation program for our named
executive officers other than Messrs. Niv and Sakhai
reflects our view that executive compensation components should
be set at the minimum levels necessary to successfully attract
and retain skilled executives and that are fair and equitable in
light of market practices. In setting an individual executive
officers initial compensation package and the relative
allocation among different types of compensation, we consider
the nature of the position being filled, the scope of associated
responsibilities, the individuals prior experience and
skills and the individuals compensation expectations, as
well as the compensation of existing executive officers at our
company and our general impressions of prevailing conditions in
the market for executive talent. Because we have historically
provided opportunities for our employees to advance within our
organization, many of our management positions are filled from
our existing pool of employees. We believe that this approach
has enabled us to maintain a highly competent and motivated
staff without requiring us to aggressively compete in the open
market for senior-level talent.
The amounts of the base salaries of our named executive officers
other than Messrs. Niv and Sakhai were established by
Mr. Niv, with input from Mr. Sakhai, at the
commencement of each such executive officers employment
with us and are subject to adjustment by Mr. Niv, with
input from Mr. Sakhai. The amounts of the discretionary
annual cash bonuses for those executives are determined after
each fiscal year by Mr. Niv, with input from
Mr. Sakhai, taking into account Mr. Nivs
subjective evaluation of the performance of each executive and
of our company during that fiscal year. In addition, our board
of directors also reviews and approves of such discretionary
cash bonuses prior to their payment. The guaranteed cash
payments that Messrs. Niv and Sakhai receive in lieu of
salary were negotiated by them with the other founders of our
company, and the aggregate amount of such guaranteed cash
payments which may be paid to all of our founding partners was
negotiated with the members of FXCM Holdings, LLC and is set
forth in the existing limited liability company agreement of
FXCM Holdings, LLC.
Compensation
Risk Assessment
We do not believe that risks arising from our compensation
policies and practices for our employees are reasonably likely
to have a material adverse effect on us.
Elements
of Compensation
Salary
and Guaranteed Cash Payments
Base salaries are intended to provide a fixed level of
compensation sufficient to attract and retain an effective
management team when considered in combination with other
components of our executive compensation program. We believe
that the base salary element is required to provide our named
executive officers with a stable income stream that is
commensurate with their responsibilities and competitive market
conditions. Annual base salaries are established on the basis of
market conditions at the time we hire an executive. Any
subsequent modifications to annual base salaries are influenced
by the performance of the executive and by significant changes
in market conditions. During 2009, in recognition of their
successful performance and continued tenure with our company,
Mr. Filkos annual base salary was increased from
$195,000 to $205,000, and Mr. Sassoons base salary
was increased from $270,000 to $290,000. Mr. Putz received
a base salary of $170,000 for 2009. Each of Messrs. Niv and
Sakhai receives guaranteed cash payments of $1,020,000 per year.
These payments have served the same function as the base
salaries that we pay to our other named executive officers.
Annual
Cash Bonuses
We award discretionary annual cash bonuses to our named
executive officers other than Messrs. Niv and Sakhai to
recognize the accomplishments of each executive and of the
company during the prior fiscal year. For 2009, Mr. Filko
received a bonus of $50,000, and Mr. Sassoon received a
bonus of $45,000. These amounts, which together represent
approximately 20% of their respective base salaries, were
awarded to Messrs. Filko and Sassoon to recognize their
increased responsibilities, departmental growth and successful
117
performance during 2009 and to remain competitive with the
external market for executive talent. Prior to July 1,
2009, Mr. Putz was entitled to an amount equal to 25% of
the profits generated by his customers plus a 2% override on the
profits generated by our FXCM Pro division. Starting on
July 1, 2009, Mr. Putz was entitled to an amount equal
to 5.8% of the profits generated by our FXCM Pro division. For
2009, Mr. Putz received an aggregate of $752,066 in such
payments. We have not historically awarded discretionary annual
cash bonuses to Messrs. Niv and Sakhai because they have
participated in the companys performance in their capacity
as equityholders.
Other
Compensation
We also provide various other benefits to certain of our named
executive officers that are intended to be part of a competitive
compensation program. These benefits include health insurance,
dental insurance, disability insurance and monthly allowances
for personal expenses. We believe that these benefits are
comparable to those offered by other companies that compete with
us for executive talent.
Payments
Upon Termination
Each of Messrs. Niv and Sakhai is entitled to certain
benefits upon the termination of his employment with us, the
terms of which are described below under Potential
Payments Upon Termination or Change in Control. We believe
that these benefits are valuable as they address the valid
concern that it may be difficult for these executives to find
comparable employment in a short period of time in the event of
termination and provide an incentive for these executives to
comply with non-competition and non-solicitation covenants,
which for a period of one year following the termination of an
executives employment, prohibit the executive from
participating in a business engaged in the foreign currency
exchange business or other businesses undertaken or proposed to
be undertaken by our company and prohibit the executive from
soliciting our companys customers or prospective customers
or our employees.
Actions
Taken in 2010 and Anticipated Actions in Connection with
Offering
As noted above, Mr. Lande became our chief financial
officer in January 2010, at which time we entered into an
employment arrangement with him. This employment arrangement
includes an annual base salary of $350,000, an annual target
bonus of $200,000 and a bonus of $600,000 at the time of an
initial public offering of our company. In addition, if Forex
Capital Markets LLC is sold, Mr. Lande (1) is entitled
to a one-time cash payment of $350,000 at the time of sale and
(2) if his employment is terminated following the sale, is
eligible for severance of one year of base salary of $350,000
and a $200,000 annual bonus.
To date in 2010, we awarded discretionary cash bonuses to
certain of our executive officers as follows: on June 30,
2010, Mr. Sassoon received a bonus of $20,000; and on
July 30, 2010, Messrs. Filko and Lande received
bonuses of $10,000 and $70,000, respectively.
Following the offering, Messrs. Niv and Sakhai will no
longer receive guaranteed cash payments of $1,020,000 per year
each or monthly allowances for personal expenses. Instead, each
of Messrs. Niv and Sakhai will be entitled to receive an
annual base salary of $800,000. In addition, while, as noted
above, we have not previously awarded cash bonuses to
Messrs. Niv or Sakhai, in connection with this offering, we
have determined that it is appropriate to revisit the terms of
our bonus structure with respect to Messrs. Niv and Sakhai
in light of the contributions of each of them to the success of
our management team in accelerating the growth of our revenues
and earnings and in recognition of the increased
responsibilities they will have as chief executive officer and
chief operating officer of a public company. Following the
offering, Messrs. Niv and Sakhai will be eligible to
receive annual cash bonuses with a target payout of 100% of base
salary, or $800,000, and a maximum payout of 200% of base
salary, or $1,600,000. The amount of the actual bonuses, if any,
will be determined based on overall company performance metrics.
We have determined that the target growth rate applicable to
this new bonus structure will be 20% annually. Moreover, if the
growth rate is less than 15% in each metric, no bonus will be
payable. Bonus payments for actual results that fall between 75%
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and 150% of target performance levels will be adjusted on a
linear basis. The following table sets forth information
regarding the metrics, performance curve and payout curve of
these bonuses.
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Metric
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Weighting
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Percentage of 20% Growth Target Attained
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Customer Account Growth
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25
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%
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<75
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75
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%
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100
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%
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150
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EPS Growth
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50
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%
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EBITDA Growth
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25
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%
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Payout as percentage of base salary
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0
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%
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50
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%
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100
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%
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200
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%
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The targets for growth in customer accounts, earnings per
share and EBITDA to be utilized in our new bonus structure are
metrics to be used by us solely to determine the extent to which
these executives will be entitled to incentive compensation and
do not reflect our expectations with respect to, or represent
any projection or guidance by us regarding, our future financial
or operational performance.
In addition to establishing annual base salaries and bonus
opportunities for Messrs. Niv and Sakhai, each of
Messrs. Niv and Sakhai will be afforded certain severance
protections in the event of a termination of employment of
either of them by us without cause or by either of them for good
reason. In the event of such termination, subject to the
execution of a release of claims against us and continued
compliance with any applicable restrictive covenants, each of
Messrs. Niv and Sakhai will be entitled to receive
(1) an aggregate amount equal to two years of annual base
salary, which amount will be payable in equal installments over
a twenty-four month period following the termination date and
(2) continued medical coverage for a period of twenty-four
months following the termination date.
In addition, we have determined to grant awards of stock options
to purchase shares of our Class A common stock pursuant to
the Long-Term Incentive Plan to certain of our employees at the
time of this offering. The terms of these stock options are
described below under IPO Date Stock Option
Awards. Mr. Lande will receive options to
purchase shares,
Mr. Putz will receive options to
purchase shares,
Mr. Sassoon will receive options to
purchase
shares and Mr. Filko will receive options to
purchase shares.
Because of the significant ownership interest that each of
Messrs. Niv and Sakhai has in our firm through their
ownership of units of FXCM Holdings, LLC and the resulting
alignment of interests that these executives already have with
our other equity owners, we have determined not to award stock
options to these executives at the time of this offering.
We expect to continue to evaluate and revisit the structure of
our executive compensation program as we gain experience as a
public company.
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Summary
Compensation Table
The following table provides summary information concerning
compensation paid or accrued by us to or on behalf of our
principal executive officer, our former principal financial
officer and each of our three other most highly compensated
executive officers who served in such capacities at
December 31, 2009, collectively known as our named
executive officers, for services rendered to us during the last
completed fiscal year.
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Non-Equity
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Incentive Plan
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All Other
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Salary
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Bonus
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Compensation
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Compensation
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Total
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Name and Principal Position
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Year
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($)
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($)
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|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Drew Niv,
|
|
|
2009
|
|
|
|
1,020,000
|
(1)
|
|
|
|
|
|
|
|
|
|
|
109,059
|
(2)
|
|
|
1,129,059
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph Filko,
|
|
|
2009
|
|
|
|
201,667
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
251,667
|
|
Senior Vice-President and Controller; former principal financial
officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Sakhai,
|
|
|
2009
|
|
|
|
1,020,000
|
(1)
|
|
|
|
|
|
|
|
|
|
|
109,543
|
(3)
|
|
|
1,129,543
|
|
Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andreas Putz,
|
|
|
2009
|
|
|
|
170,000
|
|
|
|
|
|
|
|
752,066
|
(4)
|
|
|
|
|
|
|
922,066
|
|
Managing Director and
Global Head of FXCM Pro
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Sassoon,
|
|
|
2009
|
|
|
|
278,860
|
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
323,860
|
|
General Counsel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This amount represents a guaranteed cash payment in lieu of base
salary. |
|
(2) |
|
This amount consists of $13,859 in health insurance premiums,
$1,914 in dental insurance premiums, $3,286 in disability
insurance premiums and $90,000 used for personal expenses from a
monthly allowance of up to $7,500 for such expenses. |
|
(3) |
|
This amount consists of $13,859 in health insurance premiums,
$1,914 in dental insurance premiums, $3,770 in disability
insurance premiums and $90,000 used for personal expenses from a
monthly allowance of up to $7,500 for such expenses. |
|
(4) |
|
Approximately $415,422 of this amount represents 25% of the
profits generated by the customers of Mr. Putz plus a 2%
override on the profits generated by our FXCM Pro division for
the period from January 1, 2009 to June 30, 2009. The
remaining approximately 336,644 of this amount represents 5.8%
of the profits generated by our FXCM Pro division for the period
between July 1, 2009 and December 31, 2009. |
|
|
|
As noted above, Messrs. Niv and Sakhai are founding
partners of our firm and own significant equity interests in
FXCM Holdings, LLC. Accordingly, in addition to the guaranteed
payments and other amounts received by them and reflected in the
foregoing table, these executives have received distributions,
ratable with those of other existing owners, in respect of such
equity interests. Other than tax-related distributions,
FXCM Holdings, LLC did not make any distributions to our
existing owners during 2009. Mr. Niv and Mr. Sakhai
received $16.1 million and $10.8 million,
respectively, of tax-related distributions during 2009. |
120
Grants of
Plan-Based Awards in 2009
Other than payments to Mr. Putz, we did not grant any
plan-based awards to our named executive officers in 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Possible Payouts
|
|
|
|
Under Non-Equity Incentive Plan Awards
|
|
|
|
Threshold
|
|
|
Target
|
|
|
Maximum
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Drew Niv
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph Filko
|
|
|
|
|
|
|
|
|
|
|
|
|
David Sakhai
|
|
|
|
|
|
|
|
|
|
|
|
|
Andreas Putz
|
|
|
|
|
|
|
|
(1)
|
|
|
|
|
David Sassoon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Prior to July 1, 2009, Mr. Putz was entitled an amount
equal to 25% of the profits generated by his customers plus a 2%
override on the profits generated by our FXCM Pro division.
Starting on July 1, 2009, Mr. Putz was entitled to an
amount equal to 5.8% of the profits generated by our FXCM Pro
division. There are no threshold, target or maximum amounts
associated with these payments. |
Narrative
Disclosure Regarding Employment Arrangements of Named Executive
Officers
Other than the limited liability company agreement of FXCM
Holdings, LLC, which provides for guaranteed cash payments to
Messrs. Niv and Sakhai, and Confidentiality and Restrictive
Covenant Agreements with Messrs. Niv and Sakhai, we do not
have written employment agreements or arrangements with our
named executive officers. The initial base salary for an
executive is established at the time we hire an executive
officer, and each executive officer has an expectation that he
will be considered for a discretionary cash bonus following the
conclusion of each fiscal year.
Outstanding
Equity Awards at 2009 Fiscal-Year End
Our named executive officers did not have any outstanding equity
awards as of December 31, 2009.
Option
Exercises and Stock Vested in 2009
None of our named executive officers had options that were
exercised or restricted stock that vested during 2009.
Pension
Benefits for 2009
We do not offer pension benefits to our named executive officers.
Non-Qualified
Deferred Compensation for 2009
We do not offer non-qualified deferred compensation to our named
executive officers.
Potential
Payments Upon Termination or Change in Control
Of our named executive officers for 2009, only Messrs. Niv
and Sakhai would have been entitled to benefits upon a
termination of employment on December 31, 2009. None of our
named executive officers would have been entitled to benefits
upon a change in control of our company on December 31,
2009.
Specifically, pursuant to their respective Confidentiality and
Restrictive Covenant Agreements, each of Messrs. Niv and
Sakhai would have been entitled to one year of continued
guaranteed cash payments ($1,020,000) and one year of continued
health insurance coverage ($13,859) following a termination of
employment on December 31, 2009 regardless of whether the
termination is initiated by the executive or by us and
regardless of the reason for the termination. Pursuant to the
Confidentiality and Restrictive Covenant
121
Agreement, the non-competition and non-solicitation covenants
are applicable during the one-year period following termination
of employment, during which the executive is prohibited from
participating in a business engaged in the foreign currency
exchange business or other businesses undertaken or proposed to
be undertaken by our company and is prohibited from soliciting
our companys customers or prospective customers or our
employees. In the event that the executive breaches any of these
covenants, we are not obligated to provide any further
guaranteed cash payments or health insurance coverage, and the
executive is obligated to promptly pay to us a lump sum amount
equal to the sum of all guaranteed cash payments and health
insurance payments we have made following the termination of the
executives employment.
Long Term
Incentive Plan
Our board of directors intends to adopt the FXCM Inc. 2010 Long
Term Incentive Plan, or the Long Term Incentive
Plan, and receive shareholder approval of the Long Term
Incentive Plan before the effective date of this offering. The
following description of the Long Term Incentive Plan is not
complete and is qualified by reference to the full text of the
Long Term Incentive Plan, which has been filed as an exhibit to
the registration statement of which this prospectus forms a
part. The Long Term Incentive Plan will be the source of new
equity-based awards permitting us to grant to our key employees,
directors and consultants incentive stock options (within the
meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the Code)), non-qualified stock
options, stock appreciation rights, restricted stock, other
awards valued in whole or in part by reference to shares of our
Class A common stock and performance based awards
denominated in shares or cash.
Administration. The Compensation Committee of
our board of directors will administer the Long Term Incentive
Plan. The Compensation Committee may delegate its authority
under the Long Term Incentive Plan in whole or in part as it
determines, including to a subcommittee consisting solely of at
least two non-employee directors within the meaning of
Rule 16b-3
of the Exchange Act, independent directors within
the meaning of the New York Stock Exchange listed company rules
and, to the extent Section 162(m) of the Code is applicable
to us and the Long Term Incentive Plan, outside
directors within the meaning thereof. The Compensation
Committee will determine who will receive awards under the Long
Term Incentive Plan, as well as the form of the awards, the
number of shares underlying the awards, and the terms and
conditions of the awards consistent with the terms of the Long
Term Incentive Plan. The Compensation Committee will have full
authority to interpret and administer the Long Term Incentive
Plan, which determinations will be final and binding on all
parties concerned.
Shares Subject to the Long Term Incentive
Plan. The total number of shares of our
Class A common stock which may be issued under the Long
Term Incentive Plan
is .
We will make available the number of shares of our Class A
common stock necessary to satisfy the maximum number of shares
that may be issued under the Long Term Incentive Plan. The
shares of our Class A common stock underlying any award
granted under the Long Term Incentive Plan that expires,
terminates or is cancelled or satisfied for any reason without
the payment of consideration, withheld or tendered to satisfy
tax withholding obligations, the aggregate exercise price on the
exercise of stock options or the purchase price for any other
award granted under the Long Term Incentive Plan, or repurchased
by us, in each case, will again become available for awards
under the Long Term Incentive Plan. No award may be granted
under the Long Term Incentive Plan after the tenth anniversary
of the effective date of the plan, but awards granted prior to
such date may extend beyond such tenth anniversary.
Stock Options and Stock Appreciation
Rights. The Compensation Committee may award
non-qualified or incentive stock options under the Long Term
Incentive Plan. Stock options granted under the Long Term
Incentive Plan will become vested and exercisable at such times
and upon such terms and conditions as may be determined by the
Compensation Committee at the time of grant, but an option will
generally not be exercisable for a period of more than ten years
after it is granted.
Except with respect to substitute awards, the exercise price per
share for any stock option awarded will not be less than the
fair market value of a share of our Class A common stock on
the day the stock option is granted. To the extent permitted by
the Compensation Committee, the exercise price of a stock option
may be
122
paid (1) in cash or its equivalent; (2) in shares of
our Class A common stock having a fair market value equal
to the aggregate stock option exercise price and satisfying such
other requirements as may be imposed by the Compensation
Committee; (3) partly in cash and partly in shares of our
Class A common stock; (4) if there is a public market
for shares of our Class A common stock at such time,
through the delivery of irrevocable instructions to a broker to
sell shares of our Class A common stock obtained upon the
exercise of the stock option and to deliver promptly to us an
amount out of the proceeds of the sale equal to the aggregate
stock option exercise price for the shares of our Class A
common stock being purchased; or (5) through net settlement
in shares of our Class A common stock. The repricing of a
stock option, after it has been granted, is prohibited without
prior approval of our shareholders.
The Compensation Committee may grant stock appreciation rights
independent of or in conjunction with a stock option. The
exercise price of a stock appreciation right will not be less
than the fair market value of a share of our Class A common
stock on the date the stock appreciation right is granted;
except that, in the case of a stock appreciation right granted
in conjunction with a stock option, the exercise price will not
be less than the exercise price of the related stock option.
Each stock appreciation right granted independent of a stock
option will entitle a participant upon exercise to an amount
equal to (1) the excess of (A) the fair market value
on the exercise date of one share of our Class A common
stock over (B) the exercise price per share of our
Class A common stock, multiplied by (2) the number of
shares of our Class A common stock covered by the stock
appreciation right, and each stock appreciation right granted in
conjunction with a stock option will entitle a participant to
surrender to us the stock option and to receive such amount.
Payment will be made in shares of our Class A common stock
and/or cash
(any share of our common stock valued at fair market value), as
determined by the Compensation Committee. The repricing of a
stock appreciation right, after it has been granted, is
prohibited without prior approval of our shareholders.
Other Stock-Based Awards. The Compensation
Committee, in its sole discretion, may grant or sell shares of
our Class A common stock, restricted stock, restricted
stock units and awards that are valued in whole or in part by
reference to, or are otherwise based on the fair market value
of, shares of our Class A common stock. Any of these other
stock-based awards may be in such form, and dependent on such
conditions, as the Compensation Committee determines, including,
without limitation, the right to receive, or vest with respect
to, one or more shares of our Class A common stock (or the
equivalent cash value of such shares of our Class A common
stock) upon the completion of a specified period of service, the
occurrence of an event
and/or the
attainment of performance objectives. The Compensation Committee
may in its discretion determine whether other stock-based awards
will be payable in cash, shares of our Class A common
stock, or a combination of both cash and shares.
Performance Based Awards. During any period
when Section 162(m) of the Code is applicable to us, the
Compensation Committee, in its sole discretion, may grant
certain awards that are denominated in shares or cash, that may,
but are not required to, be designed to be deductible by us
under Section 162(m) of the Code. Such awards,
performance-based awards, will be subject to the
terms and conditions established by the Compensation Committee
and will be based upon one or more of the following performance
criteria: (1) consolidated income before or after taxes
(including income before interest, taxes, depreciation and
amortization); (2) EBITDA; (3) adjusted EBITDA;
(4) operating income; (5) net income; (6) net
income per share; (7) book value per share; (8) return
on members or shareholders equity; (9) expense
management; (10) return on investment;
(11) improvements in capital structure;
(12) profitability of an identifiable business unit or
product; (13) maintenance or improvement of profit margins;
(14) stock price; (15) market share; (16) revenue
or sales; (17) costs; (18) cash flow;
(19) working capital; (20) multiple of invested
capital; (21) total return; (22) achievement of
increases in customer accounts or other stipulated or specified
targets relating to the numbers or improvements with respect to
customer accounts; and (23) such other objective
performance criteria as determined by the Compensation Committee
in its sole discretion, to the extent such criteria would be
permissible performance criteria under Section 162(m) of
the Code, if the award is designed to be deductible under
Section 162(m) of the Code. The foregoing criteria may
relate to us, one or more of our subsidiaries or one or more of
our divisions or units, or any combination of the foregoing, and
may be applied on an absolute basis
and/or be
relative to one or more peer group companies or indices, or any
combination thereof, as the Compensation Committee determines.
The Compensation Committee will
123
determine whether, with respect to a performance period, the
applicable performance goals have been met with respect to a
given participant and, if they have, during any period when
Section 162(m) of the Code is applicable to us, will so
certify and ascertain the amount of the applicable
performance-based award. During any period when
Section 162(m) of the Code is applicable to us, no
performance-based awards will be paid to any participant for a
given period of service until the Compensation Committee
certifies that the objective performance goals (and any other
material terms) applicable to such period have been satisfied.
The amount of the performance-based award actually paid to a
given participant may be less than the amount determined by the
applicable performance goal formula, at the discretion of the
Compensation Committee. The amount of the performance-based
award determined by the Compensation Committee for a performance
period will be paid to the participant at such time as
determined by the Compensation Committee in its sole discretion
after the end of such performance period; provided, however,
that a participant may, if and to the extent permitted by the
Compensation Committee and consistent with the provisions of
Section 409A of the Code, elect to defer payment of a
performance-based award. The maximum amount of performance-based
awards that may be granted during a fiscal year to any
participant will be (1) with respect to performance-based
awards that are denominated in
shares, shares,
and (2) with respect to performance-based awards that are
denominated in cash, $ .
Adjustments upon Certain Events. In the event
of any change in the outstanding shares of our Class A
common stock by reason of any share dividend or split,
reorganization, recapitalization, merger, consolidation,
spin-off, combination, combination or transaction or exchange of
shares of our Class A common stock or other corporate
exchange, or any distribution to shareholders other than regular
cash dividends, or any transaction similar to the foregoing, the
Compensation Committee in its sole discretion and without
liability to any person will make such substitution or
adjustment, if any, as it deems to be equitable, as to
(1) the number or kind of shares or other securities issued
or reserved for issuance pursuant to the Long Term Incentive
Plan or pursuant to outstanding awards, (2) the maximum
number of shares for which stock options or stock appreciation
rights may be granted during a fiscal year to any participant,
(3) the maximum amount of a performance-based award that
may be granted during a calendar year to any participant,
(4) the option price or exercise price of any option or
stock appreciation right
and/or
(5) any other affected terms of such awards.
Change in Control. In the event of a change in
control of us (as defined in the Long Term Incentive Plan), the
Long Term Incentive Plan provides that (1) if determined by
the Compensation Committee in the applicable award agreement or
otherwise, any outstanding awards then held by participants
which are unexercisable or otherwise unvested or subject to
lapse restrictions will automatically be deemed exercisable or
otherwise vested or no longer subject to lapse restrictions, as
the case may be, as of immediately prior to such change in
control and (2) the Compensation Committee may, but will
not be obligated to, provide for the issuance of substitute
awards that will substantially preserve the otherwise applicable
terms of any affected awards previously granted under the Long
Term Incentive Plan, including without limitation, any
applicable vesting conditions, as determined by the Compensation
Committee in its sole discretion; provided, however, that if the
Compensation Committee does not provide for the issuance of
substitute awards, it may, in a manner intended to comply with
the requirements of Section 409A of the Code, but will not
be obligated to: (A) cancel the awards for fair value (as
determined in the sole discretion of the Compensation
Committee); or (B) provide that, with respect to any awards
that are stock options, for a period of at least 15 days
prior to the change in control, awards will be exercisable
(including through net settlement in shares of our Class A
common stock) to the extent applicable as to all shares subject
thereto and that upon the occurrence of the change in control,
awards will terminate and be of no further force and effect.
Forfeiture and Clawback. The Compensation
Committee may, in its sole discretion, specify in an award or a
policy that will be incorporated into an award agreement by
reference that the participants rights, payments, and
benefits with respect to such award will be subject to
reduction, cancellation, forfeiture or recoupment upon the
occurrence of certain specified events, in addition to any
otherwise applicable vesting or performance conditions contained
in such award. Such events may include, but are not limited to,
termination of employment for cause, termination of the
participants provision of services to us, breach of
noncompetition, confidentiality, or other restrictive covenants
that may apply to the participant, or restatement of
124
our financial statements to reflect adverse results from those
previously released financial statements as a consequence of
errors, omissions, fraud, or misconduct.
Transferability. Unless otherwise determined
by our Compensation Committee, no award granted under the Long
Term Incentive Plan will be transferable or assignable by a
participant in the plan, other than by will or by the laws of
descent and distribution.
Amendment and Termination. Our board of
directors may amend or terminate the Long Term Incentive Plan,
but no amendment or termination will be made, (1) without
the approval of our shareholders, to the extent such approval is
required by or desirable to satisfy the requirements of any
applicable law, regulation or other rule, including listing
standards of the securities exchange that is the principal
market for the shares of our Class A common stock or change
the maximum number of shares for which awards may be granted to
any participant or (2) without the consent of a
participant, if such action would materially adversely affect
any of the rights of the participant under any award theretofore
granted to such participant under the Long Term Incentive Plan;
provided, however, that the Compensation Committee may amend the
Long Term Incentive Plan
and/or any
outstanding awards in such manner as it deems necessary to
permit the Long Term Incentive Plan
and/or any
outstanding awards to satisfy applicable requirements of the
Code or other applicable laws.
Annual
Incentive Plan
The following description of the FXCM Inc. Annual Incentive
Plan, which we refer to as our annual incentive plan, is not
complete and is qualified by reference to the full text of the
annual incentive plan, which has been filed as an exhibit to the
registration statement of which this prospectus forms a part.
Our board of directors intends to adopt the annual incentive
plan, and receive approval of such plan by our stockholders,
prior to the effective date of this offering.
Purpose. The purpose of the annual incentive
plan is to attract, retain, motivate and reward participants by
providing them with the opportunity to earn competitive
compensation directly linked to our performance.
Administration. The annual incentive plan is
to be administered by the Compensation Committee of our board of
directors. The Compensation Committee may delegate its authority
under the annual incentive plan, except in cases where such
delegation would disqualify compensation paid under the annual
incentive plan intended to be exempt under Section 162(m)
of the Code.
Eligibility; Awards. Awards may be granted to
our officers and key employees in the sole discretion of the
Compensation Committee. The annual incentive plan provides for
the payment of incentive bonuses in the form of cash or, at the
discretion of the Compensation Committee, in awards under the
Long Term Incentive Plan.
Performance Goals. The Compensation Committee
will establish the performance periods over which performance
objectives will be measured. A performance period may be for one
year or a shorter period, as determined by the Compensation
Committee. No later than 90 days after each performance
period begins (or such other date as may be required or
permitted by Section 162(m) of the Code to the extent
applicable to us and the annual incentive plan), the
Compensation Committee will establish (1) the performance
objective or objectives that must be satisfied for a participant
to receive a bonus for such performance period, and (2) the
target incentive bonus for each participant. Performance
objective(s) will be based upon one or more of the following
criteria, as determined by the Compensation Committee:
(1) consolidated income before or after taxes (including
income before interest, taxes, depreciation and amortization);
(2) EBITDA; (3) adjusted EBITDA; (4) operating
income; (5) net income; (6) net income per share;
(7) book value per share; (8) return on members
or shareholders equity; (9) expense management;
(10) return on investment; (11) improvements in
capital structure; (12) profitability of an identifiable
business unit or product; (13) maintenance or improvement
of profit margins; (14) stock price; (15) market
share; (16) revenue or sales; (17) costs;
(18) cash flow; (19) working capital;
(20) multiple of invested capital; (21) total return;
(22) achievement of increases in customer accounts or other
stipulated or specified targets relating to the numbers or
improvements with respect to customer accounts; and
(23) such other objective performance criteria as
determined by the Compensation Committee in its sole discretion,
to the extent such criteria would be permissible performance
criteria under
125
Section 162(m) of the Code, to the extent applicable to us
and the annual incentive plan. The foregoing criteria may relate
to us, one or more of our subsidiaries or one or more of our
divisions or units, or any combination of the foregoing, and may
be applied on an absolute basis
and/or be
relative to one or more peer group companies or indices, or any
combination thereof, all as the Compensation Committee
determines.
As soon as practicable after the applicable performance period
ends but in no event later than December 31st of the
calendar year immediately following the calendar year in which
the applicable performance period ends, the Compensation
Committee will (1) determine (A) whether and to what
extent any of the performance objective(s) established for such
performance period have been satisfied and certify to such
determination, and (B) for each participant employed as of
the date on which bonuses under the plan are payable, unless
otherwise determined by the Compensation Committee (to the
extent permitted under Section 162(m) of the Code, to the
extent applicable to us and the annual incentive plan), the
actual bonus to which such participant will be entitled, taking
into consideration the extent to which the performance
objective(s) have been met and such other factors as the
Compensation Committee may deem appropriate and (2) cause
such bonus to be paid to such participant. The Compensation
Committee has absolute discretion to reduce or eliminate the
amount otherwise payable to any participant under the annual
incentive plan and to establish rules or procedures that have
the effect of limiting the amount payable to each participant to
an amount that is less than the maximum amount otherwise
authorized as that participants target incentive bonus. No
participant may receive a bonus under the annual incentive plan,
with respect of any fiscal year, in excess of
$ .
Forfeiture and Clawback. In addition to any
otherwise applicable conditions under the annual incentive plan,
the Compensation Committee may, in its sole discretion, but
acting in good faith, direct that we recover all or a portion of
any bonus payable under the annual incentive plan upon the
occurrence of a breach of noncompetition, confidentiality or
other restrictive covenants that may apply to a participant, or
the restatement of our financial statements to reflect adverse
results from those previously released financial statements, as
a consequence of errors, omissions, fraud, or misconduct.
Change in Control. If there is a change in
control (as defined in the annual incentive plan), our
compensation committee, as constituted immediately prior to the
change in control, will determine in its discretion whether and
to what extent the performance criteria have been met or will be
deemed to have been met for the year in which the change in
control occurs and for any completed performance period for
which a determination under the plan has not been made.
Termination of Employment. If a participant
dies or becomes disabled prior to the date on which bonuses for
an applicable performance period are payable, the participant
may receive an annual bonus equal to the bonus otherwise payable
to the participant based on actual company performance for the
applicable performance period or, if determined by the
Compensation Committee, based upon achieving targeted
performance objectives, pro-rated for the days of employment
during the performance period. Unless otherwise determined by
our Compensation Committee, if a participants employment
terminates for any other reason prior to the date on which
bonuses for an applicable performance period are payable, such
participant will not receive a bonus.
Payment of Awards. Payment of any bonus amount
is made to participants as soon as practicable after the
Compensation Committee certifies that one or more of the
applicable objectives has been attained, or, where the
Compensation Committee will reduce, eliminate or limit the
bonus, as described above, the Compensation Committee determines
the amount of any such reduction, but in no event later than
December 31st of the calendar year immediately
following the calendar year in which the applicable performance
period ends.
Amendment and Termination of Plan. Our board
of directors or the Compensation Committee may at any time
amend, suspend, discontinue or terminate the annual incentive
plan, subject to stockholder approval if such approval is
necessary to continue to qualify the amounts payable under the
annual incentive plan under Section 162(m) of the Code or
any other applicable law or regulation if such amounts are
intended to be so qualified. Unless earlier terminated, the
annual incentive plan will expire on the day immediately prior
to our
126
first shareholder meeting at which directors are to be elected
that occurs after the close of the third calendar year following
the calendar year in which the initial public offering of the
company occurs.
IPO Date
Stock Option Awards
At the time of this offering, we intend to grant awards of stock
options to purchase an aggregate
of shares of our
Class A common stock pursuant to the Long-Term Incentive
Plan to certain of our employees. Each stock option to purchase
our Class A common stock will have an exercise price equal
to the initial public offering price per share. Subject to the
optionholders continued employment, options will vest in
equal annual installments over a four year period, will
accelerate upon a termination by us without cause
(as defined in the stock option agreement) or a termination by
the employee for good reason (as defined in the
stock option agreement) following a change in control (as
defined in the Long-Term Incentive Plan) and, to the extent
vested, will remain exercisable until the seventh anniversary of
the consummation of the offering, subject to earlier termination
in connection with a termination of employment. Holders of stock
options will not have any rights as a stockholder with respect
to the shares underlying stock options until such options are
exercised and shares of Class A common stock underlying the
stock options are actually delivered.
127
CERTAIN
RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
The agreements described in this section, or forms of such
agreements as they will be in effect at the time of this
offering, are filed as exhibits to the registration statement of
which this prospectus forms a part, and the following
descriptions are qualified by reference thereto.
Exchange
Agreement
We will enter into an exchange agreement with our existing
owners pursuant to which each existing owner (and certain
permitted transferees thereof) may, from and after the first
anniversary of the date of the closing of this offering (subject
to the terms of the exchange agreement), exchange their Holdings
Units for shares of Class A common stock of FXCM Inc. on a
one-for-one
basis, subject to customary conversion rate adjustments for
stock splits, stock dividends and reclassifications. As a holder
exchanges its Holdings Units, FXCM Inc.s interest in FXCM
Holdings, LLC will be correspondingly increased.
Registration
Rights Agreement
We will enter a registration rights agreement with our existing
owners pursuant to which we will grant them, their affiliates
and certain of their transferees the right, under certain
circumstances and subject to certain restrictions, to require us
to register under the Securities Act of 1933, as amended, or the
Securities Act, shares of Class A common stock delivered in
exchange for Holdings Units. Under the registration rights
agreement, we will agree to register the exchange of Holdings
Units for shares of Class A common stock by our existing
owners. In addition, our existing owners have the right to
request that we register the sale of shares of Class A
common stock held by them and may require us to make available
shelf registration statements permitting sales of shares of
Class A common stock held by them into the market from time
to time over an extended period. In addition, our existing
owners will have the ability to exercise certain piggyback
registration rights in respect of shares of Class A common
stock held by them in connection with registered offerings
requested by other registration rights holders or initiated by
us.
Tax
Receivable Agreement
As described in Organizational Structure
Offering Transactions, we intend to use a portion of the
proceeds from this offering to purchase Holdings Units from our
existing owners, including members of our senior management. In
addition, the unitholders of FXCM Holdings, LLC (other than FXCM
Inc.) may (subject to the terms of the exchange agreement)
exchange their Holdings Units for shares of Class A common
stock of FXCM Inc. on a
one-for-one
basis. FXCM Holdings, LLC intends to make an election under
Section 754 of the Code effective for each taxable year in
which an exchange of Holdings Units for shares of Class A
common stock occurs, which is expected to result in increases to
the tax basis of the assets of FXCM Holdings, LLC at the
time of the purchase or subsequent exchange of Holdings Units
that otherwise would not have been available. These increases in
tax basis may reduce the amount of tax that FXCM Inc. would
otherwise be required to pay in the future. These increases in
tax basis may also decrease gains (or increase losses) on future
dispositions of certain capital assets to the extent tax basis
is allocated to those capital assets. The IRS may challenge all
or part of the tax basis increase and increased deductions, and
a court could sustain such a challenge.
We will enter into a tax receivable agreement with our existing
owners that will provide for the payment from time to time by
FXCM Inc. to our existing owners of 85% of the amount of the
benefits, if any, that FXCM Inc. is deemed to realize as a
result of increases in tax basis and certain other tax benefits
related to our entering into the tax receivable agreement,
including tax benefits attributable to payments under the tax
receivable agreement. These payment obligations are obligations
of FXCM Inc. and not of FXCM Holdings, LLC. For purposes of the
tax receivable agreement, the benefit deemed realized by FXCM
Inc. will be computed by comparing the actual income tax
liability of FXCM Inc. (calculated with certain assumptions) to
the amount of such taxes that FXCM Inc. would have been required
to pay had there been no increase to the tax basis of the assets
of FXCM Holdings, LLC as a result of the purchase or exchanges
and certain other assumptions. The term of the tax receivable
agreement will continue until all such tax benefits have been
128
utilized or expired, unless FXCM Inc. exercises its right to
terminate the tax receivable agreement for an amount based on
the agreed payments remaining to be made under the agreement or
FXCM Inc. breaches any of its material obligations under the tax
receivable agreement in which case all obligations will
generally be accelerated and due as if FXCM Inc. had exercised
its right to terminate the agreement. Estimating the amount of
payments that may be made under the tax receivable agreement is
by its nature imprecise, insofar as the calculation of amounts
payable depends on a variety of factors. The actual increase in
tax basis, as well as the amount and timing of any payments
under the tax receivable agreement, will vary depending upon a
number of factors, including:
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the timing of exchanges for instance, the
increase in any tax deductions will vary depending on the fair
value, which may fluctuate over time, of the depreciable or
amortizable assets of FXCM Holdings, LLC at the time of each
exchange;
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the price of shares of our Class A common stock at the
time of the exchange the increase in any tax
deductions, as well as the tax basis increase in other assets,
of FXCM Holdings, LLC is directly proportional to the price of
shares of our Class A common stock at the time of the
exchange;
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the extent to which such exchanges are
taxable if an exchange is not taxable for any
reason, increased deductions will not be available; and
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the amount and timing of our income FXCM Inc.
will be required to pay 85% of the deemed benefits as and when
deemed realized. If FXCM Inc. does not have taxable income, FXCM
Inc. generally is not required (absent a change of control or
other circumstances requiring an early termination payment) to
make payments under the tax receivable agreement for that
taxable year because no benefit will have been actually
realized. However, any tax benefits that do not result in
realized benefits in a given tax year will likely generate tax
attributes that may be utilized to generate benefits in previous
or future tax years. The utilization of such tax attributes will
result in payments under the tax receivable agreement.
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We expect that the payments that FXCM Inc. may make under the
tax receivable agreement will be substantial. Assuming no
material changes in the relevant tax law, and that FXCM Inc.
earns sufficient taxable income to realize all tax benefits that
are subject to the tax receivable agreement, we expect that
future payments under the tax receivable agreement relating to
the purchase by FXCM Inc. of Holdings Units as part of the
Offering Transactions to aggregate
$ million (or
$ million if the underwriters
exercise their option to purchase additional shares) and to
range over the next 15 years from approximately
$ million to
$ million per year (or range
from approximately $ million
to $ million per year if the
underwriters exercise their option to purchase additional
shares) and decline thereafter. Future payments to our existing
owners in respect of subsequent exchanges would be in addition
to these amounts and are expected to be substantial. The
foregoing numbers are merely estimates and the actual payments
could differ materially. It is possible that future transactions
or events could increase or decrease the actual tax benefits
realized and the corresponding tax receivable agreement
payments. There may be a material negative effect on our
liquidity if, as a result of timing discrepancies or otherwise,
the payments under the tax receivable agreement exceed the
actual benefits FXCM Inc. realizes in respect of the tax
attributes subject to the tax receivable agreement
and/or
distributions to FXCM Inc. by FXCM Holdings, LLC are not
sufficient to permit FXCM Inc. to make payments under the tax
receivable agreement after it has paid taxes. Late payments
under the tax receivable agreement will generally accrue
interest at an uncapped rate equal to one-year LIBOR + 5%. The
payments under the tax receivable agreement are not conditioned
upon our existing owners continued ownership of us.
The effects of the tax receivable agreement on our consolidated
statement of financial condition as a result of FXCM Inc.s
purchase of Holdings Units with proceeds from this offering are
as follows:
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we will record an increase of
$ million in deferred tax
assets (or $ million if the
underwriters exercise their option to purchase additional
shares) for the estimated income tax effects of the increase in
the tax basis of the assets owned by FXCM Inc. based on enacted
federal and state tax rates at the date of the transaction. To
the extent we estimate that FXCM Inc. will not realize the full
benefit
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129
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represented by the deferred tax asset, based on an analysis of
expected future earnings, we will reduce the deferred tax asset
with a valuation allowance; and
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we will record 85% of the estimated realizable tax benefit
(which is the recorded deferred tax asset less any recorded
valuation allowance) as an increase of
$ million (or
$ million if the underwriters
exercise their option to purchase additional shares) to amounts
due pursuant to tax receivable agreement and payable to related
parties and the remaining 15% of the estimated realizable tax
benefit, or $ million (or
$ million if the underwriters
exercise their option to purchase additional shares), as an
increase to additional paid-in capital.
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Therefore, as of the date of the purchase of the Holdings Units,
on a cumulative basis the net effect of accounting for income
taxes and the tax receivable agreement on our financial
statements will be a net increase in stockholders equity
of 15% of the estimated realizable tax benefit. The amounts to
be recorded for both the deferred tax assets and the liability
for our obligations under the tax receivable agreement have been
estimated. All of the effects of changes in any of our estimates
after the date of the purchase will be included in net income.
Similarly, the effect of subsequent changes in the enacted tax
rates will be included in net income.
In addition, the tax receivable agreement provides that upon
certain mergers, asset sales, other forms of business
combinations or other changes of control, FXCM Inc.s (or
its successors) obligations with respect to exchanged or
acquired Holdings Units (whether exchanged or acquired before or
after such transaction) would be based on certain assumptions,
including that FXCM Inc. would have sufficient taxable income to
fully utilize the deductions arising from the increased tax
deductions and tax basis and other benefits related to entering
into the tax receivable agreement. As a result, (1) FXCM
Inc. could be required to make payments under the tax receivable
agreement that are greater than or less than the specified
percentage of the actual benefits FXCM Inc. realizes in respect
of the tax attributes subject to the tax receivable agreement
and (2) if FXCM Inc. elects to terminate the tax receivable
agreement early, FXCM Inc. would be required to make an
immediate payment equal to the present value of the anticipated
future tax benefits, which upfront payment may be made years in
advance of the actual realization of such future benefits. Upon
a subsequent actual exchange, any additional increase in tax
deductions, tax basis and other benefits in excess of the
amounts assumed at the change in control will also result in
payments under the tax receivable agreement. In these
situations, our obligations under the tax receivable agreement
could have a substantial negative impact on our liquidity.
Decisions made by our existing owners in the course of running
our business, such as with respect to mergers, asset sales,
other forms of business combinations or other changes in
control, may influence the timing and amount of payments that
are received by an exchanging or selling existing owner under
the tax receivable agreement. For example, the earlier
disposition of assets following an exchange or acquisition
transaction will generally accelerate payments under the tax
receivable agreement and increase the present value of such
payments, and the disposition of assets before an exchange or
acquisition transaction will increase an existing owners
tax liability without giving rise to any rights of an existing
owner to receive payments under the tax receivable agreement.
Payments under the tax receivable agreement will be based on the
tax reporting positions that we will determine. Although we are
not aware of any issue that would cause the IRS to challenge a
tax basis increase, FXCM Inc. will not be reimbursed for any
payments previously made under the tax receivable agreement. As
a result, in certain circumstances, payments could be made under
the tax receivable agreement in excess of the benefits that FXCM
Inc. actually realizes in respect of the tax attributes subject
to the tax receivable agreement.
FXCM
Holdings, LLC Limited Liability Company Agreement
As a result of the Reclassification and Offering Transactions,
FXCM Inc. will hold Holdings Units in FXCM Holdings, LLC and
will be the sole managing member of FXCM Holdings, LLC.
Accordingly, FXCM Inc. will operate and control all of the
business and affairs of FXCM Holdings, LLC and, through FXCM
Holdings, LLC and its operating entity subsidiaries, conduct our
business.
130
Pursuant to the limited liability company agreement of FXCM
Holdings, LLC as it will be in effect at the time of this
offering, FXCM Inc. has the right to determine when
distributions will be made to unitholders of FXCM Holdings, LLC
and the amount of any such distributions. If a distribution is
authorized, such distribution will be made to the unitholders of
FXCM Holdings, LLC pro rata in accordance with the percentages
of their respective limited liability company interests.
The unitholders of FXCM Holdings, LLC, including FXCM Inc., will
incur United States federal, state and local income taxes on
their proportionate share of any taxable income of FXCM
Holdings, LLC. Net profits and net losses of FXCM Holdings, LLC
will generally be allocated to its unitholders (including
FXCM Inc.) pro rata in accordance with the percentages of
their respective limited liability company interests. The
limited liability company agreement of FXCM Holdings, LLC will
provide for cash distributions, which we refer to as tax
distributions, to the holders of the Holdings Units if
FXCM Inc., as the sole managing member of FXCM Holdings, LLC,
determines that the taxable income of the relevant unitholder
will give rise to taxable income for such holder. Generally,
these tax distributions will be computed based on our estimate
of the net taxable income of FXCM Holdings, LLC allocable to a
holder of Holdings Units multiplied by an assumed tax rate equal
to the highest effective marginal combined United States
federal, state and local income tax rate prescribed for an
individual or corporate resident in New York, New York (taking
into account the nondeductibility of certain expenses and the
character of our income). Tax distributions will be made only to
the extent all distributions from FXCM Holdings, LLC for the
relevant year were insufficient to cover such tax liabilities.
The limited liability company agreement of FXCM Holdings, LLC
will also provide that substantially all expenses incurred by or
attributable to FXCM Inc. (such as expenses incurred in
connection with this offering), but not including obligations
incurred under the tax receivable agreement by FXCM Inc., income
tax expenses of FXCM Inc. and payments on indebtedness
incurred by FXCM Inc., will be borne by FXCM Holdings, LLC.
Relationship
with Global Finance and Master Capital Group
Our wholly-owned subsidiary, Forex Capital Markets Limited, is a
party to an arrangement with Global Finance Company (Cayman)
Limited, or Global Finance, and Master Capital Group, S.A.L., or
Master Capital Group. Michel Daher, who will be a holder of more
than 5% of the voting securities of FXCM Inc., after giving
effect to the Reclassification, serves as the director, and
beneficially owns more than 90% of the equity, of Global Finance
and Master Capital Group, with the balance being held by his
family entities. Pursuant to such arrangement, Global Finance
and Master Capital are permitted to use our brand name
FXCM and our technology platform to act as our local
presence in certain countries in the Middle East and North
Africa, or MENA. Forex Capital Markets Limited collects and
remits to Global Finance and Master Capital fees and commissions
charged by Global Finance and Master Capital to customers in
MENA countries. For the year ended December 31, 2009, these fees
and commissions totaled approximately $260,000.
Other
Transactions
As described in Directors and Executive Officers,
Ornit Niv, President of International Operations, is the sister
of Drew Niv, one of our directors and our Chief Executive
Officer. Ms. Niv received total compensation of $192,285
for the year ended December 31, 2009. Matthew Navie, one of
our institutional sales representatives, is the
brother-in-law
of David Sakhai, our chief operating officer. Mr. Navie
received total compensation of $189,472 for the year ended
December 31, 2009. Leya Yusupov and Shirin Yusupov are each
sisters of Eduard Yusupov, one of our directors. Leya Yusupov,
one of our senior dealers, received total compensation of
$135,000 for the year ended December 31, 2009. Shirin
Yusupov, an employee in our reconciliation department, received
total compensation of $107,000 for the year ended
December 31, 2009. Debra Blajchman, who works in our
payroll department, is the sister of Kenneth Grossman, one of
our directors. Ms. Blajchman earned total compensation of
$125,667 for the year ended December 31, 2009. Elisheva
Rutenberg, a member of our programming department, is the
sister-in-law
of Kenneth Grossman. Ms. Rutenberg received total
compensation of $110,000 for the year ended December 31,
2009. David Kaplan, one of our institutional sales
representatives, is the
brother-in-law
of Kenneth Grossman. Mr. Kaplan received total compensation
of $125,333 for the year ended December 31, 2009.
131
Statement
of Policy Regarding Transactions with Related Persons
Prior to the completion of this offering, our board of directors
will adopt a written statement of policy regarding transactions
with related persons, which we refer to as our related
person policy. Our related person policy requires that a
related person (as defined as in paragraph
(a) of Item 404 of
Regulation S-K)
must promptly disclose to our general counsel any related
person transaction (defined as any transaction that is
anticipated would be reportable by us under Item 404(a) of
Regulation S-K
in which we were or are to be a participant and the amount
involved exceeds $120,000 and in which any related person had or
will have a direct or indirect material interest) and all
material facts with respect thereto. The general counsel will
then promptly communicate that information to our board of
directors. No related person transaction will be executed
without the approval or ratification of our board of directors.
It is our policy that directors interested in a related person
transaction will recuse themselves from any vote of a related
person transaction in which they have an interest. Our policy
does not specify the standards to be applied by directors in
determining whether or not to approve or ratify a related person
transaction and we accordingly anticipate that these
determinations will be made in accordance with principles of
Delaware law generally applicable to directors of a Delaware
corporation.
Indemnification
of Directors and Officers
Our bylaws provide that we will indemnify our directors and
officers to the fullest extent permitted by the Delaware General
Corporation Law, or the DGCL. In addition, our certificate of
incorporation will provide that our directors will not be liable
for monetary damages for breach of fiduciary duty to the fullest
extent permitted by the DGCL.
There is no pending litigation or proceeding naming any of our
directors or officers to which indemnification is being sought,
and we are not aware of any pending or threatened litigation
that may result in claims for indemnification by any director or
officer.
132
PRINCIPAL
STOCKHOLDERS
The following tables set forth information regarding the
beneficial ownership of shares of our Class A common stock
and of Holdings Units by (1) each person known to us to
beneficially own more than 5% of any class of the outstanding
voting securities of FXCM Inc., (2) each of our directors
and named executive officers and (3) all of our directors
and executive officers as a group.
The number of shares of our Class A common stock and of
Holdings Units outstanding and percentage of beneficial
ownership before the Offering Transactions set forth below is
based on the number of shares of our Class A common stock
and of Holdings Units to be issued and outstanding immediately
prior to the consummation of this offering after giving effect
to the Reclassification. The number of shares of our
Class A common stock and of Holdings Units and percentage
of beneficial ownership after the Offering Transactions set
forth below is based on shares of our Class A common stock
and of Holdings Units to be issued and outstanding immediately
after the Offering Transactions. Beneficial ownership is
determined in accordance with the rules of the SEC.
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Combined Voting Power(2)(3)
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Class A Common Stock
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After the
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Beneficially Owned(1)
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Offering
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After the Offering
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After the Offering
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After the
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Transactions
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Transactions
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Transactions
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Offering
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Assuming
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Assuming
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Assuming
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Transaction
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Underwriters
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Underwriters
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Underwriters
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Prior to the
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Underwriters
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Option is
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Prior to the Offering
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Option is Not
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Option is Exercised
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Offering
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Option is Not
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Exercised
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Transactions
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Exercised
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in Full
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Transactions
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Exercised
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in Full
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Name of Beneficial Owner
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Number
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%
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Number
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%
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Number
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%
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%
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%
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%
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Entities affiliated with Long Ridge Equity Partners(4)
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Lehman Brothers Holdings Inc.(5)
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Michel Daher(6)
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Drew Niv
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David Sakhai
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William Ahdout
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Kenneth Grossman
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Eduard Yusupov
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Joseph Filko
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Andreas Putz
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David S. Sassoon
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Directors and executive officers as a group (11 persons)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holdings Units Beneficially Owned(1)
|
|
|
|
|
|
|
|
|
|
After the Offering
|
|
|
|
|
|
|
After the Offering
|
|
|
Transactions Assuming
|
|
|
|
|
|
|
Transactions Assuming
|
|
|
Underwriters Option is
|
|
|
|
Prior to the Offering
|
|
|
Underwriters Option is
|
|
|
Exercised
|
|
|
|
Transactions
|
|
|
Not Exercised
|
|
|
in Full
|
|
Name of Beneficial Owner
|
|
Number
|
|
|
%
|
|
|
Number
|
|
|
%
|
|
|
Number
|
|
|
%
|
|
|
Entities affiliated with Long Ridge Equity Partners(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lehman Brothers Holdings Inc.(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michel Daher(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Drew Niv
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Sakhai
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William Ahdout
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth Grossman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eduard Yusupov
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph Filko
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andreas Putz
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David S. Sassoon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and executive officers as a group (11 persons)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133
|
|
|
* |
|
Represents less than 1%. |
|
(1) |
|
Subject to the terms of the exchange agreement, the Holdings
Units are exchangeable for shares of our Class A common
stock on a
one-for-one
basis from and after the first anniversary of the date of the
closing of this offering. See Certain Relationships and
Related Person Transactions Exchange
Agreement. Beneficial ownership of Holdings Units
reflected in this table has not been also reflected as
beneficial ownership of shares of our Class A common stock
for which such units may be exchanged. Percentage of Holdings
Units after the Offering Transactions treats Holdings Units held
by FXCM Inc. as outstanding. |
|
(2) |
|
Represents percentage of voting power of the Class A common
stock and Class B common stock of FXCM Inc. voting together
as a single class. See Description of Capital
Stock Common Stock. |
|
(3) |
|
Our existing owners will hold shares of our Class B common
stock. Each holder of Class B common stock shall be
entitled, without regard to the number of shares of Class B
common stock held by such holder, to one vote for each Holdings
Unit held by such holder. See Description of Capital
Stock Common Stock Class B Common
Stock. |
|
(4) |
|
Long Ridge FXCM, L.P., Long Ridge FXCM Coinvestment, LLC and
Long Ridge FXCM Equity Partners, LLC. The address of these
entities is 200 Madison Avenue, Suite 1900, New York, New NY
10016. Long Ridge Equity Partners, LLC is the managing member of
Long Ridge FXCM Coinvestment, LLC and Long Ridge FXCM Equity
Partners, LLC is the general partner of Long Ridge FXCM, L.P.
James Brown is a manager of Long Ridge Equity Partners LLC, and
as a result may be deemed to share beneficial ownership of the
securities owned by these entities. Mr. Brown disclaims
beneficial ownership of the securities held by these entities,
except to the extent of his pecuniary interest therein. |
|
(5) |
|
The address of Lehman Brothers Holdings Inc. is 1271 Avenue of
the Americas,
38th
Floor, New York, NY 10020. Lehman Brothers Holdings Inc.
exercises sole voting and dispositive power over all of the
securities. |
|
(6) |
|
As a 55% owner of Charlestone Venture Holdings Limited, a
limited partner of Daher FXCM Investment, L.P., Mr. Daher
may be deemed to share beneficial ownership of the securities
held by Daher FXCM Investment, L.P. Mr. Daher disclaims
beneficial ownership of such securities, except to the extent of
his pecuniary interest therein. |
We intend to use approximately $
(or $ if the underwriters exercise
in full their option to purchase additional shares of
Class A common stock) to purchase from our existing owners,
including members of our senior
management,
Holdings Units
(or Holdings
Units if the underwriters exercise in full their option to
purchase additional shares of Class A common stock), as
described under Organizational Structure
Offering Transactions. Of this amount, we expect that
approximately $ will be paid
to
for
Holdings Units (or $
for
Holdings Units if the underwriters exercise in full their option
to purchase additional shares of Class A common stock),
approximately $ will be paid
to
for Holdings
Units (or $
for
Holdings Units if the underwriters exercise in full their option
to purchase additional shares of Class A common stock) and
approximately $ will be paid
to
for
Holdings Units (or $
for
Holdings Units if the underwriters exercise in full their option
to purchase additional shares of Class A common stock).
134
PRICING
SENSITIVITY ANALYSIS
Throughout this prospectus we provide information assuming that
the initial public offering price per share of Class A
common stock in this offering is $
, which is the midpoint of the price range indicated on the
front cover of this prospectus. However, some of this
information will be affected if the initial public offering
price per share of Class A common stock in this offering is
different from the midpoint of the price range. The following
table presents how some of the information set forth in this
prospectus would be affected by an initial public offering price
per share of Class A common stock at the low-, mid- and
high-points of the price range indicated on the front cover of
this prospectus, assuming that the underwriters option to
purchase additional shares of Class A common stock is not
exercised.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Public Offering Price per Share of Class A
|
|
|
|
Common Stock
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
(Dollars in thousands, except share or unit and per share or
per unit data)
|
|
|
Outstanding Equity Following the Offering
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares of Class A common stock offered in this
offering
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares of Class A common stock outstanding after
this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Holdings Units held by FXCM Inc. after this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Holdings Units held by our existing owners after this
offering
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares of Class A common stock outstanding after
this offering if all outstanding Holdings Units held by our
existing owners were exchanged for newly-issued shares of
Class A common stock on a
one-for-one
basis
|
|
|
|
|
|
|
|
|
|
|
|
|
FXCM Holdings, LLC Equity Ownership Percentages Following the
Offering Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage held by FXCM Inc.
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
Percentage held by existing owners
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FXCM Inc. Voting Power Percentages Following the Offering
Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage held by investors in this offering
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
Percentage held by existing owners
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Use of Proceeds
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from offering, net of estimated underwriting discounts
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds used by FXCM Inc. to purchase Holdings Units from our
existing owners
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Proceeds used by FXCM Inc. to purchase newly-issued Holdings
Units from FXCM Holdings, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated offering expenses to be borne by FXCM Holdings, LLC
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net proceeds to FXCM Holdings, LLC
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Cash and Capitalization
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members equity
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Class A common stock, par value $0.01 per share,
3,000,000,000 shares
authorized, shares issued and
outstanding on a pro forma basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B common stock, par value $0.01 per share,
1,000,000 shares
authorized, shares issued
and shares outstanding on a pro
forma basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity attributable to FXCM Inc.
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share of Class A
common stock after the offering
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Dilution in pro forma net tangible book value per share of
Class A common stock to investors in this offering
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Tax Receivable Agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Payable to existing owners pursuant to tax receivable agreement
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
135
In addition, throughout this prospectus we provide information
assuming that the underwriters option to purchase an
additional shares
of Class A common stock from us is not exercised. However,
some of this information will be affected if the
underwriters option to purchase additional shares of
Class A common stock is exercised. The following table
presents how some of the information set forth in this
prospectus would be affected if the underwriters exercise in
full their option to purchase additional shares of Class A
common stock where the initial public offering price per share
of Class A common stock is at the low-, mid- and
high-points of the price range indicated on the front cover of
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Public Offering Price per Share of Class A
|
|
|
|
Common Stock
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
(Dollars in thousands, except share or unit and per share or
per unit data)
|
|
|
Outstanding Equity Following the Offering
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares of Class A common stock offered in this
offering
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares of Class A common stock outstanding after
this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Holdings Units held by FXCM Inc. after this offering
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Holdings Units held by our existing owners after this
offering
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares of Class A common stock outstanding after
this offering if all outstanding Holdings Units held by our
existing owners were exchanged for newly-issued shares of
Class A common stock on a
one-for-one
basis
|
|
|
|
|
|
|
|
|
|
|
|
|
FXCM Holdings, LLC Equity Ownership Percentages Following the
Offering Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage held by FXCM Inc.
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
Percentage held by existing owners
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FXCM Inc. Voting Power Percentages Following the Offering
Transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage held by investors in this offering
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
Percentage held by existing owners
|
|
|
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Use of Proceeds
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from offering, net of estimated underwriting discounts
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds used by FXCM Inc. to purchase Holdings Units from our
existing owners
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Proceeds used by FXCM Inc. to purchase newly-issued Holdings
Units from FXCM Holdings, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated offering expenses to be borne by FXCM Holdings, LLC
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net proceeds to FXCM Holdings, LLC
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Cash and Capitalization
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
Total members capital
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Class A common stock, par value $0.01 per share,
3,000,000,000 shares
authorized, shares issued and
outstanding on a pro forma basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B common stock, par value $0.01 per share,
1,000,000 shares
authorized, shares issued
and shares outstanding on a pro
forma basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity attributable to FXCM Inc.
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling-interest
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share of Class A
common stock after the offering
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Dilution in pro forma net tangible book value per share of
Class A common stock to investors in this offering
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Tax Receivable Agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Payable to existing owners pursuant to tax receivable agreement
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
136
DESCRIPTION
OF CAPITAL STOCK
The following description of our capital stock as it will be in
effect upon the consummation of this offering is a summary and
is qualified in its entirety by reference to our certificate of
incorporation and bylaws, the forms of which are filed as
exhibits to the registration statement of which this prospectus
forms a part, and by applicable law.
Upon consummation of this offering, our authorized capital stock
will consist of 3,000,000,000 shares of Class A common
stock, par value $.01 per share, 1,000,000 shares of
Class B common stock, par value $.01 per share, and
300,000,000 shares of preferred stock, par value $.01 per
share. Unless our board of directors determines otherwise, we
will issue all shares of our capital stock in uncertificated
form.
Common
Stock
Class A
Common Stock
Holders of shares of our Class A common stock are entitled
to one vote for each share held of record on all matters
submitted to a vote of stockholders.
Holders of shares of our Class A common stock are entitled
to receive dividends when and if declared by our board of
directors out of funds legally available therefor, subject to
any statutory or contractual restrictions on the payment of
dividends and to any restrictions on the payment of dividends
imposed by the terms of any outstanding preferred stock.
Upon our dissolution or liquidation or the sale of all or
substantially all of our assets, after payment in full of all
amounts required to be paid to creditors and to the holders of
preferred stock having liquidation preferences, if any, the
holders of shares of our Class A common stock will be
entitled to receive pro rata our remaining assets available for
distribution.
Holders of shares of our Class A common stock do not have
preemptive, subscription, redemption or conversion rights.
Class B
Common Stock
Each holder of Class B common stock shall be entitled,
without regard to the number of shares of Class B common
stock held by such holder, to one vote for each Holdings Unit in
FXCM Holdings, LLC held by such holder. Accordingly, the
unitholders of FXCM Holdings, LLC collectively have a number of
votes in FXCM Inc. that is equal to the aggregate number of
Holdings Units that they hold.
Holders of shares of our Class A common stock and
Class B common stock vote together as a single class on all
matters presented to our stockholders for their vote or
approval, except as otherwise required by applicable law.
Holders of our Class B common stock do not have any right
to receive dividends or to receive a distribution upon a
liquidation or winding up of FXCM Inc.
Preferred
Stock
Our certificate of incorporation authorizes our board of
directors to establish one or more series of preferred stock
(including convertible preferred stock). Unless required by law
or by any stock exchange, the authorized shares of preferred
stock will be available for issuance without further action by
you. Our board of directors is able to determine, with respect
to any series of preferred stock, the terms and rights of that
series, including:
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the designation of the series;
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the number of shares of the series, which our board of directors
may, except where otherwise provided in the preferred stock
designation, increase or decrease, but not below the number of
shares then outstanding;
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whether dividends, if any, will be cumulative or non-cumulative
and the dividend rate of the series;
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the dates at which dividends, if any, will be payable;
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the redemption rights and price or prices, if any, for shares of
the series;
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the terms and amounts of any sinking fund provided for the
purchase or redemption of shares of the series;
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the amounts payable on shares of the series in the event of any
voluntary or involuntary liquidation, dissolution or
winding-up
of the affairs of our company;
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whether the shares of the series will be convertible into shares
of any other class or series, or any other security, of our
company or any other entity, and, if so, the specification of
the other class or series or other security, the conversion
price or prices or rate or rates, any rate adjustments, the date
or dates as of which the shares will be convertible and all
other terms and conditions upon which the conversion may be made;
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restrictions on the issuance of shares of the same series or of
any other class or series; and
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the voting rights, if any, of the holders of the series.
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We could issue a series of preferred stock that could, depending
on the terms of the series, impede or discourage an acquisition
attempt or other transaction that some, or a majority, of you
might believe to be in your best interests or in which you might
receive a premium for your shares of Class A common stock
over the market price of the shares of Class A common stock.
Authorized
but Unissued Capital Stock
Delaware law does not require stockholder approval for any
issuance of authorized shares. However, the listing requirements
of the New York Stock Exchange, which would apply so long as the
shares of Class A common stock remains listed on the New
York Stock Exchange, require stockholder approval of certain
issuances equal to or exceeding 20% of the then outstanding
voting power or the then outstanding number of shares of
Class A common stock (we intend to seek confirmation with
the New York Stock Exchange that the calculation in this latter
case assumes the exchange of outstanding Holdings Units not held
by FXCM Inc.). These additional shares may be used for a variety
of corporate purposes, including future public offerings, to
raise additional capital or to facilitate acquisitions.
One of the effects of the existence of unissued and unreserved
common stock or preferred stock may be to enable our board of
directors to issue shares to persons friendly to current
management, which issuance could render more difficult or
discourage an attempt to obtain control of our company by means
of a merger, tender offer, proxy contest or otherwise, and
thereby protect the continuity of our management and possibly
deprive the stockholders of opportunities to sell their shares
at prices higher than prevailing market prices.
Anti-Takeover
Effects of Provisions of Delaware Law and Our Certificate of
Incorporation and Bylaws
Undesignated
Preferred Stock
The ability to authorize undesignated preferred stock will make
it possible for our board of directors to issue preferred stock
with super majority voting, special approval, dividend or other
rights or preferences on a discriminatory basis that could
impede the success of any attempt to acquire us or otherwise
effect a change in control of us. These and other provisions may
have the effect of deferring, delaying or discouraging hostile
takeovers, or changes in control or management of our company.
Requirements
for Advance Notification of Stockholder Meetings, Nominations
and Proposals
Our bylaws provide that special meetings of the stockholders may
be called only by or at the direction of the board of directors,
the chairman of our board of directors or the chief executive
officer. Our bylaws prohibit the conduct of any business at a
special meeting other than as specified in the notice for such
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meeting. These provisions may have the effect of deferring,
delaying or discouraging hostile takeovers, or changes in
control or management of our company.
Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for
election as directors, other than nominations made by or at the
direction of the board of directors or a committee of the board
of directors. In order for any matter to be properly
brought before a meeting, a stockholder will have to
comply with advance notice requirements and provide us with
certain information. Additionally, vacancies and newly created
directorships may be filled only by a vote of a majority of the
directors then in office, even though less than a quorum, and
not by the stockholders. Our bylaws allow the presiding officer
at a meeting of the stockholders to adopt rules and regulations
for the conduct of meetings which may have the effect of
precluding the conduct of certain business at a meeting if the
rules and regulations are not followed. These provisions may
also defer, delay or discourage a potential acquirer from
conducting a solicitation of proxies to elect the
acquirers own slate of directors or otherwise attempting
to obtain control of our company.
Our certificate of incorporation provides that the board of
directors is expressly authorized to make, alter, or repeal our
bylaws and that our stockholders may only amend our bylaws with
the approval of 80% or more of all of the outstanding shares of
our capital stock entitled to vote.
No
Cumulative Voting
The DGCL provides that stockholders are not entitled to the
right to cumulate votes in the election of directors unless our
amended and restated certificate of incorporation provides
otherwise. Our amended and restated certificate of incorporation
does not expressly provide for cumulative voting.
Stockholder
Action by Written Consent
Pursuant to Section 228 of the DGCL, any action required to
be taken at any annual or special meeting of the stockholders
may be taken without a meeting, without prior notice and without
a vote if a consent or consents in writing, setting forth the
action so taken, is signed by the holders of outstanding stock
having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which
all shares of our stock entitled to vote thereon were present
and voted, unless the companys certificate of
incorporation provides otherwise. Our amended and restated
certificate of incorporation does not permit our Class A
common stockholders to act by consent in writing of such
stockholders unless such action is recommended by all directors
then in office.
Delaware
Anti-Takeover Statute
We are subject to Section 203 of the DGCL. Section 203
provides that, subject to certain exceptions specified in the
law, a publicly-held Delaware corporation shall not engage in
certain business combinations with any
interested stockholder for a three-year period after
the date of the transaction in which the person became an
interested stockholder. These provisions generally prohibit or
delay the accomplishment of mergers, assets or stock sales or
other takeover or
change-in-control
attempts that are not approved by a companys board of
directors.
In general, Section 203 prohibits a publicly-held Delaware
corporation from engaging, under certain circumstances, in a
business combination with an interested stockholder for a period
of three years following the date the person became an
interested stockholder unless:
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prior to the date of the transaction, the board of directors of
the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an
interested stockholder;
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upon completion of the transaction that resulted in the
stockholder becoming an interested stockholder, the stockholder
owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding
(1) shares owned by persons who are directors and also
officers and (2) shares owned by employee
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stock plans in which employee participants do not have the right
to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or
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On or subsequent to the date of the transaction, the business
combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least
662/3%
of the outstanding voting stock which is not owned by the
interested stockholder.
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Generally, a business combination includes a merger, asset or
stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. An interested stockholder
is a person who, together with affiliates and associates, owns
or, within three years prior to the determination of interested
stockholder status, did own 15% or more of a corporations
outstanding voting stock.
Under certain circumstances, Section 203 makes it more
difficult for a person who would be an interested
stockholder to effect various business combinations with a
corporation for a three-year period. Accordingly,
Section 203 could have an anti-takeover effect with respect
to certain transactions our board of directors does not approve
in advance. The provisions of Section 203 may
encourage companies interested in acquiring our company to
negotiate in advance with our board of directors because the
stockholder approval requirement would be avoided if our board
of directors approves either the business combination or the
transaction that results in the stockholder becoming an
interested stockholder. However, Section 203 also could
discourage attempts that might result in a premium over the
market price for the shares held by stockholders. These
provisions also may make it more difficult to accomplish
transactions that stockholders may otherwise deem to be in their
best interests.
Transfer
Agent and Registrar
The transfer agent and registrar for shares of our Class A
common stock will be American Stock Transfer & Trust
Company, LLC.
Listing
We intend to apply to have our Class A common stock
approved for listing on the New York Stock Exchange under the
symbol FXCM.
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MATERIAL
UNITED STATES FEDERAL INCOME AND ESTATE
TAX CONSEQUENCES TO
NON-U.S.
HOLDERS
The following is a summary of the material United States federal
income and estate tax consequences to
non-U.S. holders,
defined below, of the purchase, ownership and disposition of
shares of our Class A common stock as of the date hereof.
Except where noted, this summary deals only with shares of
Class A common stock purchased in this offering that are
held as capital assets by a
non-U.S. holder.
Except as modified for estate tax purposes, a
non-U.S. holder
means a beneficial owner of shares of our Class A common
stock that, for United States federal income tax purposes, is
not any of the following:
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an individual who is a citizen or resident of the United States;
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a corporation (or any other entity treated as a corporation for
United States federal income tax purposes) created or organized
in or under the laws of the United States, any state thereof or
the District of Columbia;
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any entity or arrangement treated as a partnership for United
States federal income tax purposes;
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an estate the income of which is subject to United States
federal income taxation regardless of its source; or
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a trust if it (1) is subject to the primary supervision of
a court within the United States and one or more United States
persons have the authority to control all substantial decisions
of the trust or (2) has a valid election in effect under
applicable United States Treasury regulations to be treated as a
United States person.
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This summary is based upon provisions of the United States
Internal Revenue Code of 1986, as amended (the
Code), applicable United States Treasury
regulations, rulings and judicial decisions, all as of the date
hereof. Those authorities are subject to different
interpretations and may be changed, perhaps retroactively, so as
to result in United States federal income and estate tax
consequences different from those summarized below. This summary
does not address all aspects of United States federal income and
estate taxes and does not deal with foreign, state, local,
alternative minimum or other tax considerations that may be
relevant to
non-U.S. holders
in light of their particular circumstances. In addition, this
summary does not represent a detailed description of the United
States federal income and estate tax consequences applicable to
you if you are subject to special treatment under the United
States federal income tax laws (including if you are a
United States expatriate, financial institution, insurance
company, tax-exempt organization, dealer in securities, broker,
controlled foreign corporation, passive
foreign investment company, a partnership or other
pass-through entity for United States federal income tax
purposes (or an investor in such a pass-through entity), a
person who acquired shares of our Class A common stock as
compensation or otherwise in connection with the performance of
services, or a person who has acquired shares of our
Class A common stock as part of a straddle, hedge,
conversion transaction or other integrated investment). We
cannot assure you that a change in law will not alter
significantly the tax considerations that we describe in this
summary.
We have not and will not seek any rulings from the Internal
Revenue Service (IRS) regarding the matters
discussed below. There can be no assurance that the IRS will not
take positions concerning the tax consequences of the purchase,
ownership or disposition of shares of our Class A common
stock that are different from those discussed below.
If any entity or arrangement treated as a partnership for United
States federal income tax purposes holds shares of our
Class A common stock, the tax treatment of a partner will
generally depend upon the status of the partner and the
activities of the partnership. If you are a partner of a
partnership holding shares of our Class A common stock, you
should consult your tax advisors.
If you are considering the purchase of shares of our
Class A common stock, you should consult your own tax
advisors concerning the particular United States federal income
and estate tax consequences to you of the ownership and
disposition of the shares of Class A common stock, as well
as the consequences
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to you arising under the laws of any other applicable taxing
jurisdiction in light of your particular circumstances.
Dividends
Cash distributions on shares of our Class A common stock
will constitute dividends for United States federal income tax
purposes to the extent paid from our current or accumulated
earnings and profits, as determined under United States federal
income tax principles. To the extent those distributions exceed
both our current and our accumulated earnings and profits, they
will constitute a return of capital and will first reduce your
tax basis in our Class A common stock (determined on a
share by share basis), but not below zero, and then will be
treated as gain from the sale of stock.
Dividends paid to a
non-U.S. holder
generally will be subject to withholding of United States
federal income tax at a 30% rate, or such lower rate as may be
specified by an applicable income tax treaty. However, dividends
that are effectively connected with the conduct of a trade or
business by the
non-U.S. holder
within the United States (and, if required by an applicable
income tax treaty, are attributable to a United States permanent
establishment) generally are not subject to the withholding tax,
provided certain certification and disclosure requirements are
satisfied. Instead, such dividends are generally subject to
United States federal income tax on a net income basis in the
same manner as if the
non-U.S. holder
were a United States person as defined under the Code. A
corporate
non-U.S. holder
may be subject to an additional branch profits tax
at a 30% rate (or such lower rate as may be specified by an
applicable income tax treaty) on earnings and profits
attributable to such dividends that are effectively connected
with its United States trade or business (and, if an income tax
treaty applies, are attributable to its United States permanent
establishment).
A
non-U.S. holder
of shares of our Class A common stock who wishes to claim
the benefit of an applicable treaty rate and avoid backup
withholding, as discussed below, for dividends will be required
(a) to complete IRS
Form W-8BEN
(or other applicable form) and certify under penalty of perjury
that such holder is not a United States person as defined under
the Code and is eligible for treaty benefits or (b) if
shares of our Class A common stock are held through certain
foreign intermediaries, satisfy the relevant certification
requirements of applicable United States Treasury regulations.
Special certification and other requirements apply to certain
non-U.S. holders
that are pass-through entities rather than corporations or
individuals.
A
non-U.S. holder
of shares of our Class A common stock eligible for a
reduced rate of United States withholding tax pursuant to an
income tax treaty may obtain a refund of any excess amounts
withheld by timely filing an appropriate claim for refund with
the IRS.
Gain on
Disposition of Shares of Class A Common Stock
Any gain realized by a
non-U.S. holder
on the disposition of shares of our Class A common stock
generally will not be subject to United States federal income
tax unless:
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the gain is effectively connected with a trade or business of
the
non-U.S. holder
in the United States (and, if required by an applicable income
tax treaty, is attributable to a United States permanent
establishment);
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the
non-U.S. holder
is an individual who is present in the United States for
183 days or more in the taxable year of that disposition,
and certain other conditions are met; or
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our Class A common stock constitutes a United States real
property interest by reason of our status as a United
States real property holding corporation for United States
federal income tax purposes at any time during the shorter of
the five-year period ending on the date of the disposition or
the period that the
non-U.S. holder
held shares of our Class A common stock.
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In the case of a
non-U.S. holder
described in the first bullet point above, any gain will be
subject to United States federal income tax on a net income
basis generally in the same manner as if the
non-U.S. holder
were a United States person as defined under the Code, and a
non-U.S. holder
that is a foreign corporation may also be subject to the branch
profits tax equal to 30% of its effectively connected earnings
and profits
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attributable to such gain (or, if an income tax treaty applies,
at such lower rate as may be specified by the treaty on its
gains attributable to its United States permanent
establishment). Except as otherwise provided by an applicable
income tax treaty, an individual
non-U.S. holder
described in the second bullet point above will be subject to a
30% tax on any gain derived from the sale, which may be offset
by certain United States source capital losses, even though the
individual is not considered a resident of the United States
under the Code.
We believe we are not and do not anticipate becoming a
United States real property holding corporation for
United States federal income tax purposes. You should consult
your own tax advisor about the consequences that could result if
we are, or become, a United States real property holding
corporation.
Information
Reporting and Backup Withholding
We must report annually to the IRS and to each
non-U.S. holder
the amount of dividends paid to such holder and the tax withheld
with respect to such dividends, regardless of whether
withholding was required. Copies of the information returns
reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the
non-U.S. holder
resides under the provisions of an applicable income tax treaty
or agreement.
A
non-U.S. holder
will be subject to backup withholding for dividends paid to such
holder unless such holder certifies under penalty of perjury
that it is a
non-U.S. holder
(and the payor does not have actual knowledge or reason to know
that such holder is a United States person as defined under the
Code), or such holder otherwise establishes an exemption.
Information reporting and, depending on the circumstances,
backup withholding will apply to the proceeds of a sale of
shares of our Class A common stock within the United States
or conducted through certain United States-related financial
intermediaries, unless the beneficial owner certifies under
penalty of perjury that it is a
non-U.S. holder
(and the payor does not have actual knowledge or reason to know
that the beneficial owner is a United States person as defined
under the Code) or such owner otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules may be allowed as a
refund or a credit against a
non-U.S. holders
United States federal income tax liability provided the required
information is timely furnished to the IRS.
Additional
Withholding Requirements
Under recently enacted legislation, the relevant withholding
agent may be required to withhold 30% of any dividends and the
proceeds of a sale of shares of our Class A common stock
paid after December 31, 2012 to (i) a foreign
financial institution unless such foreign financial institution
agrees to verify, report and disclose its United States
accountholders and meets certain other specified requirements or
(ii) a non-financial foreign entity that is the beneficial
owner of the payment unless such entity certifies that it does
not have any substantial United States owners or provides the
name, address and taxpayer identification number of each
substantial United States owner and such entity meets certain
other specified requirements. You should consult your own tax
advisors regarding this legislation and any regulations that may
be promulgated thereunder that may be relevant to your
investment in shares of our Class A common stock.
Federal
Estate Tax
Shares of our Class A common stock that are owned (or
treated as owned) by an individual who is not a citizen or
resident of the United States (as specially defined for United
States federal estate tax purposes) at the time of death will be
included in such individuals gross estate for United
States federal estate tax purposes, unless an applicable estate
or other tax treaty provides otherwise, and, therefore, may be
subject to United States federal estate tax.
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SHARES ELIGIBLE
FOR FUTURE SALE
Prior to this offering, there has been no public market for
shares of our Class A common stock. We cannot predict the
effect, if any, future sales of shares of Class A common
stock, or the availability for future sale of shares of
Class A common stock, will have on the market price of
shares of our Class A common stock prevailing from time to
time. The sale of substantial amounts of shares of our
Class A common stock in the public market, or the
perception that such sales could occur, could harm the
prevailing market price of shares of our Class A common
stock.
Currently, no shares of our Class A common stock are
outstanding and 100 shares of our Class B common stock
are outstanding, all of which are owned by FXCM Holdings, LLC.
We intend to cause FXCM Holdings, LLC to distribute one or
more shares of Class B common stock to each of our existing
owners prior to the purchase by FXCM Inc. of Holdings Units with
the proceeds of this offering, with any shares of Class B
common stock not so distributed to be retained in treasury by
FXCM Holdings, LLC.
Upon completion of this offering we will have a total
of shares
of our Class A common stock outstanding
(or shares
of Class A common stock if the underwriters exercise in
full their option to purchase additional shares of Class A
common stock). All of these shares of Class A common stock
will have been sold in this offering and will be freely tradable
without restriction or further registration under the Securities
Act by persons other than our affiliates. Under the
Securities Act, an affiliate of an issuer is a
person that directly or indirectly controls, is controlled by or
is under common control with that issuer.
In addition, subject to certain limitations and exceptions,
pursuant to the terms of an exchange agreement we will enter
into with our existing owners, unitholders of FXCM Holdings, LLC
may, from and after the first anniversary of the closing of this
offering (subject to the terms of the exchange agreement),
exchange Holdings Units for shares of our Class A common
stock on a
one-for-one
basis, subject to customary conversion rate adjustments for
stock splits, stock dividends and reclassifications. Upon
consummation of this offering, our existing owners will hold
Holdings Units
(or
Holdings Units if the underwriters exercise in full their option
to purchase additional shares of Class A common stock), all
of which will be exchangeable for shares of our Class A
common stock. The shares of Class A common stock we issue
upon such exchanges would be restricted securities
as defined in Rule 144 unless we register such issuances.
However, we will enter into one or more registration rights
agreements with our existing owners that will require us to
register under the Securities Act these shares of Class A
common stock. See Registration Rights
and Certain Relationships and Related Person
Transactions Registration Rights Agreement.
In
addition,
shares of Class A common stock may be granted under our
Long Term Incentive Plan, including shares issuable upon
the exercise of stock options that we intend to grant to our
employees at the time of this offering. See
Management Long Term Incentive Plan and
IPO Date Stock Option Awards. We intend
to file one or more registration statements on
Form S-8
under the Securities Act to register shares of Class A
common stock or securities convertible into or exchangeable for
shares of Class A common stock issued under or covered by
our Long Term Incentive Plan. Any such
Form S-8
registration statements will automatically become effective upon
filing. Accordingly, shares of Class A common stock
registered under such registration statements will be available
for sale in the open market. We expect that the initial
registration statement on
Form S-8
will
cover shares
of Class A common stock.
Our certificate of incorporation authorizes us to issue
additional shares of Class A common stock and options,
rights, warrants and appreciation rights relating to
Class A common stock for the consideration and on the terms
and conditions established by our board of directors in its sole
discretion. In accordance with the DGCL and the provisions of
our certificate of incorporation, we may also issue preferred
stock that has designations, preferences, rights, powers and
duties that are different from, and may be senior to, those
applicable to shares of Class A common stock. See
Description of Capital Stock. Similarly, the limited
liability company agreement of FXCM Holdings, LLC permits FXCM
Holdings, LLC to issue an unlimited number of additional limited
liability company interests of FXCM Holdings, LLC with
designations, preferences, rights, powers and duties that are
different from, and may be senior to, those applicable to the
Holdings Units, and which may be exchangeable for shares of our
Class A common stock.
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Registration
Rights
We will enter into one or more registration rights agreements
with our existing owners pursuant to which we will grant them,
their affiliates and certain of their transferees the right,
under certain circumstances and subject to certain restrictions,
to require us to register under the Securities Act shares of
Class A common stock delivered in exchange for Holdings
Units or shares of Class A common stock (and other
securities convertible into or exchangeable or exercisable for
shares of Class A common stock) otherwise held by them.
Securities registered under any such registration statement will
be available for sale in the open market unless restrictions
apply. See Certain Relationships and Related Person
Transactions Registration Rights Agreement.
Lock-Up
Agreements
We have agreed, subject to enumerated exceptions, that we will
not offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, or file with the SEC a registration
statement under the Securities Act relating to, any shares of
our Class A common stock or securities convertible into or
exchangeable or exercisable for any shares of our Class A
common stock, or publicly disclose the intention to make any
such offer, sale, pledge, disposition or filing, without the
prior written consent of Credit Suisse Securities (USA) LLC,
J.P. Morgan Securities LLC and Citigroup Global Markets
Inc. for a period of 180 days after the date of this
prospectus. However, in the event that either (1) during
the last 17 days of the
lock-up
period, we release earnings results or material news or a
material event relating to us occurs or (2) prior to the
expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period, then in either case the expiration of the
lock-up
will be extended until the expiration of the
18-day
period beginning on the date of the release of the earnings
results or the occurrence of the material news or event, as
applicable, unless Credit Suisse Securities (USA) LLC,
J.P. Morgan Securities LLC and Citigroup Global Markets
Inc. waive, in writing, such an extension.
Our officers, directors and certain existing owners have agreed,
subject to enumerated exceptions, that they will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly
or indirectly, any shares of our Class A common stock or
securities convertible into or exchangeable or exercisable for
any shares of our Class A common stock, enter into a
transaction that would have the same effect, or enter into any
swap, hedge or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of our
Class A common stock, whether any of these transactions are
to be settled by delivery of our Class A common stock or
other securities, in cash or otherwise, or publicly disclose the
intention to make any such offer, sale, pledge or disposition,
or to enter into any transaction, swap, hedge or other
arrangement, without, in each case, the prior written consent of
Credit Suisse Securities (USA) LLC, J.P. Morgan Securities
LLC and Citigroup Global Markets Inc. for a period of
180 days after the date of this prospectus. However, in the
event that either (1) during the last 17 days of the
lock-up
period, we release earnings results or material news or a
material event relating to us occurs or (2) prior to the
expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period, then in either case the expiration of the
lock-up
will be extended until the expiration of the
18-day
period beginning on the date of the release of the earnings
results or the occurrence of the material news or event, as
applicable, unless Credit Suisse Securities (USA) LLC,
J.P. Morgan Securities LLC and Citigroup Global Markets
Inc. waive, in writing, such an extension.
Rule 144
In general, under Rule 144 a person (or persons whose
shares are aggregated), including any person who may be deemed
our affiliate, is entitled to sell within any three-month period
a number of restricted securities that does not exceed the
greater of 1% of the then outstanding shares of Class A
common stock and the average weekly trading volume during the
four calendar weeks preceding each such sale, provided that at
least six months has elapsed since such shares of Class A
common stock were acquired from us or any affiliate of ours and
certain manner of sale, notice requirements and requirements as
to availability of current public information about us are
satisfied. Any person who is deemed to be our affiliate must
comply with the provisions of Rule 144 (other than the
six-month holding period requirement) in order to sell shares of
Class A common stock which are not restricted securities
(such as shares of Class A common stock acquired by
affiliates either in this offering or through purchases in the
open market following this offering). In addition, a person who
is not our affiliate, and who has not been our affiliate at any
time during the 90 days preceding any sale, is entitled to
sell shares of Class A common stock without regard to the
foregoing limitations, provided that at least one year has
elapsed since the shares of Class A common stock were
acquired from us or any affiliate of ours.
145
UNDERWRITING
Under the terms and subject to the conditions contained in an
underwriting agreement
dated ,
2010, we have agreed to sell to the underwriters named below,
for whom Credit Suisse Securities (USA) LLC, J.P. Morgan
Securities LLC and Citigroup Global Markets Inc. are acting as
representatives, the following respective numbers of shares of
Class A common stock:
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Number of
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Underwriter
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Shares
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Credit Suisse Securities (USA) LLC
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J.P. Morgan Securities LLC
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Citigroup Global Markets Inc.
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Deutsche Bank Securities Inc.
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Barclays Capital Inc.
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Sandler ONeill & Partners, L.P.
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|
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UBS Securities LLC
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Total
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The underwriting agreement provides that the underwriters are
obligated to purchase all the shares of Class A common
stock in the offering if any are purchased, other than those
shares covered by the over-allotment option described below. The
underwriting agreement also provides that if an underwriter
defaults the purchase commitments of non-defaulting underwriters
may be increased or the offering may be terminated.
We have granted to the underwriters a
30-day
option to purchase on a pro rata basis up
to additional
shares from us at the initial public offering price less the
underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of Class A
common stock.
The underwriters propose to offer the shares of Class A
common stock initially at the public offering price on the cover
page of this prospectus and to selling group members at that
price less a selling concession of
$ per share. The underwriters and
selling group members may allow a discount of
$ per share on sales to other
broker/dealers. After the initial public offering the
representatives may change the public offering price and
concession and discount to broker/dealers.
The following table summarizes the compensation and estimated
expenses we will pay:
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Per Share
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Total
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Without
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With
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Without
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With
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Over-Allotment
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Over-Allotment
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Over-Allotment
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Over-Allotment
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|
Underwriting Discounts and Commissions paid by us
|
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$
|
|
|
|
$
|
|
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|
$
|
|
|
|
$
|
|
|
Expenses payable by us
|
|
$
|
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|
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$
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$
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$
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|
The representatives have informed us that the underwriters do
not expect sales to accounts over which the underwriters have
discretionary authority to exceed 5% of the shares of
Class A common stock being offered.
We have agreed, subject to enumerated exceptions, that we will
not offer, sell, contract to sell, pledge or otherwise dispose
of, directly or indirectly, or file with the SEC a registration
statement under the Securities Act relating to, any shares of
our Class A common stock or securities convertible into or
exchangeable or exercisable for any shares of our Class A
common stock, or publicly disclose the intention to make any
such offer, sale, pledge, disposition or filing, without the
prior written consent of Credit Suisse Securities (USA) LLC,
J.P. Morgan Securities LLC and Citigroup Global Markets Inc. for
a period of 180 days after the date of this prospectus.
However, in the event that either (1) during the last
17 days of the
lock-up
period, we release earnings results or material news or a
material event relating to us occurs or (2) prior to the
expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period, then in either case the expiration of the
lock-up
will be extended until the expiration of the
18-day
period beginning on the date of the release of the earnings
results or the
146
occurrence of the material news or event, as applicable, unless
Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC
and Citigroup Global Markets Inc. waive, in writing, such an
extension.
Our officers, directors and certain existing owners have agreed,
subject to enumerated exceptions, that they will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly
or indirectly, any shares of our Class A common stock or
securities convertible into or exchangeable or exercisable for
any shares of our Class A common stock, enter into a
transaction that would have the same effect, or enter into any
swap, hedge or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of our
Class A common stock, whether any of these transactions are
to be settled by delivery of our Class A common stock or
other securities, in cash or otherwise, or publicly disclose the
intention to make any such offer, sale, pledge or disposition,
or to enter into any transaction, swap, hedge or other
arrangement, without, in each case, the prior written consent of
Credit Suisse Securities (USA) LLC, J.P. Morgan Securities LLC
and Citigroup Global Markets Inc. for a period of 180 days
after the date of this prospectus. However, in the event that
either (1) during the last 17 days of the
lock-up
period, we release earnings results or material news or a
material event relating to us occurs or (2) prior to the
expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the
lock-up
period, then in either case the expiration of the
lock-up
will be extended until the expiration of the
18-day
period beginning on the date of the release of the earnings
results or the occurrence of the material news or event, as
applicable, unless Credit Suisse Securities (USA) LLC, J.P.
Morgan Securities LLC and Citigroup Global Markets Inc. waive,
in writing, such an extension.
We have agreed to indemnify the underwriters against liabilities
under the Securities Act, or contribute to payments that the
underwriters may be required to make in that respect.
We will apply to list the shares of Class A common stock on
The New York Stock Exchange.
In connection with the listing of the Class A common stock
on The New York Stock Exchange, the underwriters will undertake
to sell round lots of 100 shares or more to a minimum
of beneficial
owners.
The underwriters and their respective affiliates are full
service financial institutions engaged in various activities,
which may include securities trading, commercial and investment
banking, financial advisory, investment management, principal
investment, hedging, financing and brokerage activities. Certain
of the underwriters and their respective affiliates have, from
time to time, performed, and may in the future perform, various
financial advisory, investment banking services and other
commercial dealings for us and our affiliates, for which they
received or will receive customary fees and expenses. Certain of
the underwriters or their respective affiliates may act as
lenders under our contemplated credit facility. An affiliate of
Credit Suisse Securities (USA) LLC, an affiliate of
J.P. Morgan Securities LLC, an affiliate of Citigroup
Global Markets Inc., an affiliate of Deutsche Bank
Securities Inc. and an affiliate of UBS Securities LLC act as
our FX market makers that provide FX liquidity to us. In
addition, an affiliate of Citigroup Global Markets Inc. has a
prime brokerage relationship with us and an affiliate of
Deutsche Bank Securities Inc. has a prime brokerage and white
label relationship with us.
Prior to this offering, there has been no public market for our
Class A common stock. The initial public offering price has
been determined by a negotiation among us and the
representatives and will not necessarily reflect the market
price of our Class A common stock following the offering.
The principal factors that were considered in determining the
public offering price included:
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|
|
|
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the information presented in this prospectus;
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|
|
the history of and prospects for the industry in which we will
compete;
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|
|
|
the ability of our management;
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|
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|
the prospects for our future earnings;
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|
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|
the present state of our development and current financial
condition;
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|
|
the recent market prices of, and the demand for, publicly traded
Class A common stock of generally comparable
companies; and
|
|
|
|
the general condition of the securities markets at the time of
this offering.
|
147
We offer no assurances that the initial public offering price
will correspond to the price at which the Class A common
stock will trade in the public market subsequent to the offering
or that an active trading market for our Class A common
stock will develop and continue after the offering.
In connection with the offering the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate
covering transactions, and penalty bids in accordance with
Regulation M under the Exchange Act.
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|
|
|
Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
|
|
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|
Over-allotment involves sales by the underwriters of shares in
excess of the number of shares the underwriters are obligated to
purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short
position. In a covered short position, the number of shares
over-allotted by the underwriters is not greater than the number
of shares that they may purchase in the over-allotment option.
In a naked short position, the number of shares involved is
greater than the number of shares in the over-allotment option.
The underwriters may close out any covered short position by
either exercising their over-allotment option
and/or
purchasing shares in the open market.
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|
|
|
Syndicate covering transactions involve purchases of the
Class A common stock in the open market after the
distribution has been completed in order to cover syndicate
short positions. In determining the source of shares to close
out the short position, the underwriters will consider, among
other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase
shares through the over-allotment option. If the underwriters
sell more shares than could be covered by the over-allotment
option, a naked short position, the position can only be closed
out by buying shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned
that there could be downward pressure on the price of the shares
in the open market after pricing that could adversely affect
investors who purchase in the offering.
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|
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|
Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the Class A common
stock originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
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|
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|
In passive market making, market makers in the Class A
common stock who are underwriters or prospective underwriters
may, subject to limitations, make bids for or purchases of our
Class A common stock until the time, if any, at which a
stabilizing bid is made.
|
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our Class A common stock or preventing
or retarding a decline in the market price of the Class A
common stock. As a result the price of our Class A common
stock may be higher than the price that might otherwise exist in
the open market. These transactions may be effected on The New
York Stock Exchange or otherwise and, if commenced, may be
discontinued at any time.
The shares are offered for sale in those jurisdictions in the
United States, Europe, Asia and elsewhere where it is lawful to
make such offers.
Each of the underwriters has represented and agreed that it has
not offered, sold or delivered and will not offer, sell or
deliver any of the shares directly or indirectly, or distribute
this prospectus or any other offering material relating to the
shares, in or from any jurisdiction except under circumstances
that will result in compliance with the applicable laws and
regulations thereof and that will not impose any obligations on
us except as set forth in the underwriting agreement.
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a
Relevant Member State), each underwriter has
represented, warranted and agreed that with effect from and
including the date on which the Prospectus Directive is
implemented in that Relevant Member State (the Relevant
Implementation Date) it has not made and will not make an
offer of shares of Class A common stock to the public in
that Relevant Member State other than any time,
148
(a) to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the
last financial year; (2) a total balance sheet of more than
43,000,000 and (3) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts;
(c) to fewer than 100 natural or legal persons (other than
qualified investors as defined in the Prospectus Directive)
subject to obtaining the prior consent of the lead
manager; or
(d) in any other circumstances falling within
Article 3(2) of the Prospectus Directive, provided that no
such offer of shares of Class A common stock shall require
us or any underwriter to publish a prospectus pursuant to
Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an
offer of Shares to the public in relation to any
shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the shares to be offered so as to enable an
investor to decide to purchase or subscribe the shares, as the
same may be varied in that Member State by any measure
implementing the Prospectus Directive in that Member State and
the expression Prospectus Directive means Directive
2003/71/EC and includes any relevant implementing measure in
each Relevant Member State.
Each of the underwriters has severally represented, warranted
and agreed as follows:
(a) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of section 21 of FSMA) to persons who
have professional experience in matters relating to investments
falling with Article 19(5) of the Financial Services and
Markets Act 2000 (Financial Promotion) Order 2005 or in
circumstances in which section 21 of FSMA does not apply to
the company; and
(b) it has complied with, and will comply with all
applicable provisions of FSMA with respect to anything done by
it in relation to the shares of common stock in, from or
otherwise involving the United Kingdom.
The shares of Class A common stock may not be offered or
sold by means of any document other than (i) in
circumstances which do not constitute an offer to the public
within the meaning of the Companies Ordinance (Cap. 32, Laws of
Hong Kong), or (ii) to professional investors
within the meaning of the Securities and Futures Ordinance (Cap.
571, Laws of Hong Kong) and any rules made thereunder, or
(iii) in other circumstances which do not result in the
document being a prospectus within the meaning of
the Companies Ordinance (Cap. 32, Laws of Hong Kong), and no
advertisement, invitation or document relating to the shares may
be issued or may be in the possession of any person for the
purpose of issue (in each case whether in Hong Kong or
elsewhere), which is directed at, or the contents of which are
likely to be accessed or read by, the public in Hong Kong
(except if permitted to do so under the laws of Hong Kong) other
than with respect to shares which are or are intended to be
disposed of only to persons outside Hong Kong or only to
professional investors within the meaning of the
Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong)
and any rules made thereunder.
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore (the SFA),
(ii) to a relevant person, or any person pursuant to
Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA or (iii) otherwise
pursuant to, and in accordance with the conditions of, any other
applicable provision of the SFA.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or
149
(b) a trust (where the trustee is not an accredited
investor) whose sole purpose is to hold investments and each
beneficiary is an accredited investor, shares, debentures and
units of shares and debentures of that corporation or the
beneficiaries rights and interest in that trust shall not
be transferable for 6 months after that corporation or that
trust has acquired the shares under Section 275 except:
(1) to an institutional investor under Section 274 of
the SFA or to a relevant person, or any person pursuant to
Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA; (2) where no
consideration is given for the transfer; or (3) by
operation of law.
A prospectus in electronic format may be made available on the
web sites maintained by one or more of the underwriters, or
selling group members, if any, participating in this offering
and one or more of the underwriters participating in this
offering may distribute prospectuses electronically. The
representatives may agree to allocate a number of shares to
underwriters and selling group members for sale to their online
brokerage account holders. Internet distributions will be
allocated by the underwriters and selling group members that
will make internet distributions on the same basis as other
allocations.
150
LEGAL
MATTERS
The validity of the shares of Class A common stock will be
passed upon for us by Simpson Thacher & Bartlett LLP,
New York, New York. Certain legal matters in connection with
this offering will be passed upon for the underwriters by
Shearman & Sterling LLP, New York, New York.
EXPERTS
The statement of financial condition of FXCM Inc. at
August 23, 2010 appearing in this Prospectus and
Registration Statement has been audited by Ernst &
Young LLP, independent registered public accounting firm, as set
forth in their report thereon appearing elsewhere herein, and is
included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
The consolidated financial statements of FXCM Holdings, LLC and
subsidiaries at December 31, 2009 and for the year ended
December 31, 2009, appearing in this Prospectus and
Registration Statement have been audited by Ernst &
Young LLP, independent registered public accounting firm, as set
forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority
of such firm as experts in accounting and auditing.
The consolidated financial statements of FXCM Holdings, LLC and
subsidiaries as of December 31, 2008 and for the years
ended December 31, 2008 and 2007 included in this
prospectus have been audited by McGladrey & Pullen,
LLP, an independent registered public accounting firm, as stated
in their report appearing herein. Such financial statements are
included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The consolidated financial statements of ODL Group Limited at
December 31, 2009 and 2008 and for each of the two years in
the period ended December 31, 2009 appearing in this
prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon
such report given on the authority of such firm as experts in
accounting and auditing.
CHANGE IN
ACCOUNTANTS
On June 21, 2010, we dismissed our independent registered
public accounting firm, McGladrey & Pullen, LLP, and
engaged the services of Ernst & Young LLP as our new
independent registered public accounting firm for the fiscal
year ended December 31, 2009. The board of directors of
FXCM Holdings, LLC authorized the dismissal of
McGladrey & Pullen and the engagement of
Ernst & Young.
The reports of McGladrey & Pullen on our financial
statements for the years ended December 31, 2008 and 2007
did not contain an adverse opinion or a disclaimer of opinion
and were not qualified or modified as to uncertainty, audit
scope or accounting principles.
During the years ended December 31, 2008 and 2007, and the
subsequent period preceding the dismissal of
McGladrey & Pullen on June 21, 2010, there were
no disagreements with McGladrey & Pullen on any matter
of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreements,
if not resolved to the satisfaction of McGladrey &
Pullen, would have caused it to make reference thereto in its
reports on the consolidated financial statements for such
periods, and there occurred no reportable events
within the meaning of Item 304(a)(1) of SEC
Regulation S-K.
We have provided McGladrey & Pullen with a copy of the
foregoing statements. A copy of a letter from
McGladrey & Pullen to the SEC stating its agreement
with these statements is attached as an exhibit to the
registration statement of which this prospectus forms a part.
During the years ended December 31, 2008 and 2007 and the
subsequent period preceding the dismissal of
McGladrey & Pullen on June 21, 2010, neither we
nor anyone on our behalf consulted with Ernst & Young
regarding any of the matters or events set forth in
Item 304(a)(2)(i) or (ii) of SEC
Regulation S-K.
151
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act with respect to the shares of
Class A common stock offered by this prospectus. This
prospectus, filed as part of the registration statement, does
not contain all of the information set forth in the registration
statement and its exhibits and schedules, portions of which have
been omitted as permitted by the rules and regulations of the
SEC. For further information about us and shares of our
Class A common stock, we refer you to the registration
statement and to its exhibits and schedules. Statements in this
prospectus about the contents of any contract, agreement or
other document are not necessarily complete and in each instance
we refer you to the copy of such contract, agreement or document
filed as an exhibit to the registration statement. Anyone may
inspect the registration statement and its exhibits and
schedules without charge at the public reference facilities the
SEC maintains at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain copies of all or any
part of these materials from the SEC upon the payment of certain
fees prescribed by the SEC. You may obtain further information
about the operation of the SECs Public Reference Room by
calling the SEC at
1-800-SEC-0330.
You may also inspect these reports and other information without
charge at a website maintained by the SEC. The address of this
site is
http://www.sec.gov.
Upon completion of this offering, we will become subject to the
informational requirements of the Exchange Act and will be
required to file reports and other information with the SEC. You
will be able to inspect and copy these reports and other
information at the public reference facilities maintained by the
SEC at the address noted above. You also will be able to obtain
copies of this material from the Public Reference Room of the
SEC as described above, or inspect them without charge at the
SECs website. We intend to make available to our
Class A common stockholders annual reports containing
consolidated financial statements audited by an independent
registered public accounting firm.
152
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
FXCM Inc.
|
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|
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F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-3
|
|
FXCM Holdings,
LLC
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-9
|
|
|
|
|
F-10
|
|
Unaudited Consolidated
Financial Statements June 30, 2010 and 2009
|
|
|
|
|
|
|
|
F-28
|
|
|
|
|
F-29
|
|
|
|
|
F-30
|
|
|
|
|
F-31
|
|
ODL Group
Limited
|
|
|
|
|
|
|
|
F-48
|
|
|
|
|
F-49
|
|
|
|
|
F-50
|
|
|
|
|
F-51
|
|
|
|
|
F-52
|
|
|
|
|
F-53
|
|
F-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors
FXCM Inc.
We have audited the accompanying statement of financial
condition of FXCM Inc. (the Company) as of
August 23, 2010. This statement of financial condition is
the responsibility of the Companys management. Our
responsibility is to express an opinion on this statement of
financial condition based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of financial
condition is free of material misstatement. We were not engaged
to perform an audit of the Companys internal control over
financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of
financial condition, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall statement of financial condition presentation. We
believe that our audit of the statement of financial condition
provides a reasonable basis for our opinion.
In our opinion, the statement of financial condition referred to
above presents fairly, in all material respects, the financial
position of FXCM Inc. at August 23, 2010, in conformity
with U.S. generally accepted accounting principles.
September 3, 2010
New York, NY
F-2
FXCM
Inc.
As of
August 23, 2010
|
|
|
|
|
Assets
|
|
|
|
|
Cash
|
|
$
|
1
|
|
Commitments and Contingencies
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
Class A Common Stock, par value $0.01 per share,
1,000 shares authorized, none issued and outstanding
|
|
$
|
|
|
Class B Common Stock, par value $0.01 per share,
1,000 shares authorized, 100 shares issued and
outstanding
|
|
$
|
1
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
$
|
1
|
|
|
|
|
|
|
Notes to
Statement of Financial Condition
FXCM Inc. (the Corporation) was incorporated as a
Delaware corporation on August 10, 2010. Pursuant to a
reorganization into a holding corporation structure, the
Corporation will become a holding corporation and its sole
assets are expected to be an equity interest in FXCM Holdings,
LLC. The Corporation will be the managing member of FXCM
Holdings, LLC and will operate and control all of the businesses
and affairs of FXCM Holdings, LLC and, through FXCM Holdings,
LLC and its subsidiaries, continue to conduct the business now
conducted by these subsidiaries.
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Accounting The Statement of
Financial Condition has been prepared in accordance with
accounting principles generally accepted in the United States of
America. Separate statements of income, changes in
stockholders equity and cash flows have not been presented
in the financial statements because there have been no
activities in this entity.
The Corporation is authorized to issue 1,000 shares of
Class A common stock, par value $0.01 per share
(Class A Common Stock), and 1,000 shares
of Class B common stock, par value $0.01 per share
(Class B Common Stock). Under the
Corporations certificate of incorporation in effect as of
August 23, 2010, all shares of Class A common stock
and Class B common stock are identical. The Company has
issued 100 shares of Class B common stock in exchange
for $1.00, all of which were held by FXCM Holdings, LLC at
August 23, 2010.
F-3
Report of
Independent Registered Public Accounting Firm
The Board of Directors
FXCM Holdings, LLC and Subsidiaries
We have audited the accompanying consolidated statements of
financial condition of FXCM Holdings, LLC and subsidiaries (the
Company) as of December 31, 2009, and the
related consolidated statements of operations and comprehensive
income, changes in equity, and cash flows for the year ended
December 31, 2009. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of FXCM Holdings, LLC and subsidiaries at
December 31, 2009, and the consolidated results of their
operations and their cash flows for the year ended
December 31, 2009, in conformity with U.S. generally
accepted accounting principles.
September 3, 2010
New York, NY
F-4
Report of
Independent Registered Public Accounting Firm
To the Managing Members
FXCM Holdings, LLC and Subsidiaries
We have audited the accompanying consolidated statement of
financial condition of FXCM Holdings, LLC and Subsidiaries (the
Company) as of December 31, 2008, and the
related consolidated statements of operations and comprehensive
income, changes in equity, and cash flows for the years ended
December 31, 2008 and 2007. These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of FXCM Holdings, LLC and Subsidiaries as of
December 31, 2008, and the results of their operations and
their cash flows for the years ended December 31, 2008 and
2007, in conformity with U.S. generally accepted accounting
principles.
/s/ McGladrey & Pullen, LLP
New York, New York
June 24, 2010, except for Note 14,
as to which the date is September 3, 2010
F-5
FXCM
Holdings, LLC and Subsidiaries
As of
December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Amounts in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
139,858
|
|
|
$
|
179,967
|
|
Cash and cash equivalents, held for customers
|
|
|
353,825
|
|
|
|
253,391
|
|
Due from brokers
|
|
|
1,581
|
|
|
|
2,361
|
|
Accounts receivable
|
|
|
2,892
|
|
|
|
469
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
498,156
|
|
|
|
436,188
|
|
Deferred tax asset
|
|
|
480
|
|
|
|
720
|
|
Office, communication and computer equipment, net
|
|
|
10,121
|
|
|
|
8,021
|
|
Intangible assets, net
|
|
|
1,823
|
|
|
|
1,340
|
|
Other assets
|
|
|
7,356
|
|
|
|
4,775
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
517,936
|
|
|
$
|
451,044
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Customer account liabilities
|
|
$
|
353,825
|
|
|
$
|
253,391
|
|
Accounts payable and accrued expenses
|
|
|
20,559
|
|
|
|
22,308
|
|
Note payable
|
|
|
|
|
|
|
10,730
|
|
Due to member
|
|
|
|
|
|
|
2,970
|
|
Due to brokers
|
|
|
764
|
|
|
|
3,191
|
|
Deferred revenue
|
|
|
6,000
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
381,148
|
|
|
|
298,590
|
|
Deferred revenue
|
|
|
6,000
|
|
|
|
12,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
387,148
|
|
|
|
310,590
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Members capital
|
|
|
130,335
|
|
|
|
140,453
|
|
Accumulated other comprehensive income
|
|
|
453
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
130,788
|
|
|
|
140,454
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
517,936
|
|
|
$
|
451,044
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-6
FXCM
Holdings, LLC and Subsidiaries
For the
Years Ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Amounts in thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail trading revenue
|
|
$
|
291,668
|
|
|
$
|
281,385
|
|
|
$
|
144,935
|
|
Institutional trading revenue
|
|
|
21,107
|
|
|
|
18,439
|
|
|
|
11,695
|
|
Interest income
|
|
|
1,289
|
|
|
|
9,085
|
|
|
|
16,357
|
|
Other income
|
|
|
8,666
|
|
|
|
13,731
|
|
|
|
11,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
322,730
|
|
|
|
322,640
|
|
|
|
184,522
|
|
Referring broker fees
|
|
|
76,628
|
|
|
|
64,567
|
|
|
|
33,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
|
246,102
|
|
|
|
258,073
|
|
|
|
151,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
62,588
|
|
|
|
54,578
|
|
|
|
53,575
|
|
Advertising and marketing
|
|
|
29,355
|
|
|
|
24,629
|
|
|
|
27,846
|
|
Communication and technology
|
|
|
24,026
|
|
|
|
21,311
|
|
|
|
17,836
|
|
General and administrative
|
|
|
26,453
|
|
|
|
20,247
|
|
|
|
17,037
|
|
Depreciation and amortization
|
|
|
6,542
|
|
|
|
6,095
|
|
|
|
7,364
|
|
Interest expense
|
|
|
125
|
|
|
|
2,168
|
|
|
|
1,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
149,089
|
|
|
|
129,028
|
|
|
|
125,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
97,013
|
|
|
|
129,045
|
|
|
|
26,279
|
|
Income tax provision
|
|
|
10,053
|
|
|
|
8,872
|
|
|
|
3,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
86,960
|
|
|
|
120,173
|
|
|
|
23,159
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
452
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
87,412
|
|
|
$
|
120,174
|
|
|
$
|
23,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-7
FXCM
Holdings, LLC and Subsidiaries
For the
Years Ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Total
|
|
|
Other
|
|
|
|
|
|
|
Members
|
|
|
Comprehensive
|
|
|
Total
|
|
|
|
Capital
|
|
|
Income
|
|
|
Equity
|
|
|
|
(Amounts in thousands)
|
|
|
Balance, January 1, 2007
|
|
$
|
83,121
|
|
|
$
|
|
|
|
$
|
83,121
|
|
Net income
|
|
|
23,159
|
|
|
|
|
|
|
|
23,159
|
|
Distributions
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
96,280
|
|
|
$
|
|
|
|
$
|
96,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
120,173
|
|
|
|
|
|
|
$
|
120,173
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
Distributions
|
|
|
(76,000
|
)
|
|
|
|
|
|
|
(76,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
140,453
|
|
|
$
|
1
|
|
|
$
|
140,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
86,960
|
|
|
|
|
|
|
$
|
86,960
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
|
|
|
|
452
|
|
|
|
452
|
|
Distributions
|
|
|
(97,078
|
)
|
|
|
|
|
|
|
(97,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
130,335
|
|
|
$
|
453
|
|
|
$
|
130,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-8
FXCM
Holdings, LLC and Subsidiaries
For the
Years Ended December 31, 2009, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Amounts in thousands)
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
86,960
|
|
|
$
|
120,173
|
|
|
$
|
23,159
|
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,542
|
|
|
|
6,095
|
|
|
|
7,364
|
|
Gain (Loss) on disposal of office, communication and computer
equipment
|
|
|
(20
|
)
|
|
|
88
|
|
|
|
|
|
Deferred tax expense (benefit)
|
|
|
240
|
|
|
|
(720
|
)
|
|
|
400
|
|
Deferred revenue
|
|
|
(6,000
|
)
|
|
|
(6,000
|
)
|
|
|
24,000
|
|
Loss from other investment
|
|
|
224
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, held for customers
|
|
|
(102,610
|
)
|
|
|
63,613
|
|
|
|
(64,012
|
)
|
Due from brokers
|
|
|
780
|
|
|
|
1,280
|
|
|
|
(3,220
|
)
|
Accounts receivable
|
|
|
(2,423
|
)
|
|
|
837
|
|
|
|
(1,054
|
)
|
Other assets
|
|
|
(805
|
)
|
|
|
(635
|
)
|
|
|
(1,218
|
)
|
Customer account liabilities
|
|
|
100,434
|
|
|
|
(62,049
|
)
|
|
|
62,183
|
|
Accounts payable and accrued expenses
|
|
|
(1,749
|
)
|
|
|
11,421
|
|
|
|
(2,721
|
)
|
Due to brokers
|
|
|
(2,427
|
)
|
|
|
(10,222
|
)
|
|
|
12,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
79,146
|
|
|
|
123,881
|
|
|
|
56,886
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received on sale of investments
|
|
|
|
|
|
|
|
|
|
|
12,098
|
|
Cash paid for investment
|
|
|
(2,000
|
)
|
|
|
(2,000
|
)
|
|
|
|
|
Purchases of intangible assets
|
|
|
(1,249
|
)
|
|
|
(1,190
|
)
|
|
|
(150
|
)
|
Proceeds from sale of office and computer equipment
|
|
|
154
|
|
|
|
54
|
|
|
|
|
|
Purchases of office, communication and computer equipment
|
|
|
(8,010
|
)
|
|
|
(5,968
|
)
|
|
|
(5,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(11,105
|
)
|
|
|
(9,104
|
)
|
|
|
6,612
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments under capital lease
|
|
|
|
|
|
|
(300
|
)
|
|
|
(1,189
|
)
|
Payment on advances to members
|
|
|
|
|
|
|
410
|
|
|
|
30
|
|
Payment of note payable
|
|
|
(10,730
|
)
|
|
|
|
|
|
|
|
|
Members distributions
|
|
|
(100,048
|
)
|
|
|
(65,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(110,778
|
)
|
|
|
(65,045
|
)
|
|
|
(1,159
|
)
|
Effect of foreign currency exchange rate changes on cash and
cash equivalents
|
|
|
2,628
|
|
|
|
(1,564
|
)
|
|
|
1,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(40,109
|
)
|
|
|
48,168
|
|
|
|
64,168
|
|
Cash and Cash Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of Year
|
|
|
179,967
|
|
|
|
131,799
|
|
|
|
67,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of Year
|
|
$
|
139,858
|
|
|
$
|
179,967
|
|
|
$
|
131,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
10,994
|
|
|
$
|
3,494
|
|
|
$
|
2,089
|
|
Cash paid for interest
|
|
$
|
1,926
|
|
|
$
|
|
|
|
$
|
|
|
See accompanying notes to the consolidated financial statements.
F-9
FXCM
Holdings, LLC and Subsidiaries
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies and
Estimates
|
Nature
of Business
FXCM Holdings, LLC (herein Holdings or the
(Company)), a Delaware limited liability company
formed in 2005, commenced operations in January 2007 for the
purpose of consolidating the ownership of a group of companies
which shared common ownership. During 2007, Holdings was formed
to be the parent company to Forex Capital Markets, LLC (herein
US), FXCM Canada, Ltd. (herein Canada),
and Forex Trading, LLC (herein FXT). FXTs
wholly owned subsidiaries include FXCM Asia Limited (herein
HK), Forex Capital Markets Limited (herein
UK), FXCM Australia, Ltd. (herein
Australia), and FXCM DMCC (herein
Dubai). Holdings and its consolidated subsidiaries
are referred to herein as the Company.
US and FXT are organized under the laws of the state of Delaware
as limited liability companies. US is registered as a futures
commission merchant with the Commodity Futures Trading
Commission (herein the CFTC) and the National
Futures Association (herein the NFA). UK is
organized in the United Kingdom and is regulated by the
Financial Services Authority (herein the FSA).
Canada is a Nova Scotia limited liability company and is
registered as an exchange contracts dealer with the British
Columbia Securities Commission (herein the BCSC).
Canada ceased operations in October 2009 and is in the process
of deregistering with the BCSC with the ultimate objective of
dissolution. HK is organized in Hong Kong and is regulated by
the Securities and Futures Commission (herein the
SFC). Australia is organized in New Zealand and
regulated by the Australia Securities & Investments
Commission (herein the ASIC). Dubai is organized in
Dubai and regulated by the Dubai Multi Commodities Centre and is
registered with the Dubai Gold & Commodities Exchange.
The Company is an online provider of foreign exchange
(FX) trading and related services to domestic and
international retail and institutional customers and offers
customers access to global
over-the-counter
FX markets. In a FX trade, a participant buys one currency
and simultaneously sells another, a combination known as a
currency pair. The Companys proprietary
trading platform presents its FX customers with the best price
quotations on several currency pairs from various global banks,
financial institutions and market makers, or FX market makers.
The Companys primary source of revenue is earned by adding
a markup to the price provided by FX market makers and
generates its trading revenue based on the volume of
transactions. The Company utilizes what is referred to as an
agency execution or agency model. Under the agency model, when a
customer executes a trade on the best price quotation presented
by the FX market maker, the Company acts as a credit
intermediary, or a riskless principal, simultaneously entering
into a trade with the customer and the FX market maker. This
agency model has the effect of automatically hedging the
Companys positions and eliminating market risk exposure.
The systematic hedge gains and losses are included in retail
trading revenue in the consolidated statements of operations and
comprehensive income. The Company also offers FX trading
services to banks, hedge funds and other institutional
customers, also on an agency model basis, through its FXCM Pro
division. This service allows customers to obtain optimal prices
offered by external banks. The counterparties to these trades
are external financial institutions that hold customer account
balances and settle the transactions. The Company receives
commissions for these services without incurring credit or
market risk. Additionally, the Company is engaged in various
ancillary FX related services which include use of our platform,
technical expertise, trading facilities and software.
A summary of the Companys significant accounting policies
and estimates is as follows:
Basis
of Presentation
The accompanying consolidated financial statements are presented
in accordance with accounting principles generally accepted in
the United States of America (U.S. GAAP) and
are presented in U.S. dollars. The consolidated financial
statements include the accounts of Holdings, US, Canada, and FXT
and its wholly owned subsidiaries. The Company consolidates
those entities in which it is the primary beneficiary of a
F-10
FXCM
Holdings, LLC and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies and
Estimates (Continued)
|
variable-interest entity, or VIE and entities where it has a
controlling financial interest. The Company was not the primary
beneficiary of any VIE for any of the three years in the period
ended December 31, 2009. When the Company is not the
primary beneficiary of a VIE or does not have a controlling
interest in an entity but exercises significant influence over
the entitys operating and financial policies, such
investment is accounted for under the equity method of
accounting. The Company recognizes its share of earnings or
losses of an equity method investee based on its ownership
percentage. All material intercompany accounts and transactions
are eliminated in consolidation.
Use of
Estimates
The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements as well as
the reported amount of revenue and expenses during the year.
Actual results could differ from those estimates.
Cash
and Cash Equivalents
Cash and cash equivalents include cash at banks and highly
liquid instruments with original maturities of less than
90 days at the time of purchase. At times, these balances
may exceed federally insured limits. This potentially subjects
the Company to concentration risk. The Company has not
experienced losses in such accounts.
Cash
and Cash Equivalents, held for customers
Cash and cash equivalents, held for customers represents cash
held to fund customer liabilities in connection with foreign
currency transactions. The balance arises primarily from cash
deposited by customers, customer margin balances, and cash held
by FX market makers related to hedging activities. The Company
records a corresponding liability in connection with this amount
that is included in customer account liabilities in the
consolidated statements of financial condition (see
Note 2). A portion of the balance is not available for
general use due to legal restrictions in accordance with the
FSA, the SFC and the ASIC regulations. These legally restricted
balances were $255.0 million and $64.5 million as of
December 31, 2009 and 2008, respectively.
Fair
Value Measurements
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Fair value measurement establishes a fair value hierarchy that
prioritizes the inputs of valuation techniques used to measure
fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets
or liabilities and the lowest priority to unobservable inputs.
These two inputs create the following fair value hierarchy:
Level I: Quoted prices in active
markets for identical assets or liabilities, accessible by the
Company at the measurement date.
Level II: Quoted prices for
similar assets or liabilities in active markets, or quoted
prices for identical or similar assets or liabilities in markets
that are not active, or other observable inputs other than
quoted prices.
Level III: Unobservable inputs for
assets or liabilities.
F-11
FXCM
Holdings, LLC and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies and
Estimates (Continued)
|
As of December 31, 2009 and 2008, substantially all of the
Companys financial instruments were carried at fair value
based on spot exchange rates broadly distributed in active
markets, or amounts approximating fair value. Assets, including,
due from brokers and others, are carried at cost or contracted
amounts, which approximates fair value. Similarly, liabilities,
including customer account liabilities, due to brokers and
payables to others are carried at fair value or contracted
amounts, which approximates fair value.
The Company did not have any Level II and III
financial assets or liabilities as of December 31, 2009 and
2008. Cash and cash equivalents and cash and cash equivalents,
held for customers are deemed to be Level I financial
assets.
Due
from/to Brokers
Due from/to Brokers represents the amount of the unsettled spot
currency trades that the Company has open with its financial
institutions. The Company has master netting agreements with its
respective counterparties under which its due to/from brokers
are presented on a
net-by-counterparty
basis in accordance with U.S. GAAP.
Office,
Communication and Computer Equipment
Office, communication and computer equipment consist of
purchased technology hardware and software, internally developed
software, leasehold improvements, furniture and fixtures,
computer equipment and communication equipment. Office,
communication and computer equipment are recorded at historical
cost, net of accumulated depreciation. Additions and
improvements that extend the lives of assets are capitalized,
while expenditures for repairs and maintenance are expensed as
incurred. Certain costs of software developed or obtained for
internal use are capitalized. Depreciation is computed using the
straight-line method. The Company depreciates these assets using
the following useful lives:
|
|
|
Computer equipment
|
|
3 to 5 years
|
Software
|
|
2 to 5 years
|
Leasehold improvements
|
|
Lesser of the estimated economic useful life or the term of the
lease
|
Furniture and fixtures
|
|
3 to 5 years
|
Communication equipment
|
|
3 to 5 years
|
Valuation
of Other Long-Lived Assets
The Company also assesses potential impairments of its other
long-lived assets, including office, communication and computer
equipment, when there is evidence that events or changes in
circumstances indicate that the carrying amount of an asset may
not be recovered. An impairment loss is recognized when the
carrying amount of the long-lived asset exceeds its fair value
and is not recoverable. The carrying amount of a long-lived
asset is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and
eventual disposition of the asset. Any required impairment loss
is measured as the amount by which the carrying amount of a
long-lived asset exceeds its fair value and is recorded as a
reduction in the carrying value of the related asset and a
charge to operating results. There was no impairment of other
long-lived assets in the years ended December 31, 2009,
2008 and 2007.
F-12
FXCM
Holdings, LLC and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies and
Estimates (Continued)
|
Intangible
Assets
Intangible assets, net, primarily include customer relationships
that the Company purchased from competitor companies and a
license to operate as a provider of FX trading in Australia. The
license was obtained through the acquisition in 2008 of
Australia, a registered exchange contract dealer.
The customer relationships are finite-lived intangibles and are
amortized on a straight-line basis over their estimated average
useful life of 2 years. The useful life is based on the
period the customer relationships are expected to contribute to
future cash flows as determined by the Companys historical
experience. For these finite-lived intangible assets subject to
amortization, impairment is considered upon certain
triggering events and is recognized if the carrying
amount is not recoverable and the carrying amount exceeds the
fair value of the intangible asset. There was no impairment of
finite-lived intangible assets in the years ended
December 31, 2009, 2008 and 2007.
The FX trading license is an indefinite-lived asset that is not
amortized but tested for impairment. The Companys policy
is to test for impairment at least annually, or in interim
periods if certain events occur indicating that the fair value
of the asset may be less than its carrying amount. An impairment
test on this indefinite-lived asset is performed during the
fourth quarter of the Companys fiscal year using the
October 1st carrying value. Impairment exists if the
carrying value of the indefinite-lived intangible asset exceeds
its fair value. There was no impairment of indefinite-lived
intangible assets in the years ended December 31, 2009 and
2008.
Equity
Method Investment
Investments where the Company is deemed to exercise significant
influence (generally defined as owning a voting interest of 20%
to 50%), but no control, are accounted for using the equity
method of accounting. The Company records its pro-rata share of
earnings or losses each period and record any dividends as a
reduction in the investment balance. These earnings or losses
are included in other income in the consolidated statements of
operations and comprehensive income. The carrying amount of
equity method investments was $3.8 million and
$2.0 million as of December 31, 2009 and 2008,
respectively and is reflected in other assets in the
consolidated statements of financial condition.
Accounts
Receivable
As of December 31 2009 and 2008, accounts receivable consisted
primarily of taxes receivable, fees receivable from the
Companys white label service to third parties, described
in Retail Trading Revenue below, and other
receivables.
Other
Assets
Other assets include equity method investments (see
Note 3), prepaid expenses, deposits for rent security and
employee advances.
Accounts
Payable and Other Accrued Expenses
Accounts payable and other accrued expenses include operating
expenses payable, interest on note payable, taxes payable and
commissions payable (see Note 7). Commissions payable
represents balances owed to referring brokers for trades
transacted by customers that were introduced to the Company by
such brokers.
F-13
FXCM
Holdings, LLC and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies and
Estimates (Continued)
|
Foreign
Currency
Foreign denominated assets and liabilities are remeasured into
the functional currency at exchange rates in effect at the
statement of financial condition date through the statement of
operations and comprehensive income. Gains or losses resulting
from foreign currency transactions are remeasured using the
rates on the dates on which those elements are recognized during
the period, and are included in retail trading revenue in the
consolidated statements of operations and comprehensive income.
The Company recorded a gain of $5.8 million, a loss of
$4.8 million, and a gain of $2.6 million for the years
ended December 31, 2009, 2008 and 2007, respectively.
Translation gains or losses resulting from translating the
Companys subsidiaries financial statements from the
local functional currency to the reporting currency, net of tax,
are included in other comprehensive income. Assets and
liabilities are generally translated at the balance sheet date
while revenues and expenses are generally translated at an
applicable average rate.
Revenue
Recognition
The Company makes foreign currency markets for customers trading
in foreign exchange spot markets. Transactions are recorded on
the trade date and positions are marked to market daily with
related gains and losses, including gains and losses on open
spot transactions, recognized currently in income.
Retail
Trading Revenue
Retail trading revenue is earned by adding a markup to the price
provided by FX market makers generating trading revenue based on
the volume of transactions and is recorded on trade date. The
retail trading revenue is earned utilizing an agency model.
Under the agency model, when a customer executes a trade on the
best price quotation presented by the FX market maker, the
Company acts as a credit intermediary, or a riskless principal,
simultaneously entering into a trade with the customer and the
FX market maker. This agency model has the effect of
automatically hedging the Companys positions and
eliminating market risk exposure. Retail trading revenues
principally represent the difference of the Companys
realized and unrealized foreign currency trading gains or losses
on its positions with customers and the systematic hedge gains
and losses from the trades entered into with the FX market
makers. Retail trading revenue also includes fees earned from
arrangements with other financial institutions to provide
platform, back office and other trade execution services. This
service is generally referred to as a white label arrangement.
The Company earns a percentage of the markup charged by the
financial institutions to their customers. Fees from this
service are recorded when earned on a trade date basis.
Additionally, the Company earns income from trading in contracts
for difference (CFDs), payments for order flow and
rollovers. The Companys policy is to hedge its CFD
positions with other financial institutions based on internal
guidelines. Income or loss on CFDs represents the difference
between the Companys realized and unrealized trading gains
or losses on its positions and the hedge gains or losses with
the other financial institutions. Income or loss on CFDs is
recorded on a trade date basis. Income or loss on rollovers is
the interest differential customers earn or pay on overnight
currency pair positions held and the markup that the Company
receives on interest paid or received on currency pair positions
held overnight. Income or loss on rollovers is recorded on a
trade date basis. The Company recognizes payments for order flow
as earned.
Institutional
Trading Revenue
Institutional trading revenue relates to commission income
generated by facilitating spot foreign currency trades on behalf
of institutional customers through the services provided by the
FXCM Pro division. FXCM Pro
F-14
FXCM
Holdings, LLC and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies and
Estimates (Continued)
|
allows these customers to obtain the best execution price from
external banks and routes the trades to outside financial
institutions for settlement. The counterparties to these trades
are external financial institutions that also hold customer
account balances. The Company receives commission income for
customers use of FXCM Pro without taking any market or
credit risk. Institutional trading revenue is recorded on a
trade date basis.
Other
Income
In January 2007, the Company entered into an agreement to
provide trade execution services to a related party, GCI Capital
Co. Ltd. As consideration for the services, the Company received
an upfront non refundable payment of $30.0 million in
addition to ongoing monthly fees that amounted to
$1.0 million, $3.0 million and $3.0 million for
the years ended December 31, 2009, 2008 and 2007,
respectively. Ongoing monthly fees are recognized as services
are rendered. The upfront fee is being recognized on a straight
line basis over the estimated period of performance of
5 years.
Additionally, in January 2008, the Company received
$2.0 million in proceeds from the sale to a third party of
certain Refco receivables as approved by the
U.S. Bankruptcy Court that were previously written off as a
bad debt (see Note 8).
Referring
Broker Fees
Referring broker fees represent commissions paid to brokers for
introducing trading customers to the Company. Commissions are
determined based on the number and size of transactions executed
by the customers and are recorded on a trade date basis.
Compensation
and Benefits
Compensation and benefits expense represents employee and member
salaries and benefit expense. Such amounts have been included in
employee compensation and benefits in the consolidated
statements of operations and comprehensive income.
Advertising
and Marketing
Advertising and marketing costs are charged to operations when
incurred. The Company continues to expend significant
advertising and promotion costs related to various initiatives
in media advertising on a domestic and international basis.
General
and Administrative Expenses
General and administrative expenses include bank processing and
regulatory fees, professional and consulting fees, occupancy and
equipment expense and other administrative costs. Bank
processing fees are costs associated with the processing of
credit card transactions and prime brokerage fees charged by
clearing banks. Regulatory fees are volume-based costs charged
by certain regulatory authorities.
Income
Taxes
Holdings, US and FXT are limited liability companies and, as
such, are not subject to federal or state tax. The Company is
subject to New York City unincorporated business tax, which has
been included in the determination of net income. The Company
files federal and state income tax returns on a consolidated
basis.
F-15
FXCM
Holdings, LLC and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies and
Estimates (Continued)
|
UK, HK, Canada and Australia are subject to tax provisions
according to the respective local laws and regulations of the
countries in which they operate.
In accordance with the Financial Accounting Standards Board (the
FASB) Accounting Standards Codification
(ASC) Topic 740, management is required to determine
whether a tax position of the Company is more likely than not to
be sustained upon examination by the applicable taxing
authority, including resolution of any related appeals or
litigation processes, based on the technical merits of the
position. The tax benefit to be recognized is measured as the
largest amount of benefit that is greater than 50% likely of
being realized upon ultimate settlement. Derecognition of a tax
benefit previously recognized could result in the Company
recording a tax liability that would reduce net assets. ASC
Topic 740 also provides guidance on thresholds, measurement,
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure, and transition that
is intended to provide better financial statement comparability
among different entities.
The Company does not have any uncertain tax positions at the end
of the year for which it is reasonably possible that the total
amounts of unrecognized tax benefits will significantly increase
or decrease within 12 months of the reporting date. For the
year ended December 31, 2009, management has determined
that there were no material uncertain income tax positions.
The Company is no longer subject to tax examinations by taxing
authorities for tax years before 2006 and presently has no open
examinations for tax years before 2009.
The Company recognizes the accrual of any interest and penalties
related to unrecognized tax benefits in income tax expense. No
interest or penalties were recognized in 2009.
Allocation
and Distribution of Earnings
The allocation of earnings to the members is determined in
accordance with the sharing ratios as defined in the Limited
Liability Company Agreement of Holdings (the LLC
Agreement). Distributions to members are made according to
the LLC Agreement.
Recently
Adopted Accounting Pronouncements
Accounting Standards Codification (ASC or
the Codification) In June 2009, the Financial
Accounting Standards Board (FASB) issued new
guidance establishing the ASC and revising the hierarchy of
generally accepted accounting principles. The ASC is the single
source of authoritative nongovernmental U.S. GAAP. The
provisions in this guidance do not change current
U.S. GAAP, but are intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. All
existing accounting standard documents were superseded and all
other accounting literature that is not included in the FASB
Codification is considered non-authoritative. This guidance is
effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The Company
adopted the guidance effective with the issuance of its
December 31, 2009 consolidated financial statements. As the
guidance is limited to disclosure in the financial statements
and the manner in which the Company refers to U.S. GAAP
authoritative literature, there was no material impact on the
Companys consolidated financial statements.
Uncertainty in Income Taxes In July 2006, the FASB issued
guidance clarifying the accounting for uncertainty in income
taxes recognized in an enterprises financial statements.
The guidance prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken on a
tax return. The guidance also provides guidance on
F-16
FXCM
Holdings, LLC and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies and
Estimates (Continued)
|
derecognition of tax benefits, classification on the balance
sheet, interest and penalties, accounting in interim periods,
disclosure and transition. In December 2008, the FASB provided
for a deferral of the effective date of the interpretation for
certain nonpublic enterprises to annual financial statements for
fiscal years beginning after December 15, 2008. The Company
adopted the guidance on January 1, 2009. The adoption of
the interpretation did not have a material impact on the
consolidated financial statements.
In September 2009, the FASB updated its uncertainty in income
taxes guidance. The updated guidance considers an entitys
assertion that it is a tax-exempt not-for-profit or a
pass-through-entity as a tax position that requires evaluation.
The revised guidance is effective for periods ending after
September 15, 2009. The adoption of the revised guidance
did not have a material impact on the Companys
consolidated financial statements.
Fair Value Measurements In April 2009, the FASB issued
guidance for determining fair value for an asset or liability if
there has been a significant decrease in the volume and level of
activity in relation to normal market activity. In that
circumstance, transactions or quoted prices may not be
determinative of fair value. Significant adjustments may be
necessary to quoted prices or alternative valuation techniques
may be required in order to determine the fair value of the
asset or liability under current market conditions. The guidance
is effective for financial statements issued for interim or
annual periods ending after June 15, 2009. The Company
adopted the guidance upon its issuance in April 2009 and it did
not have a material impact on the Companys consolidated
financial statements.
Subsequent Events In May 2009 and February 2010, the FASB
issued guidance on subsequent events. The guidance is intended
to establish general standards of accounting for and disclosures
of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
SEC filers must continue to evaluate subsequent events through
the date the financial statements are issued but are not
required to disclose the date through which an entity has
evaluated subsequent events. The guidance is effective for
interim or annual financial periods ending after June 15,
2009. The Company adopted the guidance upon its issuance in June
2009. See Note 15, Subsequent Events, for
further discussion of the subsequent events that occurred after
December 31, 2009.
Business Combinations Effective January 1, 2009, the
Company adopted accounting guidance issued by the FASB which
established principles and requirements for the acquirer in a
business combination, including the recognition and measurement
of the identifiable assets acquired, the liabilities assumed and
any noncontrolling interest in the acquired entity as of the
acquisition date; the recognition and measurement of the
goodwill acquired in the business combination or gain from a
bargain purchase as of the acquisition date; and additional
disclosures related to the nature and financial effects of the
business combination. Under this guidance, nearly all acquired
assets and liabilities assumed are recorded at fair value at the
acquisition date. Other significant changes include recognizing
transaction costs and most restructuring costs as expenses when
incurred. These accounting requirements are applied on a
prospective basis for all transactions completed after the
effective date. As disclosed in Note 15, Subsequent
events, in May 2010 the Company signed a purchase
agreement to acquire ODL Group Limited (ODL), a
broker of retail FX, CFDs, spread betting and retail equity
options headquartered in the United Kingdom. The closing of the
acquisition is expected to occur in September 2010. The Company
will apply the new business combination guidance upon the
closing of the acquisition.
Recently
Issued Accounting Pronouncements
Variable Interest Entities In June 2009, the FASB issued
accounting guidance, effective for the Company on
January 1, 2010, related to variable interest entities.
This guidance replaces a quantitative-based risks and
F-17
FXCM
Holdings, LLC and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies and
Estimates (Continued)
|
rewards calculation for determining which entity, if any, has
both (a) a controlling financial interest in a variable
interest entity with an approach focused on identifying which
entity has the power to direct the activities of a variable
interest entity that most significantly impact the entitys
economic performance and (b) the obligation to absorb
losses of the entity or the right to receive benefits from the
entity that could potentially be significant to the variable
interest entity. This guidance requires reconsideration of
whether an entity is a variable interest entity when any changes
in facts or circumstances occur such that the holders of the
equity investment at risk, as a group, lose the power to direct
the activities of the entity that most significantly impact the
entitys economic performance. It also requires ongoing
assessments of whether a variable interest holder is the primary
beneficiary of a variable interest entity. The Company does not
expect the adoption of this guidance to have a material impact
on the consolidated financial statements.
Fair Value Measurements Disclosures In January 2010, the
FASB issued amended disclosure guidance relating fair value
measurements. The amended guidance requires new disclosures as
follows:
|
|
|
|
|
Amounts related to transfers in and out of Levels I
and II shall be disclosed separately and the reasons for
the transfers shall be described.
|
|
|
|
In the reconciliation for fair value measurements using
significant unobservable inputs (Level III), a reporting
entity should present separately information about purchases,
sales, issuances, and settlements on a gross basis.
|
The guidance also provides amendments that clarify existing
disclosures related to the following:
|
|
|
|
|
Reporting fair value measurement disclosures for each class of
assets and liabilities.
|
|
|
|
Providing disclosure surrounding the valuation techniques and
inputs used to measure fair value for both Level II and
Level III fair value measurements.
|
This disclosure guidance was effective for the Company beginning
on January 1, 2010, except for the disclosure requirements
surrounding the reconciliation of Level III fair value
measurements, which will be effective for the Company on
January 1, 2011. The Company does not expect the adoption
of this guidance to have a material impact on its fair value
measurements disclosures.
|
|
Note 2.
|
Customer
Account Liabilities
|
Customer account liabilities represent balances held by the
Company and margin balances arising in connection with foreign
currency transactions, including unrealized gains and losses on
open foreign exchange commitments. Customer account liabilities
were $353.8 million and $253.4 million as of
December 31, 2009 and 2008, respectively.
|
|
Note 3.
|
Equity
Method Investment
|
As of December 31, 2009, the Company had $3.8 million
of equity interest in equity method investments, which consisted
primarily of a 26% equity interest in a developer of FX trading
software. Equity method investments are included in other assets
in the consolidated statement of financial condition as of
December 31, 2009 and 2008. Equity method investments are
included in corporate for purposes of segment reporting (see
Note 14). The Company owned a 15% interest in the FX
trading software developer in 2008 which was accounted for under
the cost method of accounting and increased its ownership
interest in 2009 by investing an additional $2 million.
F-18
FXCM
Holdings, LLC and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 3.
|
Equity
Method Investment (Continued)
|
Income recognized from equity method investments was not
material for the years ended December 31, 2009 and 2008 and
is included in other income, in the consolidated statements of
operations and comprehensive income.
There were no dividend distributions received from the FX
trading software developer during 2009 and 2008.
|
|
Note 4.
|
Office,
Communication and Computer Equipment
|
Office, communication and computer equipment, including
leasehold improvements, licensing and capitalized software
development costs, consisted of the following as of
December 31, 2009 and 2008, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Computer equipment
|
|
$
|
25,096
|
|
|
$
|
25,985
|
|
Software
|
|
|
4,057
|
|
|
|
715
|
|
Leasehold improvements
|
|
|
1,684
|
|
|
|
1,661
|
|
Furniture and fixtures
|
|
|
1,491
|
|
|
|
1,323
|
|
Communication equipment
|
|
|
785
|
|
|
|
688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,113
|
|
|
|
30,372
|
|
Less: Accumulated depreciation
|
|
|
(22,992
|
)
|
|
|
(22,351
|
)
|
|
|
|
|
|
|
|
|
|
Office, communication and computer equipment, net
|
|
$
|
10,121
|
|
|
$
|
8,021
|
|
|
|
|
|
|
|
|
|
|
Depreciation is computed on a straight-line basis (see
Note 1). Depreciation expense was $5.7 million,
$6.1 million, and $7.4 million for the years ended
December 31, 2009, 2008 and 2007, respectively. The Company
disposed of $5.3 million of fully depreciated assets as of
December 31, 2009.
|
|
Note 5.
|
Intangible
Assets
|
The Companys acquired intangible assets consisted of the
following as of December 31, 2009 and 2008, with amounts in
thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Finite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
1,839
|
|
|
$
|
(766
|
)
|
|
$
|
1,073
|
|
|
$
|
590
|
|
|
$
|
|
|
|
$
|
590
|
|
Indefinite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
|
|
600
|
|
|
|
|
|
|
|
600
|
|
|
|
600
|
|
|
|
|
|
|
|
600
|
|
Exchange membership seat
|
|
|
150
|
|
|
|
|
|
|
|
150
|
|
|
|
150
|
|
|
|
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,589
|
|
|
$
|
(766
|
)
|
|
$
|
1,823
|
|
|
$
|
1,340
|
|
|
$
|
|
|
|
$
|
1,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite-lived assets are amortized on a straight-line basis over
two years. Indefinite-lived assets are not amortized (see
Note 1). Amortization expense was $0.8 million for the
year ended December 31, 2009. There was no amortization
expense for the year ended December 31, 2008 as the
customer relationships were
F-19
FXCM
Holdings, LLC and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 5.
|
Intangible
Assets (Continued)
|
purchased in December of that year. Estimated future
amortization expense for acquired intangible assets outstanding
as of December 31, 2009 is as follows, with amounts in
thousands:
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortization
|
|
Year Ending December 31,
|
|
Expense
|
|
|
2010
|
|
$
|
920
|
|
2011
|
|
|
153
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,073
|
|
|
|
|
|
|
Other assets were comprised of the following as of
December 31, 2009 and 2008, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Equity method investments
|
|
$
|
3,777
|
|
|
$
|
2,000
|
|
Prepaid expenses
|
|
|
2,098
|
|
|
|
1,404
|
|
Deposits
|
|
|
731
|
|
|
|
515
|
|
Employee advances
|
|
|
440
|
|
|
|
377
|
|
Other
|
|
|
310
|
|
|
|
479
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,356
|
|
|
$
|
4,775
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Company had loan advances in
connection with an investment in a third party in the amount of
$2.0 million. This amount was fully provided for and the loss is
included in general and administrative in the consolidated
statements of operations and comprehensive income.
|
|
Note 7.
|
Accounts
Payable and Other Accrued Expenses
|
Accounts payable and other accrued expenses were comprised of
the following as of December 31, 2009 and 2008, with
amounts in thousands:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Operating expenses payable
|
|
$
|
7,261
|
|
|
$
|
7,873
|
|
Commissions payable
|
|
|
6,247
|
|
|
|
5,555
|
|
Income taxes payable
|
|
|
7,051
|
|
|
|
6,956
|
|
Interest payable
|
|
|
|
|
|
|
1,924
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,559
|
|
|
$
|
22,308
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8.
|
Related
Party Transactions
|
In October 2005, Refco, Inc. and certain of its subsidiaries,
including Refco Group (collectively, Refco), an
equity owner of 35% of the Company at that time, commenced
voluntary bankruptcy proceedings. The
F-20
FXCM
Holdings, LLC and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 8.
|
Related
Party Transactions (Continued)
|
Chapter 11 plan was confirmed by the U.S. Bankruptcy
Court in New York on December 15, 2006. As part of the
liquidation, Refcos management contracted to sell its 35%
equity interest in the Company to a group of investors in
October 2007. The transaction closed on January 17, 2008.
In March 2007, the Company entered into a promissory note with
one of its members in consideration of $10.7 million. The
note originally matured on March 5, 2012, with an interest
rate of 10% compounded annually. During 2008, the note was
amended with a new maturity date of December 31, 2008, with
an interest rate of 15.5% compounded monthly. The note was
satisfied in January 2009. During 2008 and 2007, the interest
expense on the promissory note was $1.9 million, and
$1.1 million, respectively, and is reflected as interest
expense in the consolidated statement of operations and
comprehensive income. The interest payable at December 31,
2008 was $1.9 million and is included in accounts payable
and accrued expenses in the consolidated statement of financial
condition.
The Company has advanced funds to several employees. As of
December 31, 2009 and 2008, the outstanding balance was
$0.4 million and $0.4 million, respectively, and is
included in other assets in the consolidated statements of
financial condition.
Customer account liabilities include balances for both employees
and managing members. As of December 31, 2009, and 2008,
members account liabilities totaled $2.7 million and
$2.2 million, respectively, and are included in the
consolidated statements of financial condition as customer
account liabilities.
Pursuant to an agreement dated August 26, 2010, a former
employee of the Company is, upon a change of control
(CIC) of the Company, entitled to a payment of
(i) 1.00% of the implied value placed upon 100% of the
Company in the event of the CIC, excluding any amount of capital
invested as part of the CIC, any expenses related to the
execution of the CIC and any undistributed capital invested in
the Company prior to the CIC or (ii) if an initial public
offering (IPO) of the Company has occurred prior to
the CIC, 0.75% of the implied value placed upon 100% of the
Company in the event of such IPO, excluding the amount of
capital raised in the IPO, any expenses related to the execution
of the IPO and any undistributed capital invested in the Company
prior to the IPO. Pursuant to ASC 718 Compensation
Arrangements, any expense relating to this arrangement should be
accrued when probable and the Company has not accrued any
expense relating to this arrangement to date.
UK is party to an arrangement with Global Finance Company
(Cayman) Limited, (Global Finance), and Master
Capital Group, S.A.L. (Master Capital). A director
of the Company beneficially owns more than 90% of the equity, of
Global Finance and Master Capital. Pursuant to such arrangement,
Global Finance and Master Capital are permitted to use the brand
name FXCM and our technology platform to act as our
local presence in certain countries in the Middle East and North
Africa (MENA). UK collects and remits to Global
Finance and Master Capital fees and commissions charged by
Global Finance and Master Capital to customers in MENA
countries. For the years ended December 31, 2009 and 2008,
these fees and commissions were approximately $0.3 million
and nil, respectively. The Company expects to enter into a
definitive agreement in the near future.
|
|
Note 9.
|
Employee
Benefit Plan
|
The Company maintains a defined contribution employee
profit-sharing and savings 401(k) plan for all eligible full
time employees. The Company was not required to and made no
contributions to the plan for the years ended December 31,
2009, 2008 and 2007.
F-21
FXCM
Holdings, LLC and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 10.
|
Net
Capital Requirements
|
US is subject to the National Futures Associations net
capital requirements for forex dealing members. Since the agency
model (see Note 1) is not used for all customer
transactions, US is required to maintain adjusted net
capital equal to or in excess of $20 million plus 5%
of all liabilities owed to customers exceeding $10 million.
Adjusted net capital and the level of notional values under
these transactions change from day to day.
HK is a licensed leveraged foreign exchange trading company with
the SFC. HK is subject to required minimum liquid capital
financial requirements.
UK is a registered securities and futures firm with the FSA. UK
is subject to minimum capital requirements.
Canada is a registered exchange contract dealer with the BCSC.
Canada is subject to BCSC minimum financial requirements or
risk adjusted capital.
Australia is a registered exchange contract dealer with the
ASIC. Australia is subject to ASIC minimum financial
requirements or adjusted surplus liquid funds.
The minimum capital requirements of the above entities may
effectively restrict the payment of cash distributions to
members.
The tables below present the capital, as defined by the
respective regulatory authority, the minimum capital requirement
and the excess capital for US, HK, UK, Canada and Australia as
of December 31, 2009 and 2008, with amounts in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
US
|
|
|
HK
|
|
|
UK
|
|
|
Canada
|
|
|
Australia
|
|
|
Capital
|
|
$
|
64.4
|
|
|
$
|
16.9
|
|
|
$
|
29.5
|
|
|
$
|
2.4
|
|
|
$
|
1.2
|
|
Minimum capital requirement
|
|
|
25.0
|
|
|
|
3.3
|
|
|
|
4.9
|
|
|
|
0.6
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess capital
|
|
$
|
39.4
|
|
|
$
|
13.6
|
|
|
$
|
24.6
|
|
|
$
|
1.8
|
|
|
$
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
US
|
|
|
HK
|
|
|
UK
|
|
|
Canada
|
|
|
Australia
|
|
|
Capital
|
|
$
|
113.6
|
|
|
$
|
25.9
|
|
|
$
|
10.6
|
|
|
$
|
2.0
|
|
|
$
|
|
|
Minimum capital requirement
|
|
|
10.0
|
|
|
|
2.0
|
|
|
|
1.0
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess capital
|
|
$
|
103.6
|
|
|
$
|
23.9
|
|
|
$
|
9.6
|
|
|
$
|
1.5
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11.
|
Commitments
and Contingencies
|
Operating
Lease Commitments
The Company leases office space and equipment under operating
leases. Some of the lease agreements contain renewal options
with varying terms and conditions. The lease for the office
facilities is subject to escalation factors primarily related to
property taxes and building operating expenses. Future minimum
lease
F-22
FXCM
Holdings, LLC and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 11.
|
Commitments
and Contingencies (Continued)
|
payments under noncancelable operating leases with terms in
excess of one year are as follows as of December 31, 2009,
with amounts in thousands:
|
|
|
|
|
|
|
As of
|
|
Year Ending December 31,
|
|
December 31, 2009
|
|
|
2010
|
|
$
|
2,428
|
|
2011
|
|
|
1,392
|
|
2012
|
|
|
683
|
|
2013
|
|
|
452
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,955
|
|
|
|
|
|
|
The aggregate rental expense for operating leases charged to
operations, included in general and administrative expense in
the consolidated statements of operations and comprehensive
income, for the years ended December 31, 2009, 2008 and
2007, was $2.9 million, $2.4 million and
$2.5 million, respectively. These amounts are net of
sublease income of $0.6 million, $0.4 million and nil
for the years ended December 31, 2009, 2008 and 2007,
respectively. The future minimum lease payments for the year
ended December 31, 2010 of $2.4 million is net of
sublease income of $0.4 million.
Litigation
In February 2004, the CFTC filed a claim against the Company
alleging that it violated certain provisions of the Commodity
Exchange Act (the CEA) in the case of Gibraltar
Monetary Corporation, Inc. (Gibraltar) and its
employee. The trial in this matter ended in September 2005. On
May 30, 2006, the court found the Company not liable as a
principal for Gibraltars misrepresentations, misleading
statements or deceptive omissions, and dismissed the case. The
matter was appealed by the CFTC to the U.S. Circuit Court
of Appeals for the Eleventh Circuit. On July 21, 2009, the
Eleventh Circuit affirmed the District Courts decision
that Gibraltar was not acting as the Companys agent when
it committed violations of the CEA. The order became final on
September 15, 2009.
The Company has been named in various arbitration cases brought
by customers seeking damages for trading losses. Management has
investigated these matters and feels that such cases are without
merit and is defending them vigorously. However, the
arbitrations are presently in the discovery stage and no
judgment can be made regarding the ultimate outcome of the
arbitrators decisions.
In September 2008, Lehman Brothers Holdings Inc.
(Lehman), an equity owner of 9.9% of the Company,
commenced voluntary bankruptcy proceedings (Case
No. 08-13555).
The ultimate disposition of Lehmans equity interest in the
Company is under review by the U.S. Bankruptcy Court.
It is the opinion of management of the Company that the ultimate
outcomes of the matters referenced above are unlikely to have a
material adverse effect on the business, financial condition or
operating results of the Company. The Companys
consolidated financial statements do not include any accrual for
litigation contingency, as such amounts cannot be reasonably
estimated or expected to have a material impact.
Guarantees
At the inception of guarantees, if any, the Company will record
the fair value of the guarantee as a liability, with the
offsetting entry being recorded based on the circumstances in
which the guarantee was issued. The Company did not have any
such guarantees in place as of December 31, 2009 and 2008.
F-23
FXCM
Holdings, LLC and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
Holdings is treated as a partnership for U.S. federal and
certain state income tax purposes. Therefore, under
U.S. tax regulations, the partnership itself is generally
not subject to federal, state or local income taxes with the
exception of certain unincorporated business taxes. Accordingly,
federal, state or local income taxes have not been provided for
in the accompanying financial statements with the exception of
New York City unincorporated business taxes (UBT)
and foreign corporation taxes. Holdings is subject to New York
City UBT tax at a rate of 4%, HK is subject to Hong Kong profits
tax at a rate of 16.5%, UK income is subject to UK corporate tax
at a statutory rate of 28%, Australia is subject to Australia
tax at 30% and Canada is subject to Canadian corporation tax at
a rate of 31%. Each partner in the partnership is responsible
for reporting its allocable share of the partnerships
income, gain, losses, deductions and credits on its tax return.
Holdings, US and FXT operate as limited liability companies in
the United States and, as such, are not subject
U.S. federal or state income tax and are not required to
file separate returns as their results are filed with Holdings.
The components of the provision for income taxes consisted of
the following amounts for the years ended December 31,
2009, 2008 and 2007, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
New York City unincorporated business tax
|
|
$
|
1,080
|
|
|
$
|
5,105
|
|
|
$
|
532
|
|
UK corporation tax
|
|
|
7,159
|
|
|
|
2,026
|
|
|
|
1,682
|
|
Hong Kong profits tax
|
|
|
1,074
|
|
|
|
1,465
|
|
|
|
833
|
|
Australian profits tax
|
|
|
695
|
|
|
|
|
|
|
|
|
|
Canadian corporation tax
|
|
|
45
|
|
|
|
276
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,053
|
|
|
$
|
8,872
|
|
|
$
|
3,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The deferred tax asset is comprised of the cumulative effects of
temporary differences arising from the book and tax treatment of
income related to the agreement to provide trade execution
services. For book purposes, the $30 million upfront
payment (Note 1) is being amortized over five years
with $6 million in income recognized in 2009, 2008 and
2007. However, for tax purposes, the entire balance has been
recognized, resulting in a temporary difference of
$12 million, $18 million and $24 million in 2009,
2008 and 2007, respectively. Deferred tax asset was
$0.5 million and $0.7 million as of December 31,
2009 and 2008, respectively. The Company did not record a
valuation allowance as of December 31, 2009 and 2008.
The following table reconciles the provision for taxes to the
U.S. federal statutory tax rate:
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Statutory U.S. federal income tax rate
|
|
35.0%
|
|
35.0%
|
|
35.0%
|
Income passed through to individual members
|
|
(35.0)
|
|
(35.0)
|
|
(35.0)
|
State and local income tax
|
|
1.1
|
|
4.0
|
|
2.0
|
Foreign income tax
|
|
9.3
|
|
2.9
|
|
9.9
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
10.4%
|
|
6.9%
|
|
11.9%
|
|
|
|
|
|
|
|
|
|
Note 13.
|
Foreign
Currencies and Concentrations of Credit Risk
|
As a riskless principal under the agency model, the Company
accepts and clears foreign exchange spot contracts for the
accounts of its customers (see Note 1). These activities
may expose the Company to off-
F-24
FXCM
Holdings, LLC and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 13.
|
Foreign
Currencies and Concentrations of Credit
Risk (Continued)
|
balance-sheet risk in the event that the customer or other
broker is unable to fulfill its contracted obligations and the
Company has to purchase or sell the financial instrument
underlying the contract at a loss.
In connection with these activities, the Company executes and
clears customers transactions involving the sale of
foreign currency not yet purchased, substantially all of which
are transacted on a margin basis subject to internal policies.
Such transactions may expose the Company to off-balance-sheet
risk in the event margin deposits are not sufficient to fully
cover losses that customers may incur. In the event that a
customer fails to satisfy its obligations, the Company may be
required to purchase or sell financial instruments at prevailing
market prices to fulfill the customers obligation.
The Company controls such risks associated with its customer
activities by requiring customers to maintain margin collateral,
in the form of cash, in compliance with various internal
guidelines. The Companys trading software technology
monitors margin levels on a real time basis and, pursuant to
such guidelines, requires customers to deposit additional cash
collateral, or to reduce positions, if necessary. The system is
designed to ensure that any breach in a customers margin
requirement as a result of losses on the trading account will
automatically trigger a final liquidation, which will execute
the closing of all positions. Exposure to credit risk is
therefore minimal. Institutional customers are permitted credit
pursuant to limits set by the Companys prime brokers. The
prime brokers incur the credit risk relating to the trading
activities of these customers in accordance with the respective
agreements between such brokers and the Company.
The Company is engaged in various trading activities with
counterparties which include brokers and dealers, futures
commission merchants, banks, and other financial institutions.
In the event counterparties do not fulfill their obligations,
the Company may be exposed to risk. The risk of default depends
on the creditworthiness of the counterparty or issuer of the
financial instrument. It is the Companys policy to:
(i) perform credit reviews and due diligence prior to
conducting business with counterparties; (ii) set exposure
limits and monitor exposure against such limits; and
(iii) periodically review, as necessary, the credit
standing of counterparties using multiple sources of
information. As of December 31, 2009, 74% of the
Companys due from brokers balance, included in the
statements of financial condition, was from one large, global
financial institution. As of December 31, 2008, 98% of the
Companys due from brokers balance was from three large,
global financial institutions. Two banks held more than 10% each
of the Companys total cash and cash equivalents and cash
and cash equivalents, held for customers as of December 31,
2009 and 2008.
ASC 280 Segments Reporting, establishes standards for
reporting information about operating segments. Operating
segments are defined as components of an enterprise about which
separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision
making group, in deciding how to allocate resources and in
assessing performance. The Companys operations relate to
foreign exchange trading and related services and operate in two
segments retail and institutional, with different
target markets and are covered by a separate sales force,
customer support and trading platforms. The Companys
segments are organized around three geographic areas. These
geographic areas are the United States, Asia and Europe and are
based on the location of its customers accounts.
Retail
Trading
The Company operates its retail business whereby it acts as an
agent between retail customers and a collection of large global
banks and financial institutions by making foreign currency
markets for customers trading in foreign exchange spot markets
through its Retail Trading business segment. In addition, the
Retail Trading business segment includes the Companys
white label relationships LFDs, payments for order flow and
rollovers.
F-25
FXCM
Holdings, LLC and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 14.
|
Segments (Continued)
|
Institutional
Trading
Institutional Trading facilitates spot foreign currency trades
on behalf of institutional customers through the services
provided by the FXCM Pro Division of US. This service allows
customers to obtain the best execution price from external banks
and financial institutions.
Information concerning the Companys operations by
reportable segment is as follows, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For The
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
Retail
|
|
|
Institutional
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
Trading
|
|
|
Corporate
|
|
|
Total
|
|
|
Total revenues less referring broker fees
|
|
$
|
225,492
|
|
|
$
|
20,610
|
|
|
$
|
|
|
|
$
|
246,102
|
|
Operating expenses
|
|
|
75,723
|
|
|
|
12,594
|
|
|
|
60,772
|
|
|
|
149,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
149,769
|
|
|
$
|
8,016
|
|
|
$
|
(60,772
|
)
|
|
$
|
97,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
499,296
|
|
|
|
2,827
|
|
|
|
15,813
|
|
|
$
|
517,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For The
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
Retail
|
|
|
Institutional
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
Trading
|
|
|
Corporate
|
|
|
Total
|
|
|
Total revenues less referring broker fees
|
|
$
|
240,505
|
|
|
$
|
17,568
|
|
|
$
|
|
|
|
$
|
258,073
|
|
Operating expenses
|
|
|
62,714
|
|
|
|
10,717
|
|
|
|
55,597
|
|
|
|
129,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
177,791
|
|
|
$
|
6,851
|
|
|
$
|
(55,597
|
)
|
|
$
|
129,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
430,854
|
|
|
|
8,109
|
|
|
|
12,081
|
|
|
$
|
451,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For The
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Retail
|
|
|
Institutional
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
Trading
|
|
|
Corporate
|
|
|
Total
|
|
|
Total revenues less referring broker fees
|
|
$
|
140,055
|
|
|
$
|
11,256
|
|
|
$
|
|
|
|
$
|
151,311
|
|
Operating expenses
|
|
|
66,531
|
|
|
|
7,260
|
|
|
|
51,241
|
|
|
|
125,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
73,524
|
|
|
|
3,996
|
|
|
|
(51,241
|
)
|
|
$
|
26,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
451,098
|
|
|
|
3,341
|
|
|
|
18,125
|
|
|
$
|
472,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Total Revenues less Referring Broker Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
206,332
|
|
|
$
|
239,210
|
|
|
$
|
139,363
|
|
Asia
|
|
|
13,182
|
|
|
|
15,371
|
|
|
|
10,922
|
|
Europe, Middle East and North Africa
|
|
|
36,357
|
|
|
|
10,478
|
|
|
|
7,599
|
|
Other
|
|
|
3,526
|
|
|
|
1,243
|
|
|
|
367
|
|
Eliminations
|
|
|
(13,295
|
)
|
|
|
(8,229
|
)
|
|
|
(6,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
246,102
|
|
|
$
|
258,073
|
|
|
$
|
151,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
FXCM
Holdings, LLC and Subsidiaries
Notes to
Consolidated Financial
Statements (Continued)
|
|
Note 14.
|
Segments (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
141,952
|
|
|
$
|
126,901
|
|
|
$
|
124,327
|
|
Asia
|
|
|
7,612
|
|
|
|
6,652
|
|
|
|
5,429
|
|
Europe, Middle East and North Africa
|
|
|
10,018
|
|
|
|
3,425
|
|
|
|
2,013
|
|
Other
|
|
|
946
|
|
|
|
279
|
|
|
|
203
|
|
Eliminations
|
|
|
(11,439
|
)
|
|
|
(8,229
|
)
|
|
|
(6,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
149,089
|
|
|
$
|
129,028
|
|
|
$
|
125,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income (Loss) Before Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
64,380
|
|
|
$
|
112,309
|
|
|
$
|
15,036
|
|
Asia
|
|
|
5,570
|
|
|
|
8,719
|
|
|
|
5,493
|
|
Europe, Middle East and North Africa
|
|
|
26,339
|
|
|
|
7,053
|
|
|
|
5,586
|
|
Other
|
|
|
2,580
|
|
|
|
964
|
|
|
|
164
|
|
Eliminations
|
|
|
(1,856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
97,013
|
|
|
$
|
129,045
|
|
|
$
|
26,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 15.
|
Subsequent
Events
|
The Company has evaluated subsequent events after the date of
the financial statements to consider whether or not the impact
of such events needed to be reflected or disclosed in the
financial statements. Such evaluation was performed through the
report date of the financial statements.
The Company made distributions of $41 million during the
first half of 2010. The primary purpose of the distributions
were to cover member tax liabilities.
In May 2010, the Company signed a stock purchase agreement to
acquire ODL in the United Kingdom. As consideration, the Company
will issue upon closing to ODL shareholders a 3.5% interest in
FXCM Holdings, LLC and a potential to earn an additional 3.5%
interest in FXCM Holdings, LLC subject to performance to be
measured in the twelve month period ending June 2011. The
closing of the acquisition is expected to occur in September
2010.
F-27
FXCM
Holdings, LLC and Subsidiaries
As of
June 30, 2010 and December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
153,010
|
|
|
$
|
139,858
|
|
Cash and cash equivalents, held for customers
|
|
|
425,549
|
|
|
|
353,825
|
|
Due from brokers
|
|
|
741
|
|
|
|
1,581
|
|
Accounts receivable
|
|
|
5,608
|
|
|
|
2,892
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
584,908
|
|
|
|
498,156
|
|
Deferred tax asset
|
|
|
360
|
|
|
|
480
|
|
Office, communication and computer equipment, net
|
|
|
10,658
|
|
|
|
10,121
|
|
Intangible assets, net
|
|
|
1,363
|
|
|
|
1,823
|
|
Other assets
|
|
|
8,534
|
|
|
|
7,356
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
605,823
|
|
|
$
|
517,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Customer account liabilities
|
|
$
|
425,549
|
|
|
$
|
353,825
|
|
Accounts payable and accrued expenses
|
|
|
21,669
|
|
|
|
20,559
|
|
Due to brokers
|
|
|
7,838
|
|
|
|
764
|
|
Deferred revenue
|
|
|
6,000
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
461,056
|
|
|
|
381,148
|
|
Deferred revenue
|
|
|
3,000
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
464,056
|
|
|
|
387,148
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Members capital
|
|
|
141,458
|
|
|
|
130,335
|
|
Accumulated other comprehensive income
|
|
|
309
|
|
|
|
453
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
141,767
|
|
|
|
130,788
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
605,823
|
|
|
$
|
517,936
|
|
|
|
|
|
|
|
|
|
|
See accompanying unaudited notes to the consolidated financial
statements.
F-28
FXCM
Holdings, LLC and Subsidiaries
For the
Six Months Ended June 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
For the Six Months
|
|
|
|
Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Retail trading revenue
|
|
$
|
154,823
|
|
|
$
|
155,217
|
|
Institutional trading revenue
|
|
|
13,589
|
|
|
|
11,012
|
|
Interest income
|
|
|
1,005
|
|
|
|
638
|
|
Other income
|
|
|
4,205
|
|
|
|
4,837
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
173,622
|
|
|
|
171,704
|
|
Referring broker fees
|
|
|
37,073
|
|
|
|
44,004
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
|
136,549
|
|
|
|
127,700
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
34,499
|
|
|
|
29,292
|
|
Advertising and marketing
|
|
|
11,315
|
|
|
|
16,911
|
|
Communications and technology
|
|
|
12,798
|
|
|
|
12,283
|
|
General and administrative
|
|
|
17,614
|
|
|
|
11,775
|
|
Depreciation and amortization
|
|
|
3,461
|
|
|
|
3,104
|
|
Interest expense
|
|
|
51
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
79,738
|
|
|
|
73,416
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
56,811
|
|
|
|
54,284
|
|
Income tax provision
|
|
|
4,966
|
|
|
|
3,870
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
51,845
|
|
|
|
50,414
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
(144
|
)
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
51,701
|
|
|
$
|
50,698
|
|
|
|
|
|
|
|
|
|
|
See accompanying unaudited notes to the consolidated financial
statements.
F-29
FXCM
Holdings, LLC and Subsidiaries
For the
Six Months Ended June 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands)
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
51,845
|
|
|
$
|
50,414
|
|
Adjustments to reconcile net income to net cash provided by
operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,461
|
|
|
|
3,104
|
|
Loss on disposal of office, communication and computer equipment
|
|
|
|
|
|
|
9
|
|
Deferred tax expense
|
|
|
120
|
|
|
|
120
|
|
Deferred revenue
|
|
|
(3,000
|
)
|
|
|
(3,000
|
)
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, held for customers
|
|
|
(71,951
|
)
|
|
|
(55,464
|
)
|
Due from brokers
|
|
|
840
|
|
|
|
(728
|
)
|
Accounts receivable
|
|
|
(2,716
|
)
|
|
|
(1,162
|
)
|
Other assets
|
|
|
(1,178
|
)
|
|
|
(3,686
|
)
|
Customer account liabilities
|
|
|
71,724
|
|
|
|
54,503
|
|
Accounts payable and accrued expenses
|
|
|
1,110
|
|
|
|
(1,828
|
)
|
Due to brokers
|
|
|
7,074
|
|
|
|
(1,362
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
57,329
|
|
|
|
40,920
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of intangible assets
|
|
|
|
|
|
|
(1,224
|
)
|
Purchases of office, communication and computer equipment
|
|
|
(3,538
|
)
|
|
|
(5,787
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(3,538
|
)
|
|
|
(7,011
|
)
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Payment of note payable
|
|
|
|
|
|
|
(10,730
|
)
|
Members distributions
|
|
|
(40,722
|
)
|
|
|
(79,270
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(40,722
|
)
|
|
|
(90,000
|
)
|
Effect of foreign currency exchange rate changes on cash and
cash equivalents
|
|
|
83
|
|
|
|
1,244
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
13,152
|
|
|
|
(54,847
|
)
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
139,858
|
|
|
|
179,967
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
153,010
|
|
|
$
|
125,120
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
6,328
|
|
|
$
|
7,333
|
|
Cash paid for interest
|
|
$
|
|
|
|
$
|
1,926
|
|
See accompanying unaudited notes to the consolidated financial
statements.
F-30
FXCM
Holdings, LLC and Subsidiaries
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies and
Estimates
|
Nature
of Business
FXCM Holdings, LLC (herein Holdings or the
(Company)), a Delaware limited liability company
formed in 2005, commenced operations in January 2007 for the
purpose of consolidating the ownership of a group of companies
which share common ownership. During 2007, Holdings was formed
to be the parent company to Forex Capital Markets, LLC (herein
US), FXCM Canada, Ltd. (herein Canada),
and Forex Trading, LLC (herein FXT). FXTs
wholly owned subsidiaries include FXCM Asia Limited (herein
HK), Forex Capital Markets Limited (herein
UK), FXCM Australia, Ltd. (herein
Australia), and FXCM DMCC (herein
Dubai). Holdings and its consolidated subsidiaries
are referred to herein as the Company.
US and FXT are organized under the laws of the state of Delaware
as limited liability companies. US is registered as a futures
commission merchant with the Commodity Futures Trading
Commission (herein the CFTC) and the National
Futures Association (herein the NFA). UK is
organized in the United Kingdom and is regulated by the
Financial Services Authority (herein the FSA).
Canada is a Nova Scotia limited liability company and is
registered as an exchange contracts dealer with the British
Columbia Securities Commission (herein the BCSC).
Canada ceased operations in October 2009 and is in the process
of deregistering with the BCSC with the ultimate objective of
dissolution. HK is organized in Hong Kong and is regulated by
the Securities and Futures Commission (herein the
SFC). Australia is organized in New Zealand and
regulated by the Australia Securities & Investments
Commission (herein the ASIC). Dubai is organized in
Dubai and regulated by the Dubai Multi Commodities Centre and is
registered with the Dubai Gold & Commodities Exchange.
The Company is an online provider of foreign exchange
(FX) trading and related services to domestic and
international retail and institutional customers and offers
customers access to global
over-the-counter
FX markets. In a FX trade, a participant buys one currency
and simultaneously sells another, a combination known as a
currency pair. The Companys proprietary
trading platform presents FX customers with the best price
quotations on several currency pairs from various global banks,
financial institutions and market makers, or FX market
makers. The Companys primary source of revenue is earned
by adding a markup to the price provided by FX market makers and
generates its trading revenue based on the volume of
transactions. The Company utilizes what is referred to as an
agency execution or agency model. Under the agency model, when a
customer executes a trade on the best price quotation presented
by the FX market maker, the Company acts as a credit
intermediary, or a riskless principal, simultaneously entering
into a trade with the customer and the FX market maker. This
agency model has the effect of automatically hedging the
Companys positions and eliminating market risk exposure.
The systematic hedge gains and losses are included in retail
trading revenue in the consolidated . The Company also offers FX
trading services to banks, hedge funds and other institutional
customers, also on an agency model basis, through its FXCM Pro
division. This service allows customers to obtain optimal prices
offered by external banks. The counterparties to these trades
are external financial institutions that hold customer account
balances and settle the transactions. The Company receives
commissions for these services without incurring credit or
market risk. Additionally, the Company is engaged in various
ancillary FX related services which include use of our platform,
technical expertise, trading facilities and software.
A summary of the Companys significant accounting policies
and estimates is as follows:
Basis
of Presentation
The accompanying consolidated financial statements are presented
in accordance with accounting principles generally accepted in
the United States of America (U.S. GAAP) and
are presented in U.S. dollars. The consolidated financial
statements include the accounts of Holdings, US, Canada,
Systems, Yozma and FXT and its wholly owned subsidiaries. The
Company consolidates those entities in which it is the primary
F-31
FXCM
Holdings, LLC and Subsidiaries
Notes to
the Unaudited Consolidated Financial
Statements (Continued)
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies and
Estimates (Continued)
|
beneficiary of a variable-interest entity, or VIE and entities
where it has a controlling financial interest. The Company was
not the primary beneficiary of any VIE for periods ended
June 30, 2010 and December 31, 2009. When the Company
is not the primary beneficiary of a VIE or does not have a
controlling interest in an entity but exercises significant
influence over the entitys operating and financial
policies, such investment is accounted for under the equity
method of accounting. The Company recognizes its share of
earnings or losses of an equity method investee based on our
ownership percentage. All material intercompany accounts and
transactions are eliminated in consolidation.
These consolidated financial statements reflect all adjustments
that are in the opinion of management, necessary for a fair
statement of the results for the interim periods presented.
These adjustments are of a normal recurring nature.
Use of
Estimates
The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements as well as
the reported amount of revenue and expenses during the year.
Actual results could differ from those estimates.
Cash
and Cash Equivalents
Cash and cash equivalents include cash at banks and highly
liquid instruments with original maturities of less than
90 days at the time of purchase. At times, these balances
may exceed federally insured limits. This potentially subjects
the Company to concentration risk. The Company has not
experienced losses in such accounts.
Cash
and Cash Equivalents, held for customers
Cash and cash equivalents, held for customers represents cash
held to fund customer liabilities in connection with foreign
currency transactions. The balance arises primarily from cash
deposited by customers, customer margin balances, and cash held
by FX market makers related to hedging activities. The Company
records a corresponding liability in connection with this amount
that is included in customer account liabilities in the
consolidated statements of financial condition (see
Note 2). A portion of the balance is not available for
general use due to legal restrictions in accordance with the
FSA, the SFC and the ASIC regulations. These legally restricted
balances were $343.2 million and $255.0 million as of
June 30, 2010 and December 31, 2009, respectively.
Fair
Value Measurements
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Fair value measurement establishes a fair value hierarchy that
prioritizes the inputs of valuation techniques used to measure
fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets
or liabilities and the lowest priority to unobservable inputs.
These two inputs create the following fair value hierarchy:
Level I: Quoted prices in active
markets for identical assets or liabilities, accessible by the
Company at the measurement date.
F-32
FXCM
Holdings, LLC and Subsidiaries
Notes to
the Unaudited Consolidated Financial
Statements (Continued)
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies and
Estimates (Continued)
|
Level II: Quoted prices for
similar assets or liabilities in active markets, or quoted
prices for identical or similar assets or liabilities in markets
that are not active, or other observable inputs other than
quoted prices.
Level III: Unobservable inputs for
assets or liabilities.
The Company did not have any Level II and III
financial assets or liabilities as of June 30, 2010 and
December 31, 2009. Cash and cash equivalents and cash and
cash equivalents, held for customers are deemed to be
Level I financial assets.
As of June 30, 2010 and December 31, 2009,
substantially all of the Companys financial instruments
were carried at fair value based on spot exchange rates broadly
distributed in active markets, or amounts approximating fair
value. Assets, including due from brokers and others, are
carried at cost or contracted amounts, which approximates fair
value. Similarly, liabilities, including customer account
liabilities, due to brokers and payables to others are carried
at fair value or contracted amounts, which approximates fair
value.
Due
from/to Brokers
Due from/to Brokers represents the amount of the unsettled spot
currency trades that the Company has open with its financial
institutions. The Company has master netting agreements with its
respective counterparties under which its due to/from brokers
are presented on a
net-by-counterparty
basis in accordance with U.S GAAP.
Office,
Communication and Computer Equipment
Office, communication and computer equipment consist of
purchased technology hardware and software, internally developed
software, leasehold improvements, furniture and fixtures,
computer equipment and communication equipment. Office,
communication and computer equipment are recorded at historical
cost, net of accumulated depreciation. Additions and
improvements that extend the lives of assets are capitalized,
while expenditures for repairs and maintenance are expensed as
incurred. Certain costs of software developed or obtained for
internal use are capitalized. Depreciation is computed using the
straight-line method. The Company depreciates these assets using
the following useful lives:
|
|
|
Computer equipment
|
|
3 to 5 years
|
Software
|
|
2 to 5 years
|
Leasehold improvements
|
|
Lesser of the estimated economic useful life or the term of the
lease
|
Furniture and fixtures
|
|
3 to 5 years
|
Communication equipment
|
|
3 to 5 years
|
Valuation
of Other Long-Lived Assets
The Company also assesses potential impairments to its other
long-lived assets, including office, communication and computer
equipment, when there is evidence that events or changes in
circumstances indicate that the carrying amount of an asset may
not be recovered. An impairment loss is recognized when the
carrying amount of the long-lived asset exceeds its fair value
and is not recoverable. The carrying amount of a long-lived
asset is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and
eventual disposition of the asset. Any required impairment loss
is measured as the amount by which the carrying amount of a
long-lived asset exceeds its fair value and is recorded as a
reduction in the carrying value of the related asset and a
charge to operating results. There was no impairment of other
long-lived assets in the six months ended June 30, 2010 and
2009.
F-33
FXCM
Holdings, LLC and Subsidiaries
Notes to
the Unaudited Consolidated Financial
Statements (Continued)
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies and
Estimates (Continued)
|
Intangible
Assets
Intangible assets, net, primarily include customer relationships
that the Company purchased from competitor companies and a
license to operate as a provider of FX trading in Australia. The
license was obtained through the acquisition in 2008 of
Australia, a registered exchange contract dealer.
The customer relationships are finite-lived intangibles and are
amortized on a straight-line basis over their estimated average
useful life of 2 years. The useful life is based on the
period the customer relationships are expected to contribute to
future cash flows as determined by the Companys historical
experience. For these finite-lived intangible assets subject to
amortization, impairment is considered upon certain
triggering events and is recognized if the carrying
amount is not recoverable and the carrying amount exceeds the
fair value of the intangible asset. There was no impairment of
finite-lived intangible assets in the six months ended
June 30, 2010 and 2009, respectively.
The FX trading license is an indefinite-lived asset that is not
amortized but tested for impairment. The Companys policy
is to test for impairment at least annually, or in interim
periods if certain events occur indicating that the fair value
of the asset may be less than its carrying amount. Impairment
test on this indefinite-lived asset is performed during the
fourth quarter of the Companys fiscal year using the
October 1st carrying value. Impairment exists if the
carrying value of the indefinite-lived intangible asset exceeds
its fair value. There was no impairment of indefinite-lived
intangible asset in the six months ended June 30, 2010 and
2009, respectively.
Equity
Method Investment
Investments where the Company is deemed to exercise significant
influence (generally defined as owning a voting interest of 20%
to 50%), but no control, are accounted for using the equity
method of accounting. The Company records its pro-rata share of
earnings or losses each period and record any dividends as a
reduction in the investment balance. These earnings or loss are
included in other income in the consolidated statements of
operations. The carrying amount of equity method investments was
$3.8 million as of June 30, 2010 and December 31,
2009 and is reflected in other assets in the consolidated
statements of financial condition.
Accounts
Receivable
As of June 30, 2010 and December 31 2009, accounts
receivable consisted primarily of taxes receivable, fees
receivable from the Companys white label service to third
parties, described in Retail Trading Revenue below,
and other receivables.
Other
Assets
Other assets include equity method investments (see
Note 3), prepaid expenses, deposits for rent security and
employee advances.
Accounts
Payable and Other Accrued Expenses
Accounts payable and other accrued expenses included operating
expenses payable, interest on note payable, taxes payable and
commissions payable (see Note 7). Commissions payable
represents balances owed to referring brokers for trades
transacted by customers that were introduced to the Company by
such brokers.
F-34
FXCM
Holdings, LLC and Subsidiaries
Notes to
the Unaudited Consolidated Financial
Statements (Continued)
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies and
Estimates (Continued)
|
Foreign
Currency
Foreign denominated assets and liabilities are remeasured into
the functional currency at exchange rates in effect at the
balance sheet date through the statement of operations. Gains or
losses resulting from foreign currency transactions are
remeasured using the rates on the dates on which those elements
are recognized during the period, and are included in retail
trading revenue in the consolidated statements of operations and
comprehensive income. The Company recorded a loss of
$2.7 million and a gain of $2.1 million for the six
months ended June 30, 2010 and 2009, respectively.
Translation gains or losses resulting from translating the
Companys subsidiaries financial statements from the
local functional currency to the reporting currency, net of tax,
are included in other comprehensive income. Assets and
liabilities are generally translated at the balance sheet date
while revenues and expenses are generally translated at an
applicable average rate.
Revenue
Recognition
The Company makes foreign currency markets for customers trading
in foreign exchange spot markets. Transactions are recorded on
the trade date and positions are marked to market daily with
related gains and losses, including gains and losses on open
spot transactions, recognized currently in income.
Retail
Trading Revenue
Retail revenue is earned by adding a markup to the price
provided by FX market makers generating trading revenue based on
the volume of transactions and is recorded on trade date. The
retail trading revenue is earned utilizing an agency model.
Under the agency model, when a customer executes a trade on the
best price quotation presented by the FX market maker, the
Company acts as a credit intermediary, or a riskless principal,
simultaneously entering into a trade with the customer and the
FX market maker. This agency model has the effect of
automatically hedging the Companys positions and
eliminating market risk exposure. Retail trading revenues
principally represent the difference of the Companys
realized and unrealized foreign currency trading gains or losses
on its positions with customers and the systematic hedge gains
and losses from the trades entered into with the FX market
makers. Retail trading revenue also includes fees earned from
arrangements with other financial institutions to provide
platform, back office and other trade execution services. This
service is generally referred to as a white label arrangement.
The Company earns a percentage of the markup charged by the
financial institutions to their customers. Fees from this
service are recorded when earned on a trade date basis.
Additionally, the Company earns income from trading in contracts
for difference (CFDs), payments for order flow and
rollovers. The Companys policy is to hedge its CFD
positions with other financial institutions based on internal
guidelines. Income or loss on CFDs represents the difference
between the Companys realized and unrealized trading gains
or losses on its positions and the hedge gains or losses with
the other financial institutions. Income or loss on CFDs is
recorded on a trade date basis. Income or loss on rollovers is
the interest differential customers earn or pay on overnight
currency pair positions held and the markup that the Company
receives on interest paid or received on currency pair positions
held overnight. Income or loss on rollovers is recorded on a
trade date basis. The Company recognizes payment for order flow
as earned.
Institutional
Trading Revenue
Institutional trading revenue relates to commission income
generated by facilitating spot foreign currency trades on behalf
of institutional customers through the services provided by the
FXCM Pro division. FXCM Pro allows these customers to obtain the
best execution price from external banks and routes the trades
to outside financial institutions for settlement. The
counterparties to these trades are external financial
institutions
F-35
FXCM
Holdings, LLC and Subsidiaries
Notes to
the Unaudited Consolidated Financial
Statements (Continued)
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies and
Estimates (Continued)
|
that also hold customer account balances. The Company receives
commission income for customers use of FXCM Pro without
taking any market or credit risk. Institutional trading revenue
is recorded on a trade date basis.
Other
Income
In January 2007, the Company entered into an agreement to
provide trade execution services to a related party, GCI Capital
Co. Ltd. As consideration for the services, the Company received
an upfront non refundable payment of $30.0 million in
addition to ongoing monthly fees of nil and $1.0 million
for the six months ended June 30, 2010 and 2009,
respectively. The upfront fee is being recognized on a straight
line basis over the estimated period of performance of
5 years. Ongoing monthly fees are recognized as services
are performed.
Referring
Broker Fees
Referring broker fees represent commissions paid to brokers for
introducing trading customers to the Company. Commissions are
determined based on the number and size of transactions executed
by the customers and are recorded on a trade date basis.
Compensation
and Benefits
Compensation and benefits expense represents employee salaries
and benefit expense. Such amounts have been included in employee
compensation and benefits in the consolidated statements of
operations and comprehensive income.
Advertising
and Marketing
Advertising and marketing costs are charged to operations when
incurred. The Company continues to expend significant
advertising and promotion costs related to various initiatives
in media advertising on a domestic and international basis.
General
and Administrative Expenses
General and administrative expenses include bank processing and
regulatory fees, professional and consulting fees, occupancy and
equipment expense and other administrative costs. Bank
processing fees are costs associated with the processing of
credit card transactions and prime brokerage fees charged by
clearing banks. Regulatory fees are volume-based costs charged
by certain regulatory authorities.
Income
Taxes
Holdings, US and FXT are limited liability companies and, as
such, are not subject to federal or state tax. The Company is
subject to New York City unincorporated business tax, which has
been included in the determination of net income. The Company
files federal and state income tax returns on a consolidated
basis. UK, HK, Canada and Australia are subject to tax
provisions according to the respective local laws and
regulations of the countries in which they operate.
In accordance with the Financial Accounting Standards Board (the
FASB) Accounting Standards Codification
(ASC) Topic 740, management is required to determine
whether a tax position of the Company is more likely than not to
be sustained upon examination by the applicable taxing
authority, including resolution of any related appeals or
litigation processes, based on the technical merits of the
position. The tax benefit to be recognized is measured as the
largest amount of benefit that is greater than 50% likely of
being realized upon ultimate settlement. Derecognition of a tax
benefit previously recognized could result in the Company
recording a tax liability that would reduce net assets. ASC
Topic 740 also provides guidance on
F-36
FXCM
Holdings, LLC and Subsidiaries
Notes to
the Unaudited Consolidated Financial
Statements (Continued)
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies and
Estimates (Continued)
|
thresholds, measurement, derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and
transition that is intended to provide better financial
statement comparability among different entities.
The Company does not have any uncertain tax positions at the end
of the year for which it is reasonably possible that the total
amounts of unrecognized tax benefits will significantly increase
or decrease within 12 months of the reporting date. For six
months ended June 30, 2010 and the year ended
December 31, 2009, management has determined that there
were no material uncertain income tax positions.
The Company is no longer subject to tax examinations by taxing
authorities for tax years before 2006 and presently has no open
examinations for tax years before 2009.
The Company recognizes the accrual of any interest and penalties
related to unrecognized tax benefits in income tax expense. No
interest or penalties were recognized in the six months ended
June 30, 2010 and 2009.
Allocation
and Distribution of Earnings
The allocation of earnings to the members is determined in
accordance with the sharing ratios as defined in the Limited
Liability Company Agreement of Holdings (the LLC
Agreement). Distributions to members are made according to
the LLC Agreement.
Recently
Adopted Accounting Pronouncements
Accounting Standards Codification (ASC or
the Codification) In June 2009, the
Financial Accounting Standards Board (FASB) issued
new guidance establishing the ASC and revising the hierarchy of
generally accepted accounting principles. The ASC is the single
source of authoritative nongovernmental U.S. GAAP. The
provisions in this guidance do not change current
U.S. GAAP, but are intended to simplify user access to all
authoritative U.S. GAAP by providing all the authoritative
literature related to a particular topic in one place. All
existing accounting standard documents were superseded and all
other accounting literature that is not included in the FASB
Codification is considered non-authoritative. This guidance is
effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The Company
adopted the guidance effective with the issuance of its
December 31, 2009 consolidated financial statements. As the
guidance is limited to disclosure in the financial statements
and the manner in which the Company refers to U.S. GAAP
authoritative literature, there was no material impact on the
Companys consolidated financial statements.
Uncertainty in Income Taxes In July 2006, the
FASB issued guidance clarifying the accounting for uncertainty
in income taxes recognized in an enterprises financial
statements. The guidance prescribes a recognition threshold and
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
on a tax return. The guidance also provides guidance on
derecognition of tax benefits, classification on the balance
sheet, interest and penalties, accounting in interim periods,
disclosure and transition. In December 2008, the FASB provided
for a deferral of the effective date of the interpretation for
certain nonpublic enterprises to annual financial statements for
fiscal years beginning after December 15, 2008. The Company
adopted the guidance on January 1, 2009. The adoption of
the interpretation did not have a material impact on the
consolidated financial statements.
In September 2009, the FASB updated its uncertainty in income
taxes guidance. The updated guidance considers an entitys
assertion that it is a tax-exempt
not-for-profit
or a pass-through-entity as a tax position that requires
evaluation. The revised guidance is effective for periods ending
after September 15, 2009. The
F-37
FXCM
Holdings, LLC and Subsidiaries
Notes to
the Unaudited Consolidated Financial
Statements (Continued)
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies and
Estimates (Continued)
|
adoption of the revised guidance did not have a material impact
on the Companys consolidated financial statements.
Fair Value Measurements In April 2009, the
FASB issued guidance for determining fair value for an asset or
liability if there has been a significant decrease in the volume
and level of activity in relation to normal market activity. In
that circumstance, transactions or quoted prices may not be
determinative of fair value. Significant adjustments may be
necessary to quoted prices or alternative valuation techniques
may be required in order to determine the fair value of the
asset or liability under current market conditions. The guidance
is effective for financial statements issued for interim or
annual periods ending after June 15, 2009. The Company
adopted the guidance upon its issuance in April 2009 and it did
not have a material impact on the Companys consolidated
financial statements.
Subsequent Events In May 2009 and February
2010, the FASB issued guidance on subsequent events. The
guidance is intended to establish general standards of
accounting for and disclosures of events that occur after the
balance sheet date but before financial statements are issued or
are available to be issued. SEC filers must continue to evaluate
subsequent events through the date the financial statements are
issued but are not required to disclose the date through which
an entity has evaluated subsequent events. The guidance is
effective for interim or annual financial periods ending after
June 15, 2009. The Company adopted the guidance upon its
issuance in June 2009. See Note 15, Subsequent
Events, for further discussion of the subsequent events
that occurred after June 30, 2010.
Business Combinations Effective
January 1, 2009, the Company adopted accounting guidance
issued by the FASB which established principles and requirements
for the acquirer in a business combination, including the
recognition and measurement of the identifiable assets acquired,
the liabilities assumed and any noncontrolling interest in the
acquired entity as of the acquisition date; the recognition and
measurement of the goodwill acquired in the business combination
or gain from a bargain purchase as of the acquisition date; and
additional disclosures related to the nature and financial
effects of the business combination. Under this guidance, nearly
all acquired assets and liabilities assumed are recorded at fair
value at the acquisition date. Other significant changes include
recognizing transaction costs and most restructuring costs as
expenses when incurred. These accounting requirements are
applied on a prospective basis for all transactions completed
after the effective date. As disclosed in Note 15,
Subsequent events, in May 2010 the Company signed a
purchase agreement to acquire ODL Group Limited
(ODL), a broker of retail FX, CFDs, spread betting
and retail equity options headquartered in the United Kingdom.
The closing of the acquisition is expected to occur in September
2010. The Company will apply the new business combination
guidance upon the closing of the acquisition.
Variable Interest Entities Effective
January 1, 2010, the Company adopted accounting guidance
issued by the FASB related to variable interest entities. This
guidance replaces a quantitative-based risks and rewards
calculation for determining which entity, if any, has both
(a) a controlling financial interest in a variable interest
entity with an approach focused on identifying which entity has
the power to direct the activities of a variable interest entity
that most significantly impact the entitys economic
performance and (b) the obligation to absorb losses of the
entity or the right to receive benefits from the entity that
could potentially be significant to the variable interest
entity. This guidance requires reconsideration of whether an
entity is a variable interest entity when any changes in facts
or circumstances occur such that the holders of the equity
investment at risk, as a group, lose the power to direct the
activities of the entity that most significantly impact the
entitys economic performance. It also requires ongoing
assessments of whether a variable interest holder is the primary
beneficiary of a variable interest entity. The adoption of this
guidance did not have a material impact on the consolidated
financial statements.
F-38
FXCM
Holdings, LLC and Subsidiaries
Notes to
the Unaudited Consolidated Financial
Statements (Continued)
|
|
Note 1.
|
Nature of
Business and Significant Accounting Policies and
Estimates (Continued)
|
Fair Value Measurements Disclosures Effective
January 1, 2010, the Company adopted fair value measurement
disclosure guidance issued by the FASB. The amended guidance
requires new disclosures as follows:
Amounts related to transfers in and out of
Levels I and II shall be disclosed separately and the
reasons for the transfers shall be described.
|
|
|
|
|
In the reconciliation for fair value measurements using
significant unobservable inputs (Level III), a reporting
entity should present separately information about purchases,
sales, issuances, and settlements on a gross basis.
|
The guidance also provides amendments that clarify existing
disclosures related to the following:
|
|
|
|
|
Reporting fair value measurement disclosures for each class of
assets and liabilities.
|
|
|
|
Providing disclosure surrounding the valuation techniques and
inputs used to measure fair value for both Level II and
Level III fair value measurements.
|
This disclosure guidance was effective for the Company beginning
on January 1, 2010, except for the disclosure requirements
surrounding the reconciliation of Level III fair value
measurements, which will be effective for the Company on
January 1, 2011. The adoption of the guidance does not have
a material impact on the Companys fair value measurements
disclosures.
|
|
Note 2.
|
Customer
Account Liabilities
|
Customer account liabilities represent balances held by the
Company and margin balances arising in connection with foreign
currency transactions, including unrealized gains and losses on
open foreign exchange commitments. Customer account liabilities
were $425.5 million and $353.8 million as of
June 30, 2010 and December 31, 2009, respectively.
|
|
Note 3.
|
Equity
Method Investment
|
As of June 30, 2010, the Company had $3.8 million of
equity interest in equity method investments, which consisted
primarily of a 26% equity interest in a developer of FX trading
software. Equity method investments are included in other assets
in the consolidated statement of financial condition as of
June 30, 2010 and December 31, 2009. Equity method
investments are included in corporate for purposes of segment
reporting (see Note 14). The Company owned a 15% interest
in the FX trading software developer in 2008 which was accounted
for under the cost method of accounting and increased its
ownership interest in 2009 by investing an additional
$2.0 million.
Income recognized from equity method investments was not
material for the six months ended June 30, 2010 and 2009,
and is included in other income, in the consolidated statements
of operations and comprehensive income.
There were no dividend distributions received from the FX
trading software developer during the six months ended
June 30, 2010 and 2009.
F-39
FXCM
Holdings, LLC and Subsidiaries
Notes to
the Unaudited Consolidated Financial
Statements (Continued)
|
|
Note 4.
|
Office,
Communication and Computer Equipment
|
Office, communication and computer equipment, including
leasehold improvements, licensing and capitalized software
development costs, consisted of the following as of
June 30, 2010 and December 31, 2009, with amounts in
thousands:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Computer equipment
|
|
$
|
26,867
|
|
|
$
|
25,096
|
|
Software
|
|
|
5,504
|
|
|
|
4,057
|
|
Leasehold improvements
|
|
|
1,887
|
|
|
|
1,684
|
|
Furniture and fixtures
|
|
|
1,540
|
|
|
|
1,491
|
|
Communication equipment
|
|
|
845
|
|
|
|
785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,643
|
|
|
|
33,113
|
|
Less: Accumulated depreciation
|
|
|
(25,985
|
)
|
|
|
(22,992
|
)
|
|
|
|
|
|
|
|
|
|
Office, communication and computer equipment, net
|
|
$
|
10,658
|
|
|
$
|
10,121
|
|
|
|
|
|
|
|
|
|
|
Depreciation is computed on a straight-line basis (see
Note 1). Depreciation expense was $3.0 million, and
$2.8 million for the six months ended June 30, 2010
and 2009, respectively.
|
|
Note 5.
|
Intangible
Assets
|
The Companys acquired intangible assets consisted of the
following as of June 30, 2010 and December 31, 2009,
with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Finite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
1,839
|
|
|
$
|
(1,226
|
)
|
|
$
|
613
|
|
|
$
|
1,839
|
|
|
$
|
(766
|
)
|
|
$
|
1,073
|
|
Indefinite-Lived Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading license
|
|
|
600
|
|
|
|
|
|
|
|
600
|
|
|
|
600
|
|
|
|
|
|
|
|
600
|
|
Exchange membership seat
|
|
|
150
|
|
|
|
|
|
|
|
150
|
|
|
|
150
|
|
|
|
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,589
|
|
|
$
|
(1,226
|
)
|
|
$
|
1,363
|
|
|
$
|
2,589
|
|
|
$
|
(766
|
)
|
|
$
|
1,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
FXCM
Holdings, LLC and Subsidiaries
Notes to
the Unaudited Consolidated Financial
Statements (Continued)
|
|
Note 5.
|
Intangible
Assets (Continued)
|
Finite-lived assets are amortized on a straight-line basis over
two years. Indefinite-lived assets are not amortized (see
Note 1). Amortization expense was $0.5 million and
$0.3 million for the six months ended June 30,
2010 and 2009, respectively. Estimated future amortization
expense for acquired intangible assets outstanding as of
June 30, 2010 is as follows, with amounts in thousands:
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortization
|
|
Year Ending December 31,
|
|
Expense
|
|
|
Remainder of 2010
|
|
$
|
460
|
|
2011
|
|
|
153
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
613
|
|
|
|
|
|
|
Other assets were comprised of the following as of June 30,
2010 and December 31, 2009, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Equity investment
|
|
$
|
3,849
|
|
|
$
|
3,777
|
|
Prepaid expenses
|
|
|
2,848
|
|
|
|
2,098
|
|
Deposits
|
|
|
670
|
|
|
|
731
|
|
Employee advances
|
|
|
760
|
|
|
|
440
|
|
Other
|
|
|
407
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,534
|
|
|
$
|
7,356
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010, the Company had loan advances in connection
with an investment in a third party in the amount of $2.7
million. This amount was fully provided for and the loss is
included in general and administrative expenses in the
consolidated statements of operations and comprehensive income.
|
|
Note 7.
|
Accounts
Payable and Other Accrued Expenses
|
Accounts payable and other accrued expenses were comprised of
the following as of June 30, 2010 and December 31, 2009, with
amounts in thousands:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Operating expenses payable
|
|
$
|
10,277
|
|
|
$
|
7,261
|
|
Commissions payable
|
|
|
7,389
|
|
|
|
6,247
|
|
Income taxes payable
|
|
|
4,003
|
|
|
|
7,051
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,669
|
|
|
$
|
20,559
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 8.
|
Related
Party Transactions
|
Customer account liabilities include balances for both employees
and managing members. As of June 30, 2010 and
December 31, 2009, members account liabilities
totaled $2.8 million and $2.7 million, respectively,
and are included in the unaudited consolidated statements of
financial condition as customer account liabilities.
F-41
FXCM
Holdings, LLC and Subsidiaries
Notes to
the Unaudited Consolidated Financial
Statements (Continued)
|
|
Note 8.
|
Related
Party Transactions (Continued)
|
The Company has advanced funds to several employees. As of
June 30, 2010 and December 31, 2009, the outstanding
balance was $0.8 million and $0.4 million,
respectively, and is included in other assets in the
consolidated statements of financial condition.
Pursuant to an agreement dated August 26, 2010, a former
employee of the Company is, upon a change of control
(CIC) of the Company, entitled to a payment of
(i) 1.00% of the implied value placed upon 100% of the
Company in the event of the CIC, excluding any amount of capital
invested as part of the CIC, any expenses related to the
execution of the CIC and any undistributed capital invested in
the Company prior to the CIC or (ii) if an initial public
offering (IPO) of the Company has occurred prior to
the CIC, 0.75% of the implied value placed upon 100% of the
Company in the event of such IPO, excluding the amount of
capital raised in the IPO, any expenses related to the execution
of the IPO and any undistributed capital invested in the Company
prior to the IPO. Pursuant to ASC 718 Compensation
Arrangements, any expense relating to this arrangement should be
accrued when probable and the Company has not accrued any
expense relating to this arrangement to date.
UK is party to an arrangement with Global Finance Company
(Cayman) Limited, (Global Finance), and Master
Capital Group, S.A.L. (Master Capital). A director
of the Company beneficially owns more than 90% of the equity, of
Global Finance and Master Capital. Pursuant to such arrangement,
Global Finance and Master Capital are permitted to use the brand
name FXCM and our technology platform to act as our
local presence in certain countries in the Middle East and North
Africa (MENA). UK collects and remits to Global
Finance and Master Capital fees and commissions charged by
Global Finance and Master Capital to customers in MENA
countries. For the six months ended June 30, 2010 and 2009,
these fees and commissions were approximately $1.3 million
and nil, respectively. The Company expects to enter into a
definitive agreement in the near future.
|
|
Note 9.
|
Employee
Benefit Plan
|
The Company maintains a defined contribution employee
profit-sharing and savings 401(k) plan for all eligible full
time employees. The Company was not required to and made no
contributions to the plan for the six months ended June 30,
2010 and 2009.
|
|
Note 10.
|
Net
Capital Requirements
|
US is subject to the National Futures Associations net
capital requirements for forex dealing members. Since the agency
model (see Note 1) is not used for all customer
transactions, US is required to maintain adjusted net
capital equal to or in excess of $20 million plus 5%
of all liabilities owed to customers exceeding $10 million.
Adjusted net capital and the level of notional values under
these transactions change from day to day.
HK is a licensed leveraged foreign exchange trading company with
the SFC. HK is subject to required minimum liquid capital
financial requirements.
UK is a registered securities and futures firm with the FSA. UK
is subject to minimum capital requirements.
Canada is a registered exchange contract dealer with the BCSC.
Canada is subject to BCSC minimum financial requirements or
risk adjusted capital.
Australia is a registered exchange contract dealer with the
ASIC. Australia is subject to ASIC minimum financial
requirements or adjusted surplus liquid funds.
The minimum capital requirements of the above entities may
effectively restrict the payment of cash distributions to
members.
F-42
FXCM
Holdings, LLC and Subsidiaries
Notes to
the Unaudited Consolidated Financial
Statements (Continued)
|
|
Note 10.
|
Net
Capital Requirements (Continued)
|
The tables below present the capital, as defined by the
respective regulatory authority, the minimum capital requirement
and the excess capital for US, HK, UK, Canada and Australia as
of June 30, 2010, with amounts in millions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
|
US
|
|
|
HK
|
|
|
UK
|
|
|
Canada
|
|
|
Australia
|
|
|
Capital
|
|
$
|
62.0
|
|
|
$
|
18.7
|
|
|
$
|
27.2
|
|
|
$
|
2.4
|
|
|
$
|
2.2
|
|
Minimum capital requirement
|
|
|
24.5
|
|
|
|
4.1
|
|
|
|
8.4
|
|
|
|
0.6
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess capital
|
|
$
|
37.5
|
|
|
$
|
14.6
|
|
|
$
|
18.8
|
|
|
$
|
1.8
|
|
|
$
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11.
|
Commitments
and Contingencies
|
Operating
Lease Commitments
The Company leases office space and equipment under operating
leases. Some of the lease agreements contain renewal options
with varying terms and conditions. The lease for the office
facilities is subject to escalation factors primarily related to
property taxes and building operating expenses. Future minimum
lease payments under noncancelable operating leases with terms
in excess of one year are as follows as of June 30, 2010,
with amounts in thousands:
|
|
|
|
|
|
|
As of
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
Remainder of 2010
|
|
$
|
1,762
|
|
2011
|
|
|
3,381
|
|
2012
|
|
|
1,015
|
|
2013
|
|
|
452
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,610
|
|
|
|
|
|
|
The aggregate rental expense for operating leases charged to
operations, included in general and administrative expense in
the consolidated statements of operations and comprehensive
income for the six months ended June 30, 2010 and 2009, was
$2.0 million, $1.4 million, respectively. These
amounts are net of sublease income of $0.3 million for each
of the six months ended June 30, 2010 and 2009. The future
minimum sublease income included in June 30, 2010
commitments of $1.8 million is not material.
Litigation
In February 2004, the CFTC filed a claim against the Company
alleging that it violated certain provisions of the Commodity
Exchange Act (the CEA) in the case of Gibraltar
Monetary Corporation, Inc. (Gibraltar) and its
employee. The trial in this matter ended in September 2005. On
May 30, 2006, the court found the Company not liable as a
principal for Gibraltars misrepresentations, misleading
statements or deceptive omissions, and dismissed the case. The
matter was appealed by the CFTC to the U.S. Circuit Court
of Appeals for the Eleventh Circuit. On July 21, 2009, the
Eleventh Circuit affirmed the District Courts decision
that Gibraltar was not acting as the Companys agent when
it committed violations of the CEA. The order became final on
September 15, 2009.
The Company has been named in various arbitration cases brought
by customers seeking damages for trading losses. Management has
investigated these matters and feels that such cases are without
merit and is
F-43
FXCM
Holdings, LLC and Subsidiaries
Notes to
the Unaudited Consolidated Financial
Statements (Continued)
|
|
Note 11.
|
Commitments
and Contingencies (Continued)
|
defending them vigorously. However, the arbitrations are
presently in the discovery stage and no judgment can be made
regarding the ultimate outcome of the arbitrators
decisions.
In September 2008, Lehman Brothers Holdings Inc.
(Lehman), an equity owner of 9.9% of the Company,
commenced voluntary bankruptcy proceedings (Case
No. 08-13555).
The ultimate disposition of Lehmans equity interest in the
Company is under review by the U.S. Bankruptcy Court.
It is the opinion of management of the Company that the ultimate
outcomes of the matters referenced above are unlikely to have a
material adverse effect on the business, financial condition or
operating results of the Company. The Companys
consolidated financial statements do not include any accrual for
litigation contingency, as such amounts cannot be reasonably
estimated or expected to have a material impact.
Guarantees
At the inception of guarantees, if any, the Company will record
the fair value of the guarantee as a liability, with the
offsetting entry being recorded based on the circumstances in
which the guarantee was issued. The Company did not have any
such guarantees in place as of June 30, 2010 or
December 31, 2009.
Holdings is treated as a partnership for U.S. federal and
certain state income tax purposes. Therefore, under
U.S. tax regulations, the partnership itself is generally
not subject to federal, state or local income taxes with the
exception of certain unincorporated business taxes. Accordingly,
federal, state or local income taxes have not been provided for
in the accompanying financial statements with the exception of
New York City unincorporated business taxes (UBT)
and foreign corporation taxes. Holdings is subject to New York
City UBT tax at a statutory rate of 4%, HK is subject to Hong
Kong profits tax at a statutory rate of 16.5%, UK income is
subject to UK corporate tax at a statutory rate of 28%,
Australia is subject to Australia corporate tax at a statutory
rate of 30% and Canada is subject to Canadian corporation tax at
a statutory rate of 31%. Each partner in the partnership is
responsible for reporting its allocable share of the
partnerships income, gain, losses, deductions and credits
on its tax return. Holdings, US and FXT operate as limited
liability companies in the United States and, as such, are not
subject to U.S. federal or state income tax and are not
required to file separate returns as their results are filed
with Holdings.
The components of the provision for income taxes consisted of
the following amounts for the six months ended June 30,
2010 and 2009, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
New York City unincorporated business tax
|
|
$
|
1,886
|
|
|
$
|
1,965
|
|
UK corporation tax
|
|
|
2,497
|
|
|
|
1,025
|
|
Hong Kong profits tax
|
|
|
105
|
|
|
|
630
|
|
Australian profits tax
|
|
|
454
|
|
|
|
200
|
|
Canadian corporation tax
|
|
|
24
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,966
|
|
|
$
|
3,870
|
|
|
|
|
|
|
|
|
|
|
The deferred tax asset is comprised of the cumulative effects of
temporary differences arising from the book and tax treatment of
income related to the agreement to provide trade execution
services. For book purposes, the $30 million upfront
payment (Note 1) is being amortized over five years
with $3.0 million in income recognized for each of the six
month period ended June 30, 2010 and 2009. However, for tax
purposes,
F-44
FXCM
Holdings, LLC and Subsidiaries
Notes to
the Unaudited Consolidated Financial
Statements (Continued)
|
|
Note 12.
|
Income
Taxes (Continued)
|
the entire balance has been recognized, resulting in a temporary
difference of $9.0 million and $15.0 million for the
six months ended June 30, 2010 and 2009, respectively.
Deferred tax asset was $0.4 million and $0.5 million
as of June 30, 2010 and December 31, 2009,
respectively. The Company did not record a valuation allowance
as of June 30, 2010 and December 31, 2009.
The following tables reconcile the provisions for taxes to the
U.S. federal statutory tax rate:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Statutory U.S. federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Income passed through to individual members
|
|
|
(35.0
|
)
|
|
|
(35.0
|
)
|
State and local income tax
|
|
|
5.4
|
|
|
|
3.5
|
|
Foreign income tax
|
|
|
3.3
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
8.7
|
%
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Note 13.
|
Foreign
Currencies and Concentrations of Credit Risk
|
As a riskless principal under the agency model, the Company
accepts and clears foreign exchange spot contracts for the
accounts of its customers (see Note 1). These activities
may expose the Company to off-balance-sheet risk in the event
that the customer or other broker is unable to fulfill its
contracted obligations and the Company has to purchase or sell
the financial instrument underlying the contract at a loss.
In connection with these activities, the Company executes and
clears customers transactions involving the sale of
foreign currency not yet purchased, substantially all of which
are transacted on a margin basis subject to internal policies.
Such transactions may expose the Company to off-balance-sheet
risk in the event margin deposits are not sufficient to fully
cover losses that customers may incur. In the event that a
customer fails to satisfy its obligations, the Company may be
required to purchase or sell financial instruments at prevailing
market prices to fulfill the customers obligation.
The Company controls such risks associated with its customer
activities by requiring customers to maintain margin collateral,
in the form of cash, in compliance with various internal
guidelines. The Companys trading software technology
monitors margin levels on a real time basis, and, pursuant to
such guidelines, requires customers to deposit additional cash
collateral, or to reduce positions, if necessary. The system is
designed to ensure that any breach in a customers margin
requirement as a result of losses on the trading account will
automatically trigger a final liquidation, which will execute
the closing of all positions. Exposure to credit risk is
therefore minimal. Institutional customers are permitted credit
pursuant to limits set by the Companys prime brokers. The
prime brokers incur the credit risk relating to the trading
activities of these customers in accordance with the respective
agreements between such brokers and the Company.
The Company is engaged in various trading activities with
counterparties which include brokers and dealers, futures
commission merchants, banks, and other financial institutions.
In the event counterparties do not fulfill their obligations,
the Company may be exposed to risk. The risk of default depends
on the creditworthiness of the counterparty or issuer of the
financial instrument. It is the Companys policy to:
(i) perform credit reviews and due diligence prior to
conducting business with counterparties; (ii) set exposure
limits and monitor exposure against such limits; and
(iii) periodically review, as necessary, the credit
standing of counterparties using multiple sources of
information. As of June 30, 2010, 90% of the Companys
due from brokers balance, included in the statements of
financial condition, was from two large, global financial
institutions. As of December 31, 2009, 74% of the
Companys due from brokers balance was from one large,
global financial institution. As of June 30, 2010 and December
31, 2009, two banks held more than 10% each of the
Companys total cash and cash equivalents and cash and cash
equivalents, held for customers.
F-45
FXCM
Holdings, LLC and Subsidiaries
Notes to
the Unaudited Consolidated Financial
Statements (Continued)
ASC 280 Segments Reporting, establishes standards for
reporting information about operating segments. Operating
segments are defined as components of an enterprise about which
separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision
making group, in deciding how to allocate resources and in
assessing performance. The Companys operations relate to
foreign exchange trading and related services and operate in two
segments retail and institutional, with different
target markets and are covered by a separate sales force,
customer support and trading platforms. The Companys
segments are organized around three geographic areas. These
geographic areas are the United States, Asia and Europe and are
based on the location of its customers accounts.
Retail
Trading
The Company operates its retail business whereby it acts as an
agent between retail customers and a collection of large global
banks and financial institutions by making foreign currency
markets for customers trading in foreign exchange spot markets
through its Retail Trading business segment. In addition, the
Retail Trading business segment includes the Companys
white label relationships, CFDs, payments for order flows and
rollovers.
Institutional
Trading
Institutional Trading facilitates spot foreign currency trades
on behalf of institutional customers through the services
provided by the FXCM Pro Division of US. This service allows
customers to obtain the best execution price from external banks
and financial institutions.
Information concerning the Companys operations by
reportable segment is as follows, with amounts in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the
|
|
|
|
Six Months Ended
|
|
|
|
June 30, 2010
|
|
|
|
Retail
|
|
|
Institutional
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
Trading
|
|
|
Corporate
|
|
|
Total
|
|
|
Total revenues less referring broker fees
|
|
$
|
123,212
|
|
|
$
|
13,265
|
|
|
$
|
72
|
|
|
$
|
136,549
|
|
Operating expenses
|
|
|
39,164
|
|
|
|
8,642
|
|
|
|
31,932
|
|
|
|
79,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
84,048
|
|
|
|
4,623
|
|
|
|
(31,860
|
)
|
|
$
|
56,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
587,365
|
|
|
|
3,287
|
|
|
|
15,171
|
|
|
$
|
605,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
and for the Six Months Ended
|
|
|
|
June 30, 2009
|
|
|
|
Retail
|
|
|
Institutional
|
|
|
|
|
|
|
|
|
|
Trading
|
|
|
Trading
|
|
|
Corporate
|
|
|
Total
|
|
|
Total revenues less referring broker fees
|
|
$
|
116,933
|
|
|
$
|
10,767
|
|
|
$
|
|
|
|
$
|
127,700
|
|
Operating expenses
|
|
|
37,243
|
|
|
|
8,106
|
|
|
|
28,067
|
|
|
|
73,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
79,690
|
|
|
$
|
2,661
|
|
|
$
|
(28,067
|
)
|
|
$
|
54,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
499,296
|
|
|
|
2,827
|
|
|
|
15,813
|
|
|
$
|
517,936
|
|
F-46
FXCM
Holdings, LLC and Subsidiaries
Notes to
the Unaudited Consolidated Financial
Statements (Continued)
|
|
Note 14.
|
Segments (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Total Revenues less Referring Broker Fees
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
114,892
|
|
|
$
|
120,741
|
|
Asia
|
|
|
4,658
|
|
|
|
7,126
|
|
Europe, Middle East and North Africa
|
|
|
18,940
|
|
|
|
4,600
|
|
Other
|
|
|
2,123
|
|
|
|
1,051
|
|
Eliminations
|
|
|
(4,064
|
)
|
|
|
(5,818
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
136,549
|
|
|
$
|
127,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
67,877
|
|
|
$
|
74,058
|
|
Asia
|
|
|
4,292
|
|
|
|
3,356
|
|
Europe, Middle East and North Africa
|
|
|
11,049
|
|
|
|
1,444
|
|
Other
|
|
|
584
|
|
|
|
376
|
|
Eliminations
|
|
|
(4,064
|
)
|
|
|
(5,818
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
79,738
|
|
|
$
|
73,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
Income (Loss) Before Income Taxes
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
47,015
|
|
|
$
|
46,683
|
|
Asia
|
|
|
366
|
|
|
|
3,770
|
|
Europe, Middle East and North Africa
|
|
|
7,891
|
|
|
|
3,156
|
|
Other
|
|
|
1,539
|
|
|
|
675
|
|
Eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
56,811
|
|
|
$
|
54,284
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 15.
|
Subsequent
Events
|
The Company has evaluated subsequent events after the date of
the financial statements to consider whether or not the impact
of such events needed to be reflected or disclosed in the
financial statements. Such evaluation was performed through the
report date of the financial statements.
In May 2010, the Company signed a stock purchase agreement to
acquire ODL, in the United Kingdom. As consideration, the
Company will issue upon closing to ODL shareholders a 3.5%
interest in FXCM Holdings, LLC and a potential to earn an
additional 3.5% interest in FXCM Holdings, LLC subject to
performance to be measured in the twelve month period ending
June 2011. The closing of the acquisition is expected to occur
in September 2010.
F-47
REPORT OF
INDEPENDENT AUDITORS
The Board of Directors
ODL Group Limited
We have audited the accompanying group balance sheet of ODL
Group Limited as of 31 December 2009 and 2008 and the
related consolidated profit and loss account, consolidated
statement of total recognised gains and losses and consolidated
statement of cash flows for each of the two years in the period
ended 31 December 2009. These financial statements are the
responsibility of the companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. We were not engaged to perform an audit
of the companys internal control over financial reporting.
Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the
companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of ODL Group Limited at 31 December 2009
and 2008 and its consolidated results of operations and
consolidated cash flows for each of the two years in the period
ended 31 December 2009 in conformity with accounting
principles generally accepted in the United Kingdom which differ
in certain respects from those generally accepted in the United
States (see Note 32 of Notes to the Financial Statements).
As discussed in Note 1 to the financial statements, the
financial statements have been restated to correct an over
accrual of revenue in prior periods, to correctly present
certain debtors and creditors balances on a gross basis, to
correctly reclassify long and short equity positions from cash
at bank relating to one specific counterparty, to correctly
reclassify items in the group profit and loss account between
exceptional items and administrative expenses, to correct an
overstatement of share premium account and EBT Reserve and to
correctly reclassify items in the group cash flow statement.
Ernst & Young LLP
London, England
September 3, 2010
F-48
ODL Group
Limited
For the
year ended 31 December 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
£
|
|
|
£
|
|
|
Trading income
|
|
|
3
|
|
|
|
27,565,464
|
|
|
|
42,895,217
|
|
Administrative expenses
|
|
|
|
|
|
|
(41,539,361
|
)
|
|
|
(48,718,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)
|
|
|
4
|
|
|
|
(13,973,897
|
)
|
|
|
(5,822,869
|
)
|
Exceptional items
|
|
|
5
|
|
|
|
(1,320,498
|
)
|
|
|
92,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on ordinary activities before taxation
|
|
|
|
|
|
|
(15,294,395
|
)
|
|
|
(5,729,918
|
)
|
Taxation
|
|
|
8
|
|
|
|
3,919,747
|
|
|
|
(1,445,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss after taxation
|
|
|
|
|
|
|
(11,374,648
|
)
|
|
|
(7,175,378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All of the Groups activities during the year and preceding
year are classed as continuing.
F-49
ODL Group
Limited
For the
year ended 31 December 2009
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
Loss for the year
|
|
|
(11,374,648
|
)
|
|
|
(7,175,378
|
)
|
|
|
|
|
|
|
|
|
|
Currency translation difference on foreign currency net
investments
|
|
|
233,089
|
|
|
|
(102,002
|
)
|
|
|
|
|
|
|
|
|
|
Total recognised losses relating to the year
|
|
|
(11,141,559
|
)
|
|
|
(7,227,380
|
)
|
|
|
|
|
|
|
|
|
|
Prior year adjustment
|
|
|
(860,242
|
)
|
|
|
|
|
Total recognised losses since last annual report
|
|
|
(11,141,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior year adjustment
|
|
|
(860,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognised losses since last annual report
|
|
|
(12,001,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-50
ODL Group
Limited
As at
31 December 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
£
|
|
|
£
|
|
|
FIXED ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible assets
|
|
|
9
|
|
|
|
10,183,742
|
|
|
|
11,652,284
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets at fair value through profit and loss
|
|
|
10
|
|
|
|
10,430,526
|
|
|
|
5,399,920
|
|
Debtors
|
|
|
11
|
|
|
|
22,612,249
|
|
|
|
28,414,639
|
|
Cash at bank and in hand including short term deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
own funds
|
|
|
|
|
|
|
6,465,484
|
|
|
|
12,082,601
|
|
client funds
|
|
|
|
|
|
|
159,146,882
|
|
|
|
130,301,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
198,655,141
|
|
|
|
176,198,460
|
|
CREDITORS: amounts falling due within one year
|
|
|
12
|
|
|
|
(197,980,334
|
)
|
|
|
(165,451,109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CURRENT ASSETS
|
|
|
|
|
|
|
674,807
|
|
|
|
10,747,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS LESS CURRENT LIABILITIES
|
|
|
|
|
|
|
10,858,549
|
|
|
|
22,399,635
|
|
CREDITORS: amounts falling due after more than one year
|
|
|
12
|
|
|
|
(27,476
|
)
|
|
|
(277,878
|
)
|
PROVISIONS FOR LIABILITIES AND CHARGES
|
|
|
13
|
|
|
|
|
|
|
|
(210,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET ASSETS
|
|
|
|
|
|
|
10,831,073
|
|
|
|
21,910,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL AND RESERVES
|
|
|
|
|
|
|
|
|
|
|
|
|
Called up equity share capital
|
|
|
15
|
|
|
|
2,037,938
|
|
|
|
2,037,667
|
|
Share premium account
|
|
|
16
|
|
|
|
21,407,550
|
|
|
|
21,346,145
|
|
EBT reserve account
|
|
|
17
|
|
|
|
(3,305,024
|
)
|
|
|
(3,305,024
|
)
|
Cumulative translation reserve
|
|
|
19
|
|
|
|
131,087
|
|
|
|
(102,002
|
)
|
Profit and loss account
|
|
|
18
|
|
|
|
(9,440,478
|
)
|
|
|
1,934,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY SHAREHOLDERS FUNDS
|
|
|
19
|
|
|
|
10,831,073
|
|
|
|
21,910,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-51
ODL Group
Limited
As at
31 December 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
£
|
|
|
£
|
|
|
CASH INFLOW FROM OPERATING ACTIVITIES
|
|
|
20
|
|
|
|
25,840,263
|
|
|
|
9,219,656
|
|
TAXATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation tax received/(paid)
|
|
|
|
|
|
|
300,965
|
|
|
|
(3,783,041
|
)
|
CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments to acquire tangible fixed assets
|
|
|
|
|
|
|
(2,094,453
|
)
|
|
|
(4,027,171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,046,775
|
|
|
|
1,454,444
|
|
EQUITY DIVIDENDS PAID
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue of ordinary share capital
|
|
|
|
|
|
|
61,676
|
|
|
|
185,569
|
|
Settlement of financial lease liabilities
|
|
|
|
|
|
|
(879,986
|
)
|
|
|
(580,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE IN CASH
|
|
|
22
|
|
|
|
23,228,465
|
|
|
|
1,059,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-52
ODL Group
Limited
For
the year ended 31 December 2009
|
|
1
|
PRINCIPAL
ACCOUNTING POLICIES
|
BASIS
OF ACCOUNTING
The financial statements have been prepared in accordance with
applicable accounting standards and under the historical cost
convention modified by the valuation of derivative transactions
and listed investments.
The foreign exchange profit and loss account has been based on
closing prices at 22.00 hours on 31 December 2009.
In preparing the financial statements, prior period figures have
been restated to reflect the misstatement of revenues in the
year ended 31 December 2007. The effect of this restatement
was to decrease profit for that year by £0.9m and to
decrease the shareholders funds accordingly.
In addition in 2007, the share premium account and the EBT
Reserve were overstated by £0.3m. This has been adjusted
for in 2008 and 2009.
In 2008, certain debtors and creditors balances were presented
on a net basis; in the current year these have been presented on
a gross basis and as a result, an adjustment has been made to
the 2008 comparatives. The impact of this adjustment for 2008 is
an increase in the debtor balance and creditor balance of
£15.7m.
In 2008, the cash at bank balance was shown net of long and
short equity positions relating to one specific counterparty. As
a result, an adjustment has been made in the 2008 comparatives.
The impact of this adjustment for 2008 is a reduction in the
cash at bank balance of £3.1m, an increase in financial
assets at fair value of £3.7m, an increase in trade
creditors of £0.5m and an increase in short equity
positions of £0.1m.
In 2008, certain administrative expenses were presented as
non-operating exceptional items and as a result, a
reclassification has been made in 2008 comparatives. The impact
of this reclassification is an increase in administrative
expense and a decrease in exceptional items of £8.2m.
In 2008, certain cash flow from operating activities were
presented as capital expenditure and financial investment and as
a result, a reclassification has been made in 2008 comparatives.
The impact of this reclassification is a decrease in cash inflow
from operating activities of £0.2m.
In 2008, certain cash flow from operating activities were
presented as taxation paid and as a result, a reclassification
has been made in 2008 comparatives. The impact of this
reclassification is a increase in cash inflow from operating
activities of £0.5m.
In 2008, settlement of finance lease liabilities was presented
as cash flow from operating activities and as a result, a
reclassification has been made in 2008 comparatives. The impact
of this reclassification is an increase in cash inflow from
operating activities of £0.6m.
BASIS
OF CONSOLIDATION
The Groups financial statements consolidate the financial
statements of the company and its subsidiary undertakings.
Intra-group profits, assets and liabilities are eliminated on
consolidation. Profits and losses of companies entering or
leaving the Group have been included from the date of
acquisition or up to the date of disposal. The net assets of the
subsidiaries acquired are included on the basis of their fair
value.
TRADING
INCOME
Trading income represents profits and losses on foreign currency
trading, derivatives, and commissions receivable from broking
activities; all foreign exchange and OTC option contracts are
marked to market and
F-53
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
|
|
1
|
PRINCIPAL
ACCOUNTING POLICIES (Continued)
|
the resulting unrealised profit or loss is recognised.
Commissions receivable are credited to the profit and loss
account on a trade date basis.
Revenue is recognised when it is probable that economic benefits
associated with the transaction will flow to the Group and the
revenue can be reliable measured.
Finance revenue is accrued on a time basis, by reference to the
principal outstanding and at the effective interest rate
applicable.
Commission receivable, which are recognised gross of commission
payable when in substance the Group acts as principal, are
credited to the profit and loss account on a trade date basis.
FINANCIAL
ASSETS
The Group classifies its financial assets in the following
category: financial assets at fair value through profit and
loss. The Group determines the classification of its financial
assets at initial recognition and re-evaluates this designation
at each financial year end. When financial assets are recognised
initially, they are measured at fair value, being the
transaction price plus directly attributable transaction costs.
Purchase and sales of financial assets are recognised on the
trade date, being the trade date that the company commits to
purchase or sell the financial assets.
FINANCIAL
ASSETS AT FAIR VALUE THROUGH PROFIT AND LOSS
Financial assets are classified in this category if they are
acquired for sale in the short term. These financial assets are
carried in the balance sheet at fair value with gains or losses
being recognised in the profit and loss account.
FAIR
VALUES
The fair value of quoted investments is determined by reference
to bid prices at the close of business on the balance sheet
date. Where there is no active market, fair value is determined
using valuation techniques. These include using recent
arms length market transactions and reference to the
current market value of another instrument which is
substantially the same. Where there is no reasonable basis for
fair valuing and the fair value cannot be measured reliably,
assets will be carried at cost. Financial assets are classified
in this category if they are acquired for sale in the short
term. These financial assets are carried in the balance sheet at
fair value with gains or losses being recognised in the profit
and loss account.
DEPRECIATION
Depreciation of tangible fixed assets is charged by equal annual
instalments commencing with the year of acquisition at rates
estimated to write off their cost over their expected useful
lives, which are as follows:
|
|
|
|
|
|
|
Motor vehicles
|
|
|
|
|
|
4 years
|
Computer equipment
|
|
|
|
|
|
4 years
|
Furniture, fixtures and fittings
|
|
|
|
|
|
4 years
|
Software development
|
|
|
|
|
|
4 years
|
Leasehold improvements
|
|
|
|
|
|
Over the period of the lease
|
The carrying values of tangible fixed assets, are reviewed for
impairment when events or changes in circumstances indicate the
carrying value may not be recoverable.
F-54
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
|
|
1
|
PRINCIPAL
ACCOUNTING POLICIES (Continued)
|
DEBTORS
Debtors are stated at their recoverable value. At each balance
sheet date debtors are reviewed to determine whether there is an
indication of impairment. If any such indication exists, the
recoverable amount is estimated. A provision for impairment is
recognised in the profit and loss account. The provision is
subject to management review.
LEASES
AND HIRE PURCHASE CONTRACTS
Assets held under finance leases, which are leases where
substantially all the risks and rewards of ownership have passed
to the Group, and hire purchase contracts are capitalised in the
balance sheet and depreciated over the shorter of the lease term
and the assets useful lives. The capital element of future
obligations under leases and hire purchase contracts is included
as a liability in the balance sheet. The interest elements of
rental obligations are charged in the profit and loss account
over the periods of the leases and hire purchase contracts and
represent a constant proportion of the balance of capital
repayments outstanding.
Rentals paid under operating leases are charged to the profit
and loss account on a straight line basis over the lease term.
Lease incentives are recognised over the shorter of the lease
term and the date of the next rent review.
DEFERRED
TAXATION
Deferred tax is recognised in respect of all timing differences
that have originated but not reversed at the balance sheet date
where transactions or events that result in an obligation to pay
more tax in the future or a right to pay less tax in the future
have occurred at the balance sheet date. Timing differences are
differences between the companys taxable profits and its
results as stated in the financial statements that arise from
the inclusion of gains and losses in tax assessments in periods
different from those in which they are recognised in the
financial statements.
Deferred tax is measured at the average tax rates that are
expected to apply in the periods in which timing differences are
expected to reverse, based on tax rates and laws that have been
enacted or substantially enacted by the balance sheet date.
Deferred tax is measured on a non-discounted basis. Deferred tax
assets are recognised to the extent that it is regarded as more
likely than not that they will be recovered.
EMPLOYEE
BENEFIT TRUST
The assets and liabilities of the Employee Benefit Trust (EBT)
have been included in the Group financial statements. Any assets
held by the EBT cease to be recognised on the Group balance
sheet when the assets vest unconditionally in identified
beneficiaries. The costs of purchasing own shares held by the
EBT are shown as a deduction against equity. The proceeds from
the sale of own shares held increase equity. Neither the
purchase nor sale of own shares leads to a gain or loss being
recognised in the Group income statement.
FOREIGN
CURRENCIES
The Group operates a US$ denominated profit and loss account on
foreign exchange. All these balances are sold down daily to
sterling. Any profit or loss arising from such trading activity
is included within operating (loss)/profit. All monetary assets
and liabilities are translated at the closing rate at 22:00 GMT
on 31 December 2009.
F-55
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
|
|
1
|
PRINCIPAL
ACCOUNTING POLICIES (Continued)
|
FOREIGN
SUBSIDIARIES
The assets and liabilities of foreign operations are translated
into sterling at the rate of exchange ruling at the balance
sheet date. Income and expenses are translated at weighted
average exchange rates for the year. The resulting exchange
differences are recognised in reserves.
CLIENT
MONEY
The Group holds money on behalf of clients in accordance with
the Client Money Rules of the Financial Services Authority. Such
monies and the corresponding liabilities to the clients are
included in the balance sheet as disclosed in the notes.
PROVISIONS
FOR LIABILITIES AND CHARGES
A provision is recognised when the company has a legal or
constructive obligation as a result of a past event and it is
probable that an outflow of economic benefits will be required
to settle the obligation.
SHARE-BASED
PAYMENT
The cost of employees services received in exchange for
the grant of rights under an equity-based employee compensation
scheme is measured by reference to the fair value of the equity
instruments at the date of the grant. Fair value of the equity
instruments at the date of the grant is determined by an
external valuer using an appropriate pricing model or using
recent arms length market transactions.
The Group provides a loan to the employees to purchase the
equity instruments through an Employee Benefit Trust at the
price equal to the fair value of the equity instruments at the
date of the grant.
The cost of employees services received in exchange for
the grant of rights under the equity-based employee compensation
scheme is nil, ie. being the fair value of equity instruments
less the purchase price.
There is therefore no charge to the Profit and Loss Account in
accordance with FRS20 Share-based Payment.
SOFTWARE
DEVELOPMENT COSTS
Software development costs are capitalised in accordance with
the accounting policy given below. Initial capitalisation of
costs is based on managements judgment that technological
and economical feasibility is confirmed, usually when a product
development project has reached a defined milestone according to
an established project management model. In determining the
amounts to be capitalised management makes assumptions regarding
the expected future cash generation of the assets, discount
rates to be applied and the expected period of benefits. At
31 December 2009, the carrying amount of capitalised
development costs was £3,810,879 (2008: £4,203,332).
GOODWILL
Positive goodwill arising on acquisitions is capitalised and
classified as an asset on the balance sheet and amortised on a
straight line basis over its useful economic life up to a
presumed maximum of 20 years. It is reviewed for impairment
at the end of the first full financial year following the
acquisition and in other periods if events or changes in
circumstances indicate that the carrying value may not be
recoverable.
F-56
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
|
|
2
|
POST
BALANCE SHEET EVENTS
|
On 5 February 2010, the entire issued share capital of ODL
Canada Limited was sold for a total consideration of £1,
reflecting the Net Asset Value of the company on that date.
On 30 June 2010, it has been agreed in principle that the
intercompany loan to ODL IT Services Limited of £4,311,070
would be forgiven by ODL Group Limited and that ODL IT Services
Limited would be wound up before 31 December 2010.
On 30 March 2010, the subordinated loan of £6,500,000
was converted into 6,500,000 ordinary £1 shares,
issued at par value to its immediate parent company, ODL Group
Limited to strengthen the Companys balance sheet and
regulatory capital.
On 1 May 2010, terms were agreed with FXCM Holdings LLC for
the acquisition of the entire issued share capital of ODL Group
Limited for share consideration, the final value of which is to
be determined by performance in 12 month period subsequent
to the completing of the transaction.
Management is reviewing the usefulness of the capitalised
software development cost and may make provisions in the future.
The Groups trading income comprises a single segment;
foreign exchange and derivatives trading and related broking
activities, and is sourced from the UK to global customers.
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
Trading revenues
|
|
|
25,933,756
|
|
|
|
39,782,549
|
|
Interest income
|
|
|
1,201,562
|
|
|
|
2,605,515
|
|
MTM loss on unlisted investments and warrants
|
|
|
(393,546
|
)
|
|
|
(503,573
|
)
|
Other income (which includes FX gains/losses)
|
|
|
823,691
|
|
|
|
1,010,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,565,464
|
|
|
|
42,895,217
|
|
|
|
|
|
|
|
|
|
|
F-57
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
OPERATING LOSS IS STATED AFTER CHARGING:
|
|
|
|
|
|
|
|
|
Auditors remuneration:
|
|
|
|
|
|
|
|
|
as auditors
|
|
|
438,715
|
|
|
|
441,036
|
|
taxation services
|
|
|
43,573
|
|
|
|
40,188
|
|
other services
|
|
|
3,163
|
|
|
|
29,375
|
|
Operating Leases:
|
|
|
|
|
|
|
|
|
land and buildings
|
|
|
1,168,311
|
|
|
|
965,335
|
|
Write off of assets in relation to software development
|
|
|
|
|
|
|
890,430
|
|
Write off of goodwill
|
|
|
|
|
|
|
4,242,053
|
|
Foreign currency translation losses on the over hedging of net
investments
|
|
|
|
|
|
|
3,120,000
|
|
Commissions due to third parties
|
|
|
1,056,143
|
|
|
|
587,960
|
|
Provision for settlement of software agreement dispute
|
|
|
|
|
|
|
300,000
|
|
Depreciation (note 9)
|
|
|
3,085,086
|
|
|
|
2,896,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
Recognised below operating loss:
|
|
|
|
|
|
|
|
|
Loss on sale of subsidiary
|
|
|
|
|
|
|
92,952
|
|
Write down of assets/costs in relation to closure of trading
desks
|
|
|
(1,320,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,320,498
|
)
|
|
|
92,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
STAFF COSTS INCLUDING DIRECTORS EMOLUMENTS:
|
|
|
|
|
|
|
|
|
Wages and Salaries
|
|
|
9,556,659
|
|
|
|
11,135,846
|
|
Social security costs
|
|
|
1,194,543
|
|
|
|
1,681,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,751,202
|
|
|
|
12,817,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No.
|
|
|
No.
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE NUMBER EMPLOYED INCLUDING DIRECTORS
|
|
|
|
|
|
|
|
|
Trading
|
|
|
87
|
|
|
|
108
|
|
Information technology
|
|
|
35
|
|
|
|
43
|
|
Management and administration
|
|
|
59
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
F-58
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
|
|
7
|
INTANGIBLE
FIXED ASSETS
|
|
|
|
|
|
|
|
ODL
|
|
GOODWILL
|
|
Capital
|
|
|
|
£
|
|
|
Cost
|
|
|
|
|
At 1 January 2008
|
|
|
4,067,278
|
|
Write off / impairment
|
|
|
(4,067,278
|
)
|
|
|
|
|
|
At 31 December 2008
|
|
|
|
|
|
|
|
|
|
Amortisation
|
|
|
|
|
At 1 January 2008
|
|
|
(52,689
|
)
|
Charge for the year
|
|
|
(158,068
|
)
|
Write off / impairment
|
|
|
210,757
|
|
|
|
|
|
|
At 31 December 2008
|
|
|
|
|
|
|
|
|
|
Net Book Value
|
|
|
|
|
At 31 December 2008
|
|
|
|
|
|
|
|
|
|
F-59
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
(a) TAX CHARGE BASED ON THE LOSS FOR THE YEAR
|
|
|
|
|
|
|
|
|
Current tax:
|
|
|
|
|
|
|
|
|
UK Corporation tax on results of the year
|
|
|
325,188
|
|
|
|
|
|
Adjustments in respect of prior years
|
|
|
(359,194
|
)
|
|
|
194,781
|
|
Foreign tax
|
|
|
22,550
|
|
|
|
1,385,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,456
|
)
|
|
|
1,580,748
|
|
Deferred tax:
|
|
|
|
|
|
|
|
|
Deferred tax credit for the year (see notes 11 and 13)
|
|
|
(3,908,291
|
)
|
|
|
(135,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,919,747
|
)
|
|
|
1,445,461
|
|
|
|
|
|
|
|
|
|
|
(b) FACTORS AFFECTING TAX CHARGE FOR THE YEAR
|
|
|
|
|
|
|
|
|
The tax assessed for the year is different from the standard
rate of corporation tax in the UK (2009:28%; 2008:28.5%). The
differences are explained below:
|
|
|
|
|
|
|
|
|
Loss before taxation
|
|
|
(15,294,395
|
)
|
|
|
(5,729,917
|
)
|
|
|
|
|
|
|
|
|
|
UK Corporation tax thereon
|
|
|
(4,282,431
|
)
|
|
|
(1,633,026
|
)
|
Depreciation in excess of capital allowances
|
|
|
220,171
|
|
|
|
306,702
|
|
Expenses not deductible for tax purposes
|
|
|
403,657
|
|
|
|
81,049
|
|
Differing rates of overseas tax
|
|
|
|
|
|
|
372,519
|
|
Differing rates on tax losses carried back
|
|
|
5,860
|
|
|
|
|
|
Utilisation of brought forward tax losses
|
|
|
(148,742
|
)
|
|
|
|
|
Unutilised losses carried forward
|
|
|
3,776,280
|
|
|
|
2,235,923
|
|
Provision for tax on loans to EBT
|
|
|
340,188
|
|
|
|
|
|
Other timing differences
|
|
|
32,755
|
|
|
|
22,800
|
|
Prior year adjustment
|
|
|
(359,194
|
)
|
|
|
194,780
|
|
|
|
|
|
|
|
|
|
|
Current tax (credit)/charge
|
|
|
(11,456
|
)
|
|
|
1,580,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture,
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold
|
|
|
Motor
|
|
|
Fixtures and
|
|
|
Computer
|
|
|
Software
|
|
|
|
|
|
|
Improvements
|
|
|
Vehicles
|
|
|
Fittings
|
|
|
Equipment
|
|
|
Development
|
|
|
Total
|
|
|
|
£
|
|
|
£
|
|
|
£
|
|
|
£
|
|
|
£
|
|
|
£
|
|
|
COST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 January 2009
|
|
|
2,528,202
|
|
|
|
41,854
|
|
|
|
692,466
|
|
|
|
10,460,167
|
|
|
|
6,659,856
|
|
|
|
20,382,545
|
|
Additions
|
|
|
174,757
|
|
|
|
|
|
|
|
|
|
|
|
781,523
|
|
|
|
1,138,173
|
|
|
|
2,094,453
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(802,278
|
)
|
|
|
(802,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 December 2009
|
|
|
2,702,959
|
|
|
|
41,854
|
|
|
|
692,466
|
|
|
|
11,241,690
|
|
|
|
6,995,751
|
|
|
|
21,674,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEPRECIATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 January 2009
|
|
|
627,092
|
|
|
|
20,006
|
|
|
|
463,354
|
|
|
|
5,163,285
|
|
|
|
2,456,524
|
|
|
|
8,730,261
|
|
Charge for the year
|
|
|
291,509
|
|
|
|
10,464
|
|
|
|
100,363
|
|
|
|
1,630,033
|
|
|
|
1,052,717
|
|
|
|
3,085,086
|
|
Disposals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(324,369
|
)
|
|
|
(324,369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 December 2009
|
|
|
918,601
|
|
|
|
30,470
|
|
|
|
563,717
|
|
|
|
6,793,318
|
|
|
|
3,184,872
|
|
|
|
11,490,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET BOOK VALUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 December 2009
|
|
|
1,784,358
|
|
|
|
11,384
|
|
|
|
128,749
|
|
|
|
4,448,372
|
|
|
|
3,810,879
|
|
|
|
10,183,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At the year-end the Group had capital commitments of £Nil
(2008 £Nil).
F-60
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
|
|
9
|
TANGIBLE
FIXED ASSETS (Continued)
|
Included within the cost of computer equipment is
£2,421,532 in respect of assets acquired under a finance
lease (2008 £2,421,532). The amount of
depreciation charged in respect of such assets for the year was
£189,473 (2008 £212,574). Cumulative
depreciation as at 31 December 2009 was £402,047
(2008- £212,574).
Included within computer software is £231,493 in respect of
assets acquired during the year but not brought into use as at
31 December 2009 (2008 £1,341,275). No
depreciation has therefore been charged on these assets within
the year.
TANGIBLE
FIXED ASSETS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture,
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold
|
|
|
Motor
|
|
|
Fixtures and
|
|
|
Computer
|
|
|
Software
|
|
|
|
|
|
|
Improvements
|
|
|
Vehicles
|
|
|
Fittings
|
|
|
Equipment
|
|
|
Development
|
|
|
Total
|
|
|
|
£
|
|
|
£
|
|
|
£
|
|
|
£
|
|
|
£
|
|
|
£
|
|
|
COST
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 January 2008
|
|
|
2,238,532
|
|
|
|
41,854
|
|
|
|
808,473
|
|
|
|
9,152,141
|
|
|
|
5,714,855
|
|
|
|
17,955,855
|
|
Additions
|
|
|
289,670
|
|
|
|
|
|
|
|
67,724
|
|
|
|
2,277,824
|
|
|
|
1,391,953
|
|
|
|
4,027,171
|
|
Write off / impairment
|
|
|
|
|
|
|
|
|
|
|
(183,731
|
)
|
|
|
(969,798
|
)
|
|
|
(446,952
|
)
|
|
|
(1,600,481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 December 2008
|
|
|
2,528,202
|
|
|
|
41,854
|
|
|
|
692,466
|
|
|
|
10,460,167
|
|
|
|
6,659,856
|
|
|
|
20,382,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEPRECIATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 January 2008
|
|
|
374,468
|
|
|
|
9,543
|
|
|
|
378,803
|
|
|
|
3,534,146
|
|
|
|
1,687,016
|
|
|
|
5,983,976
|
|
Charge for the year
|
|
|
252,624
|
|
|
|
10,463
|
|
|
|
151,829
|
|
|
|
1,629,139
|
|
|
|
852,079
|
|
|
|
2,896,134
|
|
Write off / impairment
|
|
|
|
|
|
|
|
|
|
|
(67,278
|
)
|
|
|
|
|
|
|
(82,571
|
)
|
|
|
(149,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 December 2008
|
|
|
627,092
|
|
|
|
20,006
|
|
|
|
463,354
|
|
|
|
5,163,285
|
|
|
|
2,456,524
|
|
|
|
8,730,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET BOOK VALUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 December 2008
|
|
|
1,901,110
|
|
|
|
21,848
|
|
|
|
229,112
|
|
|
|
5,296,882
|
|
|
|
4,203,332
|
|
|
|
11,652,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
FINANCIAL
ASSETS AT FAIR VALUE THROUGH PROFIT AND LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Listed
|
|
|
Unlisted
|
|
|
Total
|
|
|
|
£
|
|
|
£
|
|
|
£
|
|
|
GROUP
|
|
|
|
|
|
|
|
|
|
|
|
|
1 January 2009 (as restated)
|
|
|
4,995,562
|
|
|
|
404,358
|
|
|
|
5,399,920
|
|
Market value adjustment recognised in the profit and loss account
|
|
|
(64,831
|
)
|
|
|
(393,546
|
)
|
|
|
(458,377
|
)
|
Net movement
|
|
|
5,499,795
|
|
|
|
(10,812
|
)
|
|
|
5,488,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 December 2009
|
|
|
10,430,526
|
|
|
|
|
|
|
|
10,430,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 January 2008
|
|
|
4,747,318
|
|
|
|
661,719
|
|
|
|
5,409,037
|
|
Additions
|
|
|
5,041,850
|
|
|
|
246,213
|
|
|
|
5,288,063
|
|
Market value adjustment recognised in the profit and loss amount
|
|
|
(215,908
|
)
|
|
|
(503,573
|
)
|
|
|
(719,481
|
)
|
Disposals
|
|
|
(4,577,698
|
)
|
|
|
|
|
|
|
(4,577,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 December 2008 (as restated)
|
|
|
4,995,562
|
|
|
|
404,359
|
|
|
|
5,399,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-61
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
|
(as restated)
|
|
|
Amounts falling due within one year:
|
|
|
|
|
|
|
|
|
Deferred tax
|
|
|
3,697,489
|
|
|
|
|
|
Corporation tax receivable
|
|
|
1,377,647
|
|
|
|
1,023,538
|
|
Trade debtors
|
|
|
15,855,952
|
|
|
|
24,441,158
|
|
Prepayments and accrued income
|
|
|
1,681,161
|
|
|
|
2,949,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,612,249
|
|
|
|
28,414,639
|
|
|
|
|
|
|
|
|
|
|
Trade debtors include amounts owed by customers, where the
amounts owing are fully collateralised. The assets belonging to
the customers, used to collateralise these balances, are not
held on the balance sheet. Included within creditors are
commissions held back as collateral against the above of
£1,013,700 (2008-£582,579). The amount is shown net of
a bad debt provision of £7,224,097 (2008: £ Nil).
The movement in provisions follows:
|
|
|
|
|
|
|
£
|
|
|
As at 31 December 2008
|
|
|
|
|
Provisions
|
|
|
7,224,097
|
|
|
|
|
|
|
As at 31 December 2009
|
|
|
7,224,097
|
|
|
|
|
|
|
Of the £7.2m provision above £5.1m was against a
specific counterparty and £0.8m was a provision in respect
of irregular payments made to an employee that the Group is
seeking to recover.
The following table includes an analysis of financial assets by
credit quality:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
Total neither past due nor impaired
|
|
|
10,164,743
|
|
|
|
28,414,639
|
|
Past due-not impaired
|
|
|
|
|
|
|
|
|
Past due-impaired
|
|
|
12,447,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,612,249
|
|
|
|
28,414,639
|
|
|
|
|
|
|
|
|
|
|
Past due-not impaired are debtors outstanding less than 3 months.
Past due-not impaired are debtors outstanding over 3 months.
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
Deferred tax is made up of:
|
|
|
|
|
|
|
|
|
Decelerated capital allowances
|
|
|
484,092
|
|
|
|
(225,601
|
)
|
Unutilised tax losses
|
|
|
3,213,397
|
|
|
|
44,800
|
|
General
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,697,489
|
|
|
|
(210,801
|
)
|
|
|
|
|
|
|
|
|
|
F-62
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
|
|
|
|
|
|
|
|
|
|
|
£
|
|
|
£
|
|
|
Movement in deferred tax:
|
|
|
|
|
|
|
|
|
Balance at the start of the year
|
|
|
(210,801
|
)
|
|
|
(346,088
|
)
|
Origination and reversal of timing differences
|
|
|
(3,908,290
|
)
|
|
|
110,301
|
|
Recognition of previously unrecognised deferred tax assets
|
|
|
|
|
|
|
22,400
|
|
Changes in tax rates and tax laws
|
|
|
|
|
|
|
2,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,697,489
|
|
|
|
(210,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movement in deferred tax:
|
|
|
|
|
|
|
|
|
Balance at the start of the year
|
|
|
(210,801
|
)
|
|
|
(346,088
|
)
|
Origination and reversal of timing differences
|
|
|
(3,908,290
|
)
|
|
|
110,341
|
|
Recognition of previously unrecognised deferred tax assets
|
|
|
|
|
|
|
22,400
|
|
Changes in tax rates and tax laws
|
|
|
|
|
|
|
2,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,697,489
|
|
|
|
(210,801
|
)
|
|
|
|
|
|
|
|
|
|
The Directors believe that the actions taken to minimise all
risks going forward and the acquisition of the Group by FXCM
Holdings LLC will ensure that the Group will be able to manage
its business risk successfully in the coming months. This will
enable the Group to continue to enhance its market position and
grow its business to generate sufficient trading profits in
future years for the Group to utilise the trading losses carried
forward. Hence, the full deferred tax asset was recognised in
the 2009 financial statements.
With regard to the unrecognised deferred tax assets, it was not
considered more likely than not that there would be sufficient
profits/gains in future years against which the capital losses
in ODL Securities Limited, the excess management expenses in ODL
Group Limited, or the trading losses in ODL IT Services Limited
could be relieved. Therefore, deferred tax asset of
£1,193,508 (2008: £2,000,599) was not recognised in
respect of these losses.
|
|
12a)
|
CREDITORS:
amounts falling due within one year
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Group
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(As restated)
|
|
|
|
£
|
|
|
£
|
|
|
Bank overdraft
|
|
|
122,119
|
|
|
|
|
|
Trade creditors
|
|
|
185,377,212
|
|
|
|
157,981,273
|
|
Short equity positions
|
|
|
1,557,261
|
|
|
|
149,523
|
|
Corporation tax payable
|
|
|
340,188
|
|
|
|
86,346
|
|
Obligations under finance leases and hire purchase agreements
(note 23)
|
|
|
250,401
|
|
|
|
|
|
Other taxation and social security
|
|
|
282,372
|
|
|
|
391,508
|
|
Other creditors
|
|
|
6,041,574
|
|
|
|
1,161,184
|
|
Accruals and deferred income
|
|
|
4,009,207
|
|
|
|
4,685,445
|
|
Amounts due to subsidiary undertakings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197,980,334
|
|
|
|
165,451,109
|
|
|
|
|
|
|
|
|
|
|
Trade creditors include customer balances of £168,940,115
(2008: £125,170,776).
|
|
|
|
|
|
|
|
|
F-63
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
|
|
12b)
|
CREDITORS:
amounts falling due after more than one year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group
|
|
|
Group
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
Obligations under finance leases and hire purchase agreements
(note 23)
|
|
|
27,476
|
|
|
|
277,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
PROVISIONS
FOR LIABILITIES AND CHARGES GROUP
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
Deferred taxation:
|
|
|
|
|
|
|
|
|
1 January
|
|
|
210,801
|
|
|
|
346,088
|
|
Utilised during the year
|
|
|
(210,801
|
)
|
|
|
(135,287
|
)
|
|
|
|
|
|
|
|
|
|
31 December
|
|
|
|
|
|
|
210,801
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
DERIVATIVES
AND OTHER FINANCIAL INSTRUMENTS
|
The Groups principal financial instruments, which are held
in subsidiaries of the company, other than derivative
transactions, comprise cash balances with brokers and customers,
and other debtors or creditors that arise through the normal
course of business. Derivative transactions with brokers are
entered into in the normal course of business in order to hedge
market exposures resulting from derivative transactions placed
by customers.
Fair
Values
There are no significant differences between the fair value of
the Groups financial assets and liabilities and their
carrying value in the balance sheet.
Included in Financial assets at fair value through profit and
loss are assets, categorised as Level I, valued at the
quoted market price of £10,430,526 (2008: £4,995,562)
and assets, categorised as Level II, valued at costs except
where the board believe that there has been a diminution in
value of £Nil (2008: £404,359). There have been no
Investments held where the basis of valuation has changed during
the year.
Included in Creditors are short equity positions where the
valuation is based on the quoted open market price of
£1,557,261 (2008: £149,523).
The fair value of the Groups financial assets and
liabilities analysed into appropriate categories, including
assets held on behalf of customers on a segregated basis is as
follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(As restated)
|
|
|
|
£
|
|
|
£
|
|
|
FINANCIAL ASSETS
|
|
|
|
|
|
|
|
|
Financial assets at fair value through profit and loss
|
|
|
10,430,526
|
|
|
|
5,399,920
|
|
Receivables
|
|
|
22,612,249
|
|
|
|
28,414,639
|
|
Cash and cash equivalents
|
|
|
165,612,366
|
|
|
|
142,383,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
198,655,141
|
|
|
|
176,198,460
|
|
|
|
|
|
|
|
|
|
|
The Groups largest credit exposure to any bank at
31 December 2009 was £24,195,492 or 15% of the
exposure to all banks and clearers (2008: £34,506,586). The
group has no significant exposure to any one
F-64
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
|
|
14
|
DERIVATIVES
AND OTHER FINANCIAL
INSTRUMENTS (Continued)
|
particular client. The balance of cash and cash equivalents will
fluctuate over the course of the reporting period.
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(As restated)
|
|
|
|
£
|
|
|
£
|
|
|
FINANCIAL LIABILITIES
|
|
|
|
|
|
|
|
|
Payables: Current Liabilities
|
|
|
197,980,334
|
|
|
|
165,451,109
|
|
|
|
|
|
|
|
|
|
|
Interest
rate profile of financial instruments
The interest rate risk profile of the Groups financial
assets and liabilities at the balance sheet date was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
Financial Liabilities
|
|
|
|
Floating
|
|
|
Nil
|
|
|
|
|
|
Floating
|
|
|
Nil
|
|
|
|
|
|
|
Rate
|
|
|
Rate
|
|
|
Total
|
|
|
Rate
|
|
|
Rate
|
|
|
Total
|
|
|
|
£
|
|
|
£
|
|
|
£
|
|
|
£
|
|
|
£
|
|
|
£
|
|
|
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sterling
|
|
|
46,135,133
|
|
|
|
9,462,916
|
|
|
|
55,598,049
|
|
|
|
66,442,718
|
|
|
|
10,424,798
|
|
|
|
76,867,516
|
|
US Dollars
|
|
|
76,709,675
|
|
|
|
760,898
|
|
|
|
77,470,573
|
|
|
|
79,332,917
|
|
|
|
330,270
|
|
|
|
79,663,187
|
|
Euros
|
|
|
28,187,156
|
|
|
|
10,259,730
|
|
|
|
38,446,886
|
|
|
|
15,939,701
|
|
|
|
|
|
|
|
15,939,701
|
|
Other
|
|
|
16,350,419
|
|
|
|
10,789,214
|
|
|
|
27,139,633
|
|
|
|
25,341,256
|
|
|
|
168,674
|
|
|
|
25,509,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167,382,383
|
|
|
|
31,272,758
|
|
|
|
198,655,141
|
|
|
|
187,056,592
|
|
|
|
10,923,742
|
|
|
|
197,980,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sterling
|
|
|
74,425,229
|
|
|
|
|
|
|
|
74,425,229
|
|
|
|
54,915,333
|
|
|
|
9,129,758
|
|
|
|
64,045,091
|
|
US Dollars
|
|
|
62,704,052
|
|
|
|
|
|
|
|
62,704,052
|
|
|
|
90,242,295
|
|
|
|
244,440
|
|
|
|
90,486,735
|
|
Euros
|
|
|
24,619,578
|
|
|
|
215,590
|
|
|
|
24,835,168
|
|
|
|
8,413,733
|
|
|
|
|
|
|
|
8,413,733
|
|
Other
|
|
|
|
|
|
|
14,234,011
|
|
|
|
14,234,011
|
|
|
|
|
|
|
|
2,505,550
|
|
|
|
2,505,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,748,859
|
|
|
|
14,449,601
|
|
|
|
176,198,460
|
|
|
|
153,571,361
|
|
|
|
11,879,748
|
|
|
|
165,451,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The floating rate financial instruments comprise cash at bank on
which interest is earned at bank base rates and amounts due to
and from customers and brokers on which interest is paid and
received based on LIBOR. Nil rate financial instruments comprise
other debtors and creditors on which no interest is received or
paid.
All financial instruments mature within one year. The following
sensitivity analysis shows the potential impact of significant
market moves on revenue. The percentage applied is based upon
the Groups assessment of movements in the relevant markets
and is considered to represent a single days movement that
could be reasonably possible. It does assume that all market
positions held by the Group would be affected in the same way
and does not take account of any remedial action taken to manage
risk that would be undertaken at the time.
F-65
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
|
|
14
|
DERIVATIVES
AND OTHER FINANCIAL
INSTRUMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
Potential
|
|
|
|
Exposure
|
|
|
Movement
|
|
|
Revenue
|
|
|
|
2009
|
|
|
Applied
|
|
|
Impact
|
|
|
|
£
|
|
|
%
|
|
|
£
|
|
|
ASSET CLASS
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Products
|
|
|
11,329,740
|
|
|
|
10
|
%
|
|
|
1,132,974
|
|
Foreign Exchange
|
|
|
43,177,572
|
|
|
|
2
|
%
|
|
|
863,551
|
|
Commodities
|
|
|
2,481,197
|
|
|
|
20
|
%
|
|
|
496,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,988,509
|
|
|
|
|
|
|
|
2,492,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
Potential
|
|
|
|
Exposure
|
|
|
Movement
|
|
|
Revenue
|
|
|
|
2008
|
|
|
Applied
|
|
|
Impact
|
|
|
|
£
|
|
|
%
|
|
|
£
|
|
|
ASSET CLASS
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Products
|
|
|
8,590,385
|
|
|
|
10
|
%
|
|
|
859,039
|
|
Foreign Exchange
|
|
|
63,461,713
|
|
|
|
2
|
%
|
|
|
1,269,234
|
|
Commodities
|
|
|
1,869,463
|
|
|
|
20
|
%
|
|
|
373,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,921,561
|
|
|
|
|
|
|
|
2,502,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
Risk
The functional currency of the Group is sterling. The net
monetary assets and liabilities analysed by currency at the
balance sheet date were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
£
|
|
|
£
|
|
|
|
|
|
Sterling
|
|
|
(21,269,467
|
)
|
|
|
10,380,138
|
|
|
|
|
|
US Dollars
|
|
|
(2,192,614
|
)
|
|
|
(27,782,683
|
)
|
|
|
|
|
Euros
|
|
|
22,507,185
|
|
|
|
16,421,435
|
|
|
|
|
|
Other currencies
|
|
|
1,629,703
|
|
|
|
11,728,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
674,807
|
|
|
|
10,747,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-66
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
|
|
15
|
CALLED UP
EQUITY SHARE CAPITAL AUTHORISED
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
111,098,535 ordinary shares of £0.01 each
|
|
|
1,110,985
|
|
|
|
1,110,985
|
|
238,971,150 deferred shares of £0.01 each
|
|
|
2,389,712
|
|
|
|
2,389,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,500,697
|
|
|
|
3,500,697
|
|
|
|
|
|
|
|
|
|
|
ALLOTTED AND CALLED UP
|
|
|
|
|
|
|
|
|
Ordinary shares of £0.01 each at 1 January
|
|
|
32,207
|
|
|
|
32,175
|
|
Issued during the year
|
|
|
271
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
At 31 December
|
|
|
32,478
|
|
|
|
32,207
|
|
Deferred shares of £0.01 each at 1 January
|
|
|
2,005,460
|
|
|
|
2,005,460
|
|
Issued during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At 31 December
|
|
|
2,005,460
|
|
|
|
2,005,460
|
|
|
|
|
|
|
|
|
|
|
Total at 31 December
|
|
|
2,037,938
|
|
|
|
2,037,667
|
|
|
|
|
|
|
|
|
|
|
On 26 May 2006, there was a re-organisation of share
capital, pursuant to which each issued and
un-issued
ordinary share of £1 each was
sub-divided
and re-designated as one ordinary share of £0.01 each and
ninety nine deferred shares of £0.01 each. On that date the
authorised share capital of the Group was increased to
£3,500,000.
The Deferred Shares shall entitle the holders to the following
rights:
(a) no right to receive any dividend or other distribution;
(b) on a return of capital in a liquidation but not
otherwise, the right to receive only the amount paid up on each
Deferred Share but only after the holder of each Ordinary Share
shall have received £100,000,000 per Ordinary Share and the
holders of Deferred Shares shall not be entitled to any further
participation in the assets or profits of the Company;
(c) no right to receive notice of, or to attend or vote at,
any general meeting of the Company.
The Group funds each of its operating subsidiaries with
sufficient capital to ensure it is able to meet its regulatory
obligations on a daily basis, in the UK, US and Japan. In doing
so, the Board of Directors believe that the interests of all
stakeholders, including customers and shareholders, are fully
protected. Account is taken of all potential events that could
have an impact on that capital.
Controls are in place to constantly monitor the level of capital
and the regulatory requirements of the activities within each
company. These requirements are based on the level of risk
evident in each subsidiary. Primarily they are influenced by the
level of market risk and credit risk taken on by the
subsidiaries, but additionally by the operational risks,
inherent in the markets in which the Group operates.
Capital is provided in the subsidiaries, in the form of share
capital and subordinated loans from the Company. When additional
capital has been required at any time, further capital has been
injected. It is the Boards policy to maintain the capital
within the Company at such a level that enables additional
funding of subsidiaries to be made when required. Should there
be insufficient capital to inject into a subsidiary, then the
activities, and hence the risks undertaken, in that subsidiary
would be reduced to ensure that regulatory obligations continue
to be met.
F-67
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
|
|
|
|
|
|
|
£
|
|
|
At 1 January 2008 (as reported)
|
|
|
21,423,187
|
|
Prior year adjustment
|
|
|
(183,442
|
)
|
|
|
|
|
|
At 1 January 2008 (as restated)
|
|
|
21,239,745
|
|
Premium on shares issued
|
|
|
106,400
|
|
|
|
|
|
|
At 1 January 2009 (as restated)
|
|
|
21,346,145
|
|
Premium on shares issued
|
|
|
61,405
|
|
|
|
|
|
|
At 31 December 2009
|
|
|
21,407,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
£
|
|
|
At 1 January 2008 (as reported)
|
|
|
3,567,604
|
|
Prior year adjustment
|
|
|
(262,580
|
)
|
|
|
|
|
|
At 1 January 2008 (as restated)
|
|
|
3,305,024
|
|
Movement during year
|
|
|
|
|
|
|
|
|
|
At 1 January 2009 (as restated)
|
|
|
3,305,024
|
|
Movement during year
|
|
|
|
|
|
|
|
|
|
At 31 December 2009
|
|
|
3,305,024
|
|
|
|
|
|
|
|
|
18
|
PROFIT
AND LOSS ACCOUNT
|
|
|
|
|
|
|
|
£
|
|
|
GROUP
|
|
|
|
|
At 1 January 2008 (as reported)
|
|
|
9,969,790
|
|
Prior year adjustment
|
|
|
(860,242
|
)
|
|
|
|
|
|
At 1 January 2008 (as restated)
|
|
|
9,109,548
|
|
Retained loss for the year
|
|
|
(7,175,378
|
)
|
|
|
|
|
|
At 1 January 2009 (as restated)
|
|
|
1,934,170
|
|
Retained loss for the year
|
|
|
(11,374,648
|
)
|
|
|
|
|
|
At 31 December 2009
|
|
|
(9,440,478
|
)
|
|
|
|
|
|
F-68
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
|
|
19
|
RECONCILIATION
OF MOVEMENT IN EQUITY SHAREHOLDERS FUNDS
|
|
|
|
|
|
|
|
£
|
|
|
At 1 January 2008 (as reported)
|
|
|
29,863,009
|
|
Prior year adjustment
|
|
|
(781,104
|
)
|
|
|
|
|
|
At 1 January 2008 (as restated)
|
|
|
29,081,905
|
|
Retained loss for the year
|
|
|
(7,175,378
|
)
|
Movement in share capital (note 15)
|
|
|
32
|
|
Movement in share premium (note 16)
|
|
|
106,400
|
|
Movement in revaluation reserve
|
|
|
(102,002
|
)
|
|
|
|
|
|
At 1 January 2009 (as restated)
|
|
|
21,910,956
|
|
Retained loss for the year
|
|
|
(11,374,648
|
)
|
Movement in share capital (note 15)
|
|
|
271
|
|
Movement in share premium (note 16)
|
|
|
61,405
|
|
Movement in revaluation reserve
|
|
|
233,089
|
|
|
|
|
|
|
At 31 December 2009
|
|
|
10,831,073
|
|
|
|
|
|
|
|
|
20
|
RECONCILIATION
OF OPERATING (LOSS)/PROFIT TO CASH INFLOW FROM OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(As restated)
|
|
|
|
£
|
|
|
£
|
|
|
Operating (loss)/profit
|
|
|
(13,973,897
|
)
|
|
|
(5,822,870
|
)
|
Depreciation (note 9)
|
|
|
3,085,086
|
|
|
|
2,896,134
|
|
Loss from current asset investments
|
|
|
458,377
|
|
|
|
719,481
|
|
Write-off of fixed assets
|
|
|
|
|
|
|
267,614
|
|
Net payment relating to current asset investments
|
|
|
(5,488,983
|
)
|
|
|
(710,354
|
)
|
Closure costs of trading desk
|
|
|
(1,302,498
|
)
|
|
|
|
|
Amortisation of intangible asset
|
|
|
|
|
|
|
158,068
|
|
Decrease/(increase) in debtors
|
|
|
10,902,327
|
|
|
|
(10,490,486
|
)
|
Increase in creditors and provisions
|
|
|
32,177,851
|
|
|
|
22,202,069
|
|
|
|
|
|
|
|
|
|
|
Cash inflow from operating activities
|
|
|
25,840,263
|
|
|
|
9,219,656
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
RECONCILIATION
OF NET CASH INFLOW TO MOVEMENT IN NET FUNDS
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
1 January
|
|
|
141,110,193
|
|
|
|
139,059,429
|
|
Increase in cash for the year
|
|
|
23,228,465
|
|
|
|
1,059,137
|
|
Settlement of finance lease liabilities
|
|
|
879,986
|
|
|
|
580,876
|
|
Bank overdraft
|
|
|
(6,275
|
)
|
|
|
470,751
|
|
|
|
|
|
|
|
|
|
|
Net funds at 31 December
|
|
|
165,212,369
|
|
|
|
141,110,193
|
|
|
|
|
|
|
|
|
|
|
F-69
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
|
|
22
|
ANALYSIS
OF CHANGE IN NET FUNDS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
Cash
|
|
|
At End of
|
|
|
|
Year
|
|
|
Flows
|
|
|
Year
|
|
|
|
£
|
|
|
£
|
|
|
£
|
|
|
Cash at bank and in hand
|
|
|
142,383,901
|
|
|
|
23,228,465
|
|
|
|
165,612,366
|
|
Finance lease liabilities
|
|
|
(1,157,864
|
)
|
|
|
879,986
|
|
|
|
(277,878
|
)
|
Bank overdraft
|
|
|
(115,844
|
)
|
|
|
(6,275
|
)
|
|
|
(122,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,110,193
|
|
|
|
24,102,176
|
|
|
|
165,212,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net funds
2008 (as restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
Cash
|
|
|
At End of
|
|
|
|
Year
|
|
|
Flows
|
|
|
Year
|
|
|
|
£
|
|
|
£
|
|
|
£
|
|
|
Cash at bank and in hand
|
|
|
141,324,764
|
|
|
|
1,059,137
|
|
|
|
142,383,901
|
|
Finance lease liabilities
|
|
|
(1,678,740
|
)
|
|
|
520,876
|
|
|
|
(1,157,864
|
)
|
Bank overdraft
|
|
|
(586,595
|
)
|
|
|
470,751
|
|
|
|
(115,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net funds
|
|
|
139,059,429
|
|
|
|
2,050,764
|
|
|
|
141,110,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net funds are analysed as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(As restated)
|
|
|
|
|
|
|
£
|
|
|
|
£
|
|
|
|
|
|
Own funds
|
|
|
6,343,365
|
|
|
|
11,966,757
|
|
Client funds
|
|
|
159,146,882
|
|
|
|
130,301,300
|
|
Finance lease liabilities
|
|
|
(277,878
|
)
|
|
|
(1,157,864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
165,212,369
|
|
|
|
141,110,193
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
ANNUAL
OBLIGATIONS UNDER OPERATING AND FINANCE LEASES AND HIRE PURCHASE
CONTRACTS
|
At 31 December the company had annual commitments under
non-cancellable operating leases expiring:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
Land and buildings:
|
|
|
|
|
|
|
|
|
Within one year
|
|
|
510,870
|
|
|
|
|
|
Greater than five years
|
|
|
403,449
|
|
|
|
689,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
914,319
|
|
|
|
689,648
|
|
|
|
|
|
|
|
|
|
|
This relates to the contract for rent and works contributions on
the 10 year lease signed on 8th Floor, 10 Lower Thames
Street, and also for the co-terminus 9 year lease signed on
part of the 5th Floor, 10 Lower Thames Street.
F-70
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
|
|
23
|
ANNUAL
OBLIGATIONS UNDER OPERATING AND FINANCE LEASES AND HIRE PURCHASE
CONTRACTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
Computer equipment:
|
|
|
|
|
|
|
|
|
Within one year
|
|
|
58,635
|
|
|
|
|
|
Between one and five years
|
|
|
109,635
|
|
|
|
560,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
168,270
|
|
|
|
560,734
|
|
|
|
|
|
|
|
|
|
|
Amounts due under finance leases and hire purchase contracts:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
Within one year
|
|
|
250,401
|
|
|
|
879,986
|
|
Between one and five years
|
|
|
27,476
|
|
|
|
277,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
277,877
|
|
|
|
1,157,864
|
|
|
|
|
|
|
|
|
|
|
The Group gives to certain executives and employees of
subsidiaries, the opportunity to acquire shares in the Group.
Whilst the Group has no cash or financial obligations to any
party in respect of any shares granted by the Group, the
services in return for which such shares are granted include
services provided to those subsidiaries. The purchase price is
funded by a loan applied for the benefit of the relevant
employees by an Employee Benefit Trust whose funds are provided
by the Group. There are no cash settlement alternatives.
Although the employees become the beneficial owner of the
Groups shares on the date of the grant, the employees will
not be permitted to sell or charge the shares within the first
three years from the date of the grant. Until such time as
employees have repaid the loan, the employees will not be
entitled to exercise their votes in respect to the Groups
shares. Nor will they be entitled to receive dividends in cash
until that time.
The total charge for the year relating to the share-based
payment plan is £nil (2008 £nil) as the
fair value of the equity instruments at the date of the grant is
equal to the purchase price paid by the employees.
A table detailing the shares outstanding as at 31 December
is shown below:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Outstanding as at 1 January
|
|
|
209,211
|
|
|
|
209,211
|
|
Granted during the year
|
|
|
|
|
|
|
|
|
Forfeited during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as at 31 December
|
|
|
209,211
|
|
|
|
209,211
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
RELATED
PARTY TRANSACTIONS
|
In the ordinary course of business, the Group undertakes
transactions on behalf of certain directors and their close
families. The transactions are undertaken on a normal arms
length basis on the same terms available to other members of
staff and comply with the FSAs guidance as to model
personal account dealings. Amounts included in client balances
at 31 December 2009 attributable, in aggregate, to key
management were £82,637 (2008: £51,227).
F-71
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
The Royal Bank of Scotland holds a fixed charge dated
10 June 2004 over all right, title and interest to the ODL
Securities Limited Margin Account and all sums standing to the
credit thereof as security for the payment of secured
obligations.
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
The value of these at 31 December
|
|
|
5,428,167
|
|
|
|
462,541
|
|
|
|
27
|
CONTINGENT
LIABILITIES
|
The Group had no contingent liabilities at the balance sheet
date.
The Company receives and pledges non-cash collateral in the form
of equity shares. The market value of non-cash collateral at the
end of the year was as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
Received and pledged in respect of CFD margin accounts
|
|
|
6,848,306
|
|
|
|
7,354,900
|
|
|
|
|
|
|
|
|
|
|
The Group accepts collateral from clients in the form of share
or other securities which mitigate the Groups credit risk.
Clients retain title to the securities lodged whilst their
trading account is operating normally, but are required to sign
a collateral agreement which will allow the Group to take title
and sell the securities in the event of the client defaulting on
any margin obligation.
|
|
29
|
ULTIMATE
CONTROLLING PARTY AND PARENT UNDERTAKING
|
Gardenparty Limited, a company incorporated in the Isle of Man
owns 51.4% of the issued equity share capital of ODL Group
Limited.
The ultimate controlling party is IFX Trust.
|
|
30
|
TRANSACTION
WITH DIRECTOR
|
During the year ending 31 December 2008, the group disposed
of its investment in ODL Monaco SAM to John Paul Thwaytes, a
director of the company. Transactions entered into, and balances
outstanding at 31 December 2008 are as follows:
|
|
|
|
|
|
|
ODL Monaco SAM
|
|
|
|
£
|
|
|
Gain on sale of subsidiary
|
|
|
154,185
|
|
|
|
|
|
|
Write down of loan
|
|
|
61,232
|
|
|
|
|
|
|
Amount owed by John Paul Thwaytes
|
|
|
279,955
|
|
|
|
|
|
|
31 FINANCIAL
RISK MANAGEMENT
Risks faced by the Group fall under the following categories:
|
|
|
|
|
Market risk, including interest rate risk in the trading book
|
|
|
|
Credit risk
|
F-72
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
31 FINANCIAL
RISK MANAGEMENT (Continued)
|
|
|
|
|
Operational risk
|
|
|
|
Liquidity risk
|
|
|
|
Strategic (or business) risk
|
|
|
|
Reputational risk
|
Each of these risks is described below:
Market
risk
The most significant risk on a day to day basis is Market Risk.
This is the risk that:
|
|
|
|
|
exposures to market price fluctuations inherent in the positions
held by the Group, are excessive in comparison with the capital
held within the business such that an adverse move in the
pricing of those positions, could cause a material loss to
arise; and
|
|
|
|
the hedging strategies adopted by the business to limit its
exposure to fluctuations in market prices of the positions it
holds prove to be flawed.
|
During 2008 the group was over hedging FX positions. This was
rectified in 2009 and stricter guidelines set for the hedging of
FX positions.
Market risk is managed principally by:
|
|
|
|
|
the regular setting and review by the Risk Committee of dealing
mandates with ratification by the Board of Directors, that is
the amount the Group is willing to risk and hence the size of
its allowed proprietary positions; and
|
|
|
|
the continuing monitoring of adherence to these mandates and
limits: and
|
|
|
|
the daily production for senior management of information on
dealing profitability.
|
Given the volatility of earnings experienced in early 2009 and
the losses incurred, the Board has taken the decision to reduce
the level of market risk it is prepared to accept. The result of
this is that for a larger proportion of our business, no market
risk will be taken as positions arising directly from client
activity will be hedged directly with our counterparties, thus
improving the quality of earnings by reducing volatility, in
removing exposures to market fluctuations. The Board consider
the revised levels of exposure now being taken and those planned
to be taken to be acceptable in the overall risk framework of
the business and its business model.
Credit
risk
Within the Group, credit risk is the risk that:
|
|
|
|
|
a bank will be unable to repay the monies deposited with it;
|
|
|
|
a market counterparty through which the Group hedges its
exposures, will be unable to settle the deals made through it or
to repay the monies that it is holding on the Groups
account;
|
|
|
|
a customer is unable to make good a deficit on his account
brought about by losses, whether created by utilising a credit
allocation or by incurring losses at such a rate that the margin
held on the account proves to be insufficient; or
|
F-73
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
31 FINANCIAL
RISK MANAGEMENT (Continued)
|
|
|
|
|
a customer, a counterparty or a bank to which the Group has a
large exposure relative to its capital fails.
|
The Group is therefore exposed to counterparty, credit and
concentration risk.
These risks are managed in the main by:
|
|
|
|
|
the establishment and operation of standard margining rules for
all clients by the Credit Committee with ratification by the
Board;
|
|
|
|
the setting and regular review of specific margining rules and
credit limits by the Credit Committee and their subsequent
reporting to the Board;
|
|
|
|
the continuous monitoring of credit exposures and by the use of
segregated accounts;
|
|
|
|
all credit lines offered are discussed and approved by the
Credit Committee;
|
|
|
|
clear and consistent rules have been established regarding the
closing out of customer positions in the event of customer
losses;
|
|
|
|
customer losses are regularly reviewed and, if significant,
further proofs of supporting funds are requested;
|
|
|
|
the creditworthiness of all new counterparties and banks is
analysed by the Credit Committee;
|
|
|
|
the creditworthiness of all existing counterparties and banks is
reviewed annually or semi annually, dependant on the nature of
the customer and notification limits for debit balances are set
by the Credit Committee;
|
|
|
|
balances with counterparties are reconciled and settled
daily; and
|
|
|
|
all customer funds nominated for segregation are held in
segregated bank accounts.
|
The market place in which the Group operates is centred on
giving clients leverage to trade products. The Group grants
credit to a very small number of clients to allow them to trade
without depositing the entire initial margin, and additionally,
the clients are not called for running losses until the amount
due exceeds the credit limit, which means their losses can come
up to the credit line limit without resulting in a margin call.
The risk appetite will be impacted by the nature of specific
clients and the products that they trade.
Historically, the occurrence of bad debts tended to be caused by
specific control failures which were addressed, rather than a
lack of understanding of relevant risk or the means of measuring
it. As stated above, following the year end, a review of trade
receivables and current assets and the management of credit risk
was undertaken. Weaknesses in the management of credit risk were
uncovered, which resulted in the recoverability of certain
receivables and assets being reassessed and credit controls
being significantly strengthened.
Operational
risk
The Group has internal processes in place to alleviate the
different forms of operational risk it is exposed to.
Principally, these risks can be summarised as follows:
|
|
|
|
|
Financial Risk
|
|
|
|
IT Risk
|
|
|
|
Legal and Compliance Risk
|
F-74
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
31 FINANCIAL
RISK MANAGEMENT (Continued)
Operational risk is managed generally by:
|
|
|
|
|
the determination of operational processes in all areas within
the business and the establishing of policies aimed at building
and strengthening the controls around those processes; and
|
|
|
|
the implementation of those controls covering the organisational
and informational processes set out in those policies.
|
More specifically:
Financial Risk is the risk that incorrect or untimely reporting
of financial information results in:
|
|
|
|
|
the businesss financial position being incorrectly stated;
|
|
|
|
the Group failing to meet its regulatory capital requirements;
|
|
|
|
the Groups financial forecasting being deficient,
resulting in inadequate resources being available; and
|
|
|
|
the Groups customer funds are not segregated in the
correct manner.
|
The following controls are used to measure and manage these
risks:
|
|
|
|
|
daily and monthly financials produced for review by senior
management;
|
|
|
|
semi annual budgetary process involving all areas of the
business with a review process and sign off that involves
buy-in from all;
|
|
|
|
variances between amounts budgeted and actuals reported,
investigated and explained;
|
|
|
|
formal reconciliation procedures over all trading and non
trading processes and balances;
|
|
|
|
the Capital Resources and Resources Requirement prepared and
distributed daily and any major movements or large uses of
capital are investigated; and
|
|
|
|
segregated accounts reconciled daily.
|
IT Risk is the risk arising from:
|
|
|
|
|
IT technology that is insufficiently adequate for its intended
purposes;
|
|
|
|
an IT strategy that is flawed in its conception of what is
required or what are the processes required to implement it;
|
|
|
|
failure in the implementation of an IT strategy or specific IT
projects, including the risk that an essential improvement to a
system, will not deliver the functionality as expected or on
time;
|
|
|
|
the compromising of the security surrounding the Groups
systems; and
|
|
|
|
failure of the Groups systems themselves.
|
Legal and Compliance Risk is the risk of the Group:
|
|
|
|
|
breaking the law or not complying with regulations, industry
requirements, ethical standards or industry prescribed
practices, including treating customers fairly, either
deliberately or accidentally because its understanding of the
law or the regulations is incomplete or not up to date;
|
|
|
|
breaching a law or a regulation relating to money laundering or
other financial crimes; and
|
F-75
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
31 FINANCIAL
RISK MANAGEMENT (Continued)
|
|
|
|
|
failing to enforce a contractual obligation against a
counterparty.
|
The Group manages theses risks by utilising the following
controls:
|
|
|
|
|
the Compliance and Human Resources Departments maintain
documented policies and procedures to assist with the management
of these risks;
|
|
|
|
compliance staff are recruited with appropriate experience to
ensure that compliance issues are handled promptly and correctly;
|
|
|
|
professional advisers are utilised to ensure legal developments
in all areas and amendments to regulatory requirements are
identified and the appropriate action taken in good time;
|
|
|
|
professional advisers are encouraged to be pro-active in
highlighting legislative and regulatory developments; and
|
|
|
|
the training of staff throughout the Group is continuous to
ensure that they are enabled with the knowledge of all
legislative and regulatory developments.
|
People Risk is the risk of:
|
|
|
|
|
the management of the Group becomes stretched and unable to
operate efficiently;
|
|
|
|
employment or workplace practices are inadequate for the purpose
intended;
|
|
|
|
the standard of employees within the Group is inadequate;
|
|
|
|
recruitment policies within the Group are flawed;
|
|
|
|
staff become ineffective or de-motivated;
|
|
|
|
key staff leaving at short notice resulting in the loss of
specific skills and knowledge;
|
|
|
|
employees act in a criminal or malicious way; and
|
|
|
|
the business breaking health and safety regulations or
employment law.
|
The Group uses the following controls to measure and manage
these risks:
|
|
|
|
|
the management structure is dictated by the Board, which itself
includes independent non-executive directors
|
|
|
|
the structure is layered involving board directors with
responsibility for specific areas and a series of committees
designed to ensure control procedures operate effectively, thus
ensuring that there is effective communication and control
within the business;
|
|
|
|
HR policies are in place and are communicated to all staff;
|
|
|
|
staff are appraised on an annual basis;
|
|
|
|
staff training is administered and recorded by the HR Department;
|
|
|
|
all directors and other key personnel are on 3 or more months
notice;
|
|
|
|
HR staff are recruited with appropriate experience to ensure
that all HR issues are handled in the right manner;
|
|
|
|
staff are recruited in accordance with documented procedures,
with references and credit checks taken on every occasion;
|
F-76
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
31 FINANCIAL
RISK MANAGEMENT (Continued)
|
|
|
|
|
segregation of duties is embedded within the business; and
|
|
|
|
compulsory staff holidays are enforced by written procedures.
|
Liquidity
risk
The nature of its business requires the Group to enter into and
settle trades at short notice and to have the funding in place
to do so. The Group is therefore exposed to liquidity risk.
Historically, the Group has not experienced any material costs
relating to liquidity risk. The Board considers the likelihood
of a material loss occurring to be remote.
The following controls are used to measure and manage this risk:
|
|
|
|
|
a range of counterparties, with whom regular meetings are held
to provide them with up to date information on the Groups
financial position and control environment, are used to ensure
the continuance of settlement facilities on competitive terms;
|
|
|
|
constant review of lines in place and the terms offered to the
Groups customers; and
|
|
|
|
a project to implement a Management Information System is in
process, this should include a newly developed working capital
report.
|
The Groups assessment of its liquidity risk exposure is
that:
|
|
|
|
|
the business is currently debt free with sufficient funds
generated by its own capital, allied with non-segregated
customer funds;
|
|
|
|
although the conditions evident in the current market place
would make it more difficult, should the Group have a
requirement to borrow funds, the acquisition by FXCM Holdings
LLC will provide the necessary liquidity should it be
needed; and
|
|
|
|
overall, the level of risk specifically relating to liquidity is
assessed as low. Most of the scenarios where the Group would
potentially suffer failure because of a lack of liquidity, would
be from events relating to operational, credit and market risk.
There is however the risk that events outside the control of the
Group may impact on overall market liquidity and while the
likelihood of such events taking place in the near future have
reduced in recent times, nevertheless the risk still exists.
There would in those circumstances be the need to raise
additional funds to provide liquidity.
|
Strategic
risk
The Group faces the risk that the strategy it has adopted will
be poorly executed or that it will not be sufficient to cope
with major changes in the constantly changing sector in which it
operates. It also faces the risk that the implementation of a
change in strategy may have an impact on the controls put in
place to manage risk.
The following controls are used to measure and manage this risk:
|
|
|
|
|
the ODL Group is managed by the board of ODL Group Limited. The
board includes two independent non-executive directors,
John-Paul Thwaytes and Sean Park, both with extensive experience
in the Financial Services industry. The board meets on a regular
basis, at least every three months, with ad hoc meetings in
between to discuss specific issues. The board sets the strategic
direction of the Group going forward;
|
F-77
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
31 FINANCIAL
RISK MANAGEMENT (Continued)
|
|
|
|
|
the Company itself has regular quarterly and monthly board
meetings, whilst each trading subsidiary has monthly board
meetings numbering at least nine each year, aimed at ensuring
that strategy is properly communicated, implemented and
measured. The members of the subsidiary boards cover all areas
within the business. Possible changes in the business
environment that might materially affect the performance of the
Group are analysed as and when required. In addition, many other
meetings containing all board members take place during the year
to discuss specific issues.
|
|
|
|
a formal budgeting process is carried out each year, ensuring
that the strategy adopted is understood by all concerned, with
constant comparison of performance against the budget taking
place throughout the year;
|
|
|
|
beneath the subsidiary companies boards sit a number of
additional committees which cover various aspects of the
operation of the business. These committees ensure that the
strategy is followed and that anything of significant magnitude
or importance that may have an impact on the strategy of the
business is reported to the board in an efficient and timely
manner;
|
|
|
|
for each material initiative there is a formal project sign off
by all relevant areas. Each project requires a sponsor and a
project manager. The project is then managed against specified
milestones by the New Business Committee;
|
|
|
|
key elements of the Groups risk control, including a high
level framework in the form of the Strategic Risk Register, are
documented; and
|
|
|
|
the Group has a specific Risk Manager appointed to have specific
responsibility for the assessment of risk within each subsidiary
and at group level.
|
The assessment of its strategic risk exposure is that the
Groups corporate structure and the control framework that
it has implemented mean that there are significant controls in
place to ensure business decisions and their implementation are
documented and communicated.
Reputational
risk
The reputation allied with goodwill that a business has in the
sector that the Group operates is important to the future
profitability of the business. A sudden loss of reputation, for
whatever reason, could have an impact on the profitability of a
company.
The vast majority of reasons why a business could suffer damage
to its reputation arise from the risks covered above and thus
the controls adopted to manage such risks also protect the
Groups reputation. There are obviously risks in addition
to those set out above, including those external to the Group
itself, which could damage the reputation of the Group so that
it suffers a material loss. Examples of such risks could be a
major fraud occurring at a direct competitor, bringing the
industry into disrepute or the arrest of a senior executive for
a non-business related crime.
These types of risk are virtually impossible to manage prior to
an event taking place. Limiting the damage to the Groups
reputation should such an event occur, therefore would be the
major thrust of risk management in this sphere.
The assessment of its reputational risk exposure is that the
Groups main exposure to reputational risk lies in events
which would impact the industry in general. Whilst Public
Relations activity and communication with clients would be used
to limit the damage should such an event take place, there is a
limit to which the risk of loss can be mitigated.
F-78
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
31 FINANCIAL
RISK MANAGEMENT (Continued)
The directors, however, believe that, as historically for both
the Group and the market in general, there have been no such
events that have damaged the Groups reputation and
therefore the risk of incurring a material loss as a result of
reputational risk is remote.
Classification
changes to conform to U.S. GAAP
Exceptional
items
Certain exceptional items are shown in the Group U.K. GAAP
profit and loss account after operating loss. Under
U.S. GAAP all of these items would be classified as
operating profits or expenses.
Deferred
taxation
Under U.K. GAAP, all deferred tax amounts are classified as
current in the balance sheet. Under U.S. GAAP, amounts are
classified as current or non-current based on the nature of the
related asset or liability. As of 31 December, 2009 only
£652,101 of the Groups deferred tax asset would be
classified as current under U.S. GAAP.
|
|
|
|
|
|
|
|
|
Profit and loss account
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
Loss after taxation as reported in the Group profit and loss
account
|
|
|
(11,374,648
|
)
|
|
|
(7,175,378
|
)
|
Adjustments to conform net income to U.S. GAAP
|
|
|
|
|
|
|
|
|
Capitalization of software costs(1)
|
|
|
252,211
|
|
|
|
(29,171
|
)
|
Goodwill(2)
|
|
|
|
|
|
|
(52,689
|
)
|
Deferred tax on above adjustments
|
|
|
(70,619
|
)
|
|
|
23,330
|
|
|
|
|
|
|
|
|
|
|
Loss after taxation according to U.S. GAAP
|
|
|
(11,193,056
|
)
|
|
|
(7,233,908
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
Comprehensive loss under U.S. GAAP, is summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
Loss in accordance with U.S. GAAP
|
|
|
(11,193,056
|
)
|
|
|
(7,233,908
|
)
|
Currency translation differences
|
|
|
233,089
|
|
|
|
(102,002
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss in accordance with U.S. GAAP
|
|
|
(10,959,967
|
)
|
|
|
(7,335,910
|
)
|
|
|
|
|
|
|
|
|
|
Movements in other comprehensive income amounts are as follows:
|
|
|
|
|
|
|
Currency translation
|
|
|
|
differences
|
|
|
|
£
|
|
|
At January 1, 2008
|
|
|
Nil
|
|
Arising in the period
|
|
|
(102,002
|
)
|
|
|
|
|
|
At December 31, 2008
|
|
|
(102,002
|
)
|
Arising in the period
|
|
|
233,089
|
|
|
|
|
|
|
At December 31, 2009
|
|
|
131,087
|
|
|
|
|
|
|
F-79
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
31 FINANCIAL
RISK MANAGEMENT (Continued)
|
|
|
|
|
|
|
|
|
Shareholders funds
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
Equity shareholders funds as reported in the Group
balance sheet
|
|
|
10,831,073
|
|
|
|
21,910,956
|
|
Adjustments to conform equity to U.S. GAAP
|
|
|
|
|
|
|
|
|
Capitalization of software costs(1)
|
|
|
(742,465
|
)
|
|
|
(994,676
|
)
|
Deferred tax on above adjustments
|
|
|
212,864
|
|
|
|
283,483
|
|
|
|
|
|
|
|
|
|
|
Equity shareholders funds according to U.S. GAAP
|
|
|
10,301,472
|
|
|
|
21,199,763
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
RECONCILIATION
BETWEEN U.K. AND U.S. GAAP
|
Consolidated
statements of cash flows
The consolidated statements of cash flows presented under U.K.
GAAP present substantially the same information as those
required under U.S. GAAP but differ with regard to the
classification of items within the statements and as regards the
definition of cash and cash equivalents.
|
|
|
|
|
|
|
|
|
Shareholders funds
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
Equity shareholders funds as reported in the Group
balance sheet
|
|
|
10,831,073
|
|
|
|
21,910,956
|
|
Adjustments to conform equity to U.S. GAAP
|
|
|
|
|
|
|
|
|
Capitalization of software costs(1)
|
|
|
(742,465
|
)
|
|
|
(994,676
|
)
|
Deferred tax on above adjustments
|
|
|
212,864
|
|
|
|
283,483
|
|
Equity shareholders funds according to U.S. GAAP
|
|
|
10,301,472
|
|
|
|
21,199,763
|
|
|
|
|
|
|
|
|
|
|
Consolidated
statements of cash flows
The consolidated statements of cash flows presented under UK
GAAP present substantially the same information as those
required under US GAAP but differ with regard to the
classification of items within the statements.
Under UK GAAP, if applicable, cash flows are presented
separately for operating activities, dividends from associates,
returns on investments and servicing of finance, taxation,
capital expenditure and financial investment, acquisitions,
equity dividends and management of liquid resources and
financing. US GAAP, however, require only three categories of
cash flow to be reported; operating, investing and financing.
Under US GAAP, cash paid or received for interest and income
taxes would be included in operating activities and capital
expenditure would be included within investing activities. Under
UK GAAP, taxes and equity dividends paid are presented as a
separate class of items while they are considered operating cash
flows under US GAAP.
F-80
ODL Group
Limited
Notes to
the Financial Statements (Continued)
For the
year ended 31 December 2009
|
|
32
|
RECONCILIATION
BETWEEN U.K. AND U.S.
GAAP (Continued)
|
The categories of cash flow activity under US GAAP can be
summarized as follows:
|
|
|
|
|
|
|
|
|
For The Year Ended 31 December:
|
|
2009
|
|
|
2008
|
|
|
|
£
|
|
|
£
|
|
|
Cash inflow from operating activities
|
|
|
26,704,925
|
|
|
|
5,097,147
|
|
Cash outflow from investing activities
|
|
|
(3,226,650
|
)
|
|
|
(4,268,662
|
)
|
Cash outflow from financing activities
|
|
|
61,676
|
|
|
|
185,569
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
23,539,951
|
|
|
|
1,014,054
|
|
Effect of foreign exchange adjustments
|
|
|
(311,486
|
)
|
|
|
45,083
|
|
Cash and cash equivalents at the start of the year
|
|
|
142,383,901
|
|
|
|
141,324,764
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year
|
|
|
165,612,366
|
|
|
|
142,383,901
|
|
|
|
|
|
|
|
|
|
|
Impact of
recent changes to US GAAP
There were no recent changes to US GAAP that would have a
material impact on the Companys financial statements.
F-81
Shares
FXCM
Inc.
Class A
Common Stock
Prospectus
|
|
|
Credit
Suisse |
J.P.
Morgan |
Citi |
|
Sandler
ONeill + Partners, L.P.
|
|
Through and
including ,
2010 (25 days after the date of this prospectus), all
dealers that effect transactions in shares of our Class A
common stock, whether or not participating in this offering, may
be required to deliver a prospectus. This delivery requirement
is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
,
2010
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
ITEM 13.
|
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION.
|
The following table sets forth the expenses payable by the
Registrant in connection with the issuance and distribution of
the shares of Class A common stock being registered hereby.
All of such expenses are estimates, other than the filing and
listing fees payable to the Securities and Exchange Commission,
the Financial Industry Regulatory Authority and the New York
Stock Exchange.
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Filing Fee Securities and Exchange Commission
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$
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14,260
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Fee Financial Industry Regulatory Authority,
Inc.
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$
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20,500
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Listing Fee New York Stock Exchange
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*
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Fees and Expenses of Counsel
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*
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Printing Expenses
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*
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Fees and Expenses of Accountants
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*
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Transfer Agent and Registrars Fees
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*
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Miscellaneous Expenses
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*
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Total
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*
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* |
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To be provided by amendment. |
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ITEM 14.
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INDEMNIFICATION
OF DIRECTORS AND OFFICERS.
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Section 102(b)(7) of the DGCL allows a corporation to
provide in its certificate of incorporation that a director of
the corporation will not be personally liable to the corporation
or its stockholders for monetary damages for breach of fiduciary
duty as a director, except where the director breached the duty
of loyalty, failed to act in good faith, engaged in intentional
misconduct or knowingly violated a law, authorized the payment
of a dividend or approved a stock repurchase in violation of
Delaware corporate law or obtained an improper personal benefit.
Our amended and restated certificate of incorporation will
provide for this limitation of liability.
Section 145 of the DGCL, or Section 145, provides that
a Delaware corporation may indemnify any person who was, is or
is threatened to be made, party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in
the right of such corporation), by reason of the fact that such
person is or was an officer, director, employee or agent of such
corporation or is or was serving at the request of such
corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses
(including attorneys fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding,
provided such person acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the
corporations best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to
believe that his or her conduct was illegal. A Delaware
corporation may indemnify any persons who were or are a party to
any threatened, pending or completed action or suit by or in the
right of the corporation by reasons of the fact that such person
is or was a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses
(including attorneys fees) actually and reasonably
incurred by such person in connection with the defense or
settlement of such action or suit, provided such person acted in
good faith and in a manner he or she reasonably believed to be
in or not opposed to the corporations best interests,
provided that no indemnification is permitted without judicial
approval if the officer, director, employee or agent is adjudged
to be liable to the corporation. Where an officer or director is
successful on the merits or otherwise in the defense of any
action referred to above, the corporation must indemnify him
against the expenses which such officer or director has actually
and reasonably incurred.
II-1
Section 145 further authorizes a corporation to purchase
and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation or is or
was serving at the request of the corporation as a director,
officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him
in any such capacity, or arising out of his or her status as
such, whether or not the corporation would otherwise have the
power to indemnify him under Section 145.
Our amended and restated bylaws will provide that we must
indemnify our directors and officers to the fullest extent
authorized by the DGCL and must also pay expenses incurred in
defending any such proceeding in advance of its final
disposition upon delivery of an undertaking, by or on behalf of
an indemnified person, to repay all amounts so advanced if it
should be determined ultimately that such person is not entitled
to be indemnified under this section or otherwise.
The indemnification rights set forth above shall not be
exclusive of any other right which an indemnified person may
have or hereafter acquire under any statute, provision of our
amended and restated certificate of incorporation, our amended
and restated bylaws, agreement, vote of stockholders or
disinterested directors or otherwise.
We expect to maintain standard policies of insurance that
provide coverage (1) to our directors and officers against
loss rising from claims made by reason of breach of duty or
other wrongful act and (2) to us with respect to
indemnification payments that we may make to such directors and
officers.
The proposed form of Underwriting Agreement to be filed as
Exhibit 1.1 to this Registration Statement provides for
indemnification to our directors and officers by the
underwriters against certain liabilities.
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ITEM 15.
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RECENT
SALES OF UNREGISTERED SECURITIES.
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On August 23, 2010, the Registrant issued 100 shares
of the Registrants Class B common stock, par value
$0.01 per share, to FXCM Holdings, LLC for $1.00. The issuance
of such shares of Class B common was not registered under
the Securities Act of 1933, as amended (the Securities
Act), because the shares were offered and sold in a
transaction exempt from registration under Section 4(2) of
the Securities Act.
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ITEM 16.
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EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES.
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Exhibit Index
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1
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.1
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Underwriting Agreement*
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3
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.1
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Form of Amended and Restated Certificate of Incorporation of the
Registrant
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3
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.2
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Form of Amended and Restated Bylaws of the Registrant
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5
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.1
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Opinion of Simpson Thacher & Bartlett LLP regarding
validity of the shares of Class A common stock registered*
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10
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.1
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Form of Amended and Restated Limited Liability Company Agreement
of FXCM Holdings, LLC*
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10
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.2
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Form of Tax Receivable Agreement*
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10
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.3
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Form of Exchange Agreement*
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10
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.4
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Form of Registration Rights Agreement*
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10
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.5
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Form of Long Term Incentive Plan*
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10
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.6
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Form of Annual Incentive Plan*
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10
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.7
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Offer Letter of Robert Lande*
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10
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.8
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Share Purchase Agreement among the sellers of ODL Group Limited
and FXCM Holdings, LLC*
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16
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.1
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Letter from McGladrey & Pullen, LLP to the Securities
and Exchange Commission
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21
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.1
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Subsidiaries of the Registrant*
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23
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.1
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Consent of Ernst & Young LLP as to FXCM Inc.
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23
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.2
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Consent of Ernst & Young LLP as to FXCM Holdings, LLC
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23
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.3
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Consent of McGladrey & Pullen, LLP as to FXCM
Holdings, LLC
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23
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.4
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Consent of Ernst & Young LLP as to ODL Group Limited
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23
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.5
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Consent of Simpson Thacher & Bartlett LLP (included as
part of Exhibit 5.1)*
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23
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.6
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Consent of Aite Group, LLC
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23
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.7
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Consent of Greenwich Associates LLC
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24
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.1
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Power of Attorney (included on signature pages to this
Registration Statement)
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* |
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To be filed by amendment. |
II-2
(1) The undersigned registrant hereby undertakes to provide
to the underwriter at the closing specified in the underwriting
agreements certificates in such denominations and registered in
such names as required by the underwriter to permit prompt
delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(3) The undersigned Registrant hereby undertakes that:
(A) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)
(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time
it was declared effective.
(B) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in New York, New York, on the
3rd day of September, 2010.
FXCM Inc.
Name: Dror (Drew) Niv
Title: Chief Executive Officer
POWER OF
ATTORNEY
Know all men by these presents, that each person whose signature
appears below hereby constitutes and appoints Dror (Drew) Niv,
Robert Lande and David S. Sassoon, and each of them, any of whom
may act without joinder of the other, the individuals true
and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for the person and in his or
her name, place and stead, in any and all capacities, to sign
this Registration Statement and any or all amendments, including
post-effective amendments to the Registration Statement,
including a prospectus or an amended prospectus therein and any
Registration Statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) under the
Securities Act, and all other documents in connection therewith
to be filed with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact as agents or any of them, or their
substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the
following persons in the capacities indicated on the
3rd day of September, 2010.
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Signature
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Title
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/s/ Drew
Niv
Dror
(Drew) Niv
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Director and Chief Executive Officer
(principal executive officer)
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/s/ David
Sakhai
David
Sakhai
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Director and Chief Operating Officer
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/s/ William
Ahdout
William
Ahdout
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Director
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/s/ Kenneth
Grossman
Kenneth
Grossman
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Director
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/s/ Eduard
Yusupov
Eduard
Yusupov
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Director
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/s/ Robert
Lande
Robert
Lande
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Chief Financial Officer
(principal financial and accounting officer)
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II-4