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EX-31.2 - EXHIBIT 31.2 - Virtu KCG Holdings LLCkcgexhibit312q315.htm
EX-32.2 - EXHIBIT 32.2 - Virtu KCG Holdings LLCkcgexhibit322q315.htm
EX-10.1 - EXHIBIT 10.1 - Virtu KCG Holdings LLCkcgexhibit101q315.htm
EX-31.1 - EXHIBIT 31.1 - Virtu KCG Holdings LLCkcgexhibit311q315.htm
EX-32.1 - EXHIBIT 32.1 - Virtu KCG Holdings LLCkcgexhibit321q315.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________  
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
000-54991
Commission File Number 
KCG HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
38-3898306
(I.R.S. Employer Identification Number)
545 Washington Boulevard, Jersey City, NJ 07310
(Address of principal executive offices and zip code)
Registrant’s telephone number, including area code: (201) 222-9400
_______________________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Class A Common Stock, $0.01 par value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
_______________________________________________ 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
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.
Large accelerated filer
 
ý


Accelerated filer
 
¨


 
 
 
 
 
 
Non-accelerated filer
 
¨
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest predictable date:
At November 4, 2015, the number of shares outstanding of the Registrant’s Class A Common Stock was 90,366,791 (including restricted stock units) and there were no shares outstanding of the Registrant’s Class B Common Stock or Preferred Stock.




KCG HOLDINGS, INC.
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended September 30, 2015
TABLE OF CONTENTS
 
 
 
Page
 
 
 
PART I
FINANCIAL INFORMATION:
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
Consolidated Statements of Operations
 
Consolidated Statements of Comprehensive Income
 
Consolidated Statements of Financial Condition
 
Consolidated Statement of Changes in Equity
 
Consolidated Statements of Cash Flows
 
Notes to Consolidated Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
PART II
OTHER INFORMATION:
 
 
 
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures
 



2




PART I
FINANCIAL INFORMATION
 
 
Item 1.
Financial Statements (Unaudited)
KCG HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands, except per share amounts)
Revenues
 
 
 
 
 
 
 
Trading revenues, net
$
277,677

 
$
150,865

 
$
657,222

 
$
615,942

Commissions and fees
95,027

 
102,663

 
282,358

 
319,696

Interest, net
(1,080
)
 
139

 
(1,699
)
 
798

Investment income and other, net
5,412

 
18,635

 
397,193

 
33,656

Total revenues
377,036

 
272,302

 
1,335,074

 
970,092

Expenses
 
 
 
 
 
 
 
Employee compensation and benefits
121,597

 
95,307

 
337,786

 
321,056

Execution and clearance fees
67,502

 
74,058

 
198,573

 
222,801

Communications and data processing
35,256

 
38,576

 
103,260

 
113,651

Depreciation and amortization
23,813

 
20,298

 
65,154

 
60,224

Payments for order flow
17,121

 
15,377

 
47,277

 
55,485

Debt interest expense
9,117

 
7,714

 
27,569

 
24,735

Collateralized financing interest
8,617

 
7,330

 
25,932

 
19,887

Occupancy and equipment rentals
7,472

 
7,672

 
22,286

 
24,192

Professional fees
4,406

 
7,161

 
21,281

 
19,900

Business development
1,846

 
3,163

 
6,728

 
7,455

Debt extinguishment charges

 

 
25,006

 
9,552

Writedown of assets and other real estate related charges
34,029

 
301

 
40,488

 
2,508

Other
10,841

 
10,580

 
29,301

 
29,990

Total expenses
341,617

 
287,537

 
950,641

 
911,436

Income (loss) from continuing operations before income taxes
35,419

 
(15,235
)
 
384,433

 
58,656

Income tax expense (benefit)
13,482

 
(5,796
)
 
132,357

 
22,191

Income (loss) from continuing operations, net of tax
21,937

 
(9,439
)
 
252,076

 
36,465

Loss from discontinued operations, net of tax

 
(177
)
 

 
(1,497
)
Net income (loss)
$
21,937

 
$
(9,616
)
 
$
252,076

 
$
34,968

Basic earnings (loss) per share from continuing operations
$
0.24

 
$
(0.09
)
 
$
2.42

 
$
0.32

Diluted earnings (loss) per share from continuing operations
$
0.24

 
$
(0.09
)
 
$
2.36

 
$
0.31

Basic loss per share from discontinued operations
$

 
$

 
$

 
$
(0.01
)
Diluted loss per share from discontinued operations
$

 
$

 
$

 
$
(0.01
)
Basic earnings (loss) per share
$
0.24

 
$
(0.09
)
 
$
2.42

 
$
0.31

Diluted earnings (loss) per share
$
0.24

 
$
(0.09
)
 
$
2.36

 
$
0.30

Shares used in computation of basic earnings (loss) per share
91,134

 
110,376

 
104,244

 
113,680

Shares used in computation of diluted earnings (loss) per share
92,079

 
110,376

 
106,816

 
117,127





The accompanying notes are an integral part of these consolidated financial statements.

3


KCG HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Net income (loss)
$
21,937

 
$
(9,616
)
 
$
252,076

 
$
34,968

Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized (loss) gain on available for sale securities, net of tax
(312
)
 
280

 
(175
)
 
47

Cumulative translation adjustment, net of tax
(595
)
 
(198
)
 
(1,651
)
 
294

Comprehensive income (loss)
$
21,030

 
$
(9,534
)
 
$
250,250

 
$
35,309

 


























The accompanying notes are an integral part of these consolidated financial statements.

4


KCG HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)

 
September 30,
 
December 31,
 
2015
 
2014
Assets
(In thousands)
Cash and cash equivalents
$
628,150

 
$
578,768

Cash and cash equivalents segregated under federal and other regulations
8,400

 
3,361

Financial instruments owned, at fair value, including securities pledged to counterparties that had the right to deliver or repledge of $598,088 at September 30, 2015 and $536,124 at December 31, 2014:
 
 
 
Equities
2,440,852

 
2,479,910

Listed options
194,068

 
144,586

Debt securities
214,695

 
82,815

Other financial instruments
284

 
60

Total financial instruments owned, at fair value
2,849,899

 
2,707,371

Collateralized agreements:
 
 
 
     Securities borrowed
1,619,512

 
1,632,062

Receivable from brokers, dealers and clearing organizations
1,010,725

 
1,188,833

Fixed assets and leasehold improvements, less accumulated depreciation and amortization
99,085

 
134,051

Investments
111,733

 
100,726

Goodwill and Intangible assets, less accumulated amortization
142,807

 
152,594

Deferred tax asset, net
180,558

 
154,759

Assets of business held for sale

 
40,484

Other assets
199,301

 
137,645

Total assets
$
6,850,170

 
$
6,830,654

Liabilities and equity
 
 
 
Liabilities
 
 
 
Financial instruments sold, not yet purchased, at fair value:
 
 
 
Equities
$
1,948,136

 
$
2,069,342

Listed options
143,610

 
115,362

Debt securities
228,277

 
101,003

Total financial instruments sold, not yet purchased, at fair value
2,320,023

 
2,285,707

Collateralized financings:
 
 
 
Securities loaned
769,140

 
707,744

Financial instruments sold under agreements to repurchase
1,113,751

 
933,576

Total collateralized financings
1,882,891

 
1,641,320

Payable to brokers, dealers and clearing organizations
315,078

 
676,089

Payable to customers
20,793

 
22,110

Accrued compensation expense
132,057

 
114,559

Accrued expenses and other liabilities
143,300

 
136,977

Income taxes payable
62,062

 

Capital lease obligations
3,221

 
6,700

Liabilities of business held for sale

 
2,356

Debt
495,372

 
422,259

Total liabilities
5,374,797

 
5,308,077

Equity
 
 
 
Class A Common Stock
 
 
 
Shares authorized: 1,000,000 at September 30, 2015 and December 31, 2014; Shares issued: 106,051 at September 30, 2015 and 127,508 at December 31, 2014; Shares outstanding: 92,508 at September 30, 2015 and 116,860 at December 31, 2014
1,061

 
1,275

Additional paid-in capital
1,435,073

 
1,369,298

Retained earnings
195,091

 
272,780

Treasury stock, at cost; 13,543 shares at September 30, 2015 and 10,649 shares at December 31, 2014
(156,159
)
 
(122,909
)
Accumulated other comprehensive income
307

 
2,133

Total equity
1,475,373

 
1,522,577

Total liabilities and equity
$
6,850,170

 
$
6,830,654




The accompanying notes are an integral part of these consolidated financial statements.

5

KCG HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the nine months ended September 30, 2015
(Unaudited)

 
Class A Common
Stock
 
 
 
 
 
Treasury Stock
 
 
 
 
(in thousands)
Shares
 
Amount
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Shares
 
Amount
 
Accumulated
other
comprehensive
income
 
Total
Equity
Balance, December 31, 2014
127,508

 
$
1,275

 
$
1,369,298

 
$
272,780

 
(10,649
)
 
$
(122,909
)
 
$
2,133

 
$
1,522,577

KCG Class A Common Stock repurchased and retired via Tender Offer
(23,571
)
 
(236
)
 

 
(329,764
)
 

 

 

 
(330,000
)
KCG Class A Common Stock repurchased

 

 

 

 
(2,894
)
 
(33,250
)
 

 
(33,250
)
Stock-based compensation
1,933

 
20

 
64,026

 

 

 

 

 
64,046

Options exercised
151

 
2

 
1,245

 

 

 

 

 
1,247

Warrants exercised
30

 

 
247

 

 

 

 

 
247

Income tax provision-stock based compensation

 

 
257

 

 

 

 

 
257

Unrealized loss on available for sale securities, net

 

 

 

 

 

 
(175
)
 
(175
)
Cumulative translation adjustment, net

 

 

 

 

 

 
(1,651
)
 
(1,651
)
Net income

 

 

 
252,076

 

 

 

 
252,076

Balance, September 30, 2015
106,051

 
$
1,061

 
$
1,435,073

 
$
195,091

 
(13,543
)
 
$
(156,159
)
 
$
307

 
$
1,475,373



























The accompanying notes are an integral part of these consolidated financial statements.

6


KCG HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
For the nine months ended September 30,
 
2015
 
2014
Cash flows from operating activities
(In thousands)
Net income
$
252,076

 
$
34,968

Loss from discontinued operations, net of tax

 
(1,497
)
Income from continuing operations, net of tax
252,076

 
36,465

Adjustments to reconcile income from continuing operations, net of tax
to net cash provided by operating activities
 
 
 
Realized gain from sale of KCG Hotspot
(385,026
)
 

Deferred taxes
(25,781
)
 

Unrealized gain on investments
(9,366
)
 
(32,681
)
Stock and unit-based compensation
74,949

 
44,506

Depreciation and amortization
65,154

 
60,224

Debt discount accretion and other debt related expenses
11,728

 
12,387

Writedown of assets and other real estate related charges
40,488

 
2,508

Deferred rent
1,647

 
(201
)
Change in value of receivable from BATS
(1,402
)
 

Realized gain from reclassification of available for sale securities
(497
)
 

Operating activities from discontinued operations

 
(1,267
)
(Increase) decrease in operating assets
 
 
 
Cash and cash equivalents segregated under federal and other regulations
(5,039
)
 
(74,262
)
Financial instruments owned, at fair value
(139,736
)
 
(127,750
)
Securities borrowed
12,550

 
(353,827
)
Receivable from brokers, dealers and clearing organizations
178,109

 
(152,815
)
Other assets
2,187

 
(1,337
)
(Decrease) increase in operating liabilities
 
 
 
Financial instruments sold, not yet purchased, at fair value
34,317

 
197,025

Securities loaned
61,396

 
44,770

Financial instruments sold under agreements to repurchase
180,176

 
226,907

Payable to brokers, dealers and clearing organizations
(361,012
)
 
135,702

Payable to customers
(1,318
)
 
255,600

Accrued compensation expense
5,585

 
(71,846
)
Accrued expenses and other liabilities
(19,922
)
 
(4,142
)
Income taxes payable
62,251

 

Net cash provided by operating activities
33,514

 
195,966

Cash flows from investing activities
 
 
 
Cash received from sale of KCG Hotspot, net of cash provided
360,928

 

Proceeds and distributions from investments
2,523

 
53,419

Purchases of fixed assets and leasehold improvements
(22,657
)
 
(26,667
)
Capitalized software development costs
(15,786
)
 
(8,735
)
Purchases of investments
(2,418
)
 
(733
)
Sale of trading rights

 
554

Net cash provided by investing activities
322,590

 
17,838

Cash flows from financing activities
 
 
 
Repayment of Credit Agreement

 
(235,000
)
Proceeds from issuance of 6.875% Senior Secured Notes, net
494,810

 

Repayment of 8.25% Senior Secured Notes
(305,000
)
 

Repayment of convertible notes
(117,259
)
 

Payment of debt issuance costs
(12,645
)
 

Borrowings under capital lease obligations

 
4,525

Principal payments on capital lease obligations
(3,478
)
 
(7,314
)
Cost of common stock repurchased - Tender Offer
(330,000
)
 

Cost of common stock repurchased
(33,250
)
 
(110,133
)
Stock options exercised
1,247

 

Warrants exercised
247

 

Income tax provision on stock awards exercised
257

 

Net cash used in financing activities
(305,071
)
 
(347,922
)
Effect of exchange rate changes on cash and cash equivalents
(1,651
)
 
294

Increase (decrease) in cash and cash equivalents
49,382

 
(133,824
)
Cash and cash equivalents at beginning of period
578,768

 
674,281

Cash and cash equivalents at end of period
$
628,150

 
$
540,457

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
69,307

 
$
51,754

Cash paid for income taxes
$
78,164

 
$
16,884

Non-cash investing activities - Contribution of fixed assets to joint venture
$
4,364

 
$


The accompanying notes are an integral part of these consolidated financial statements.

7

KCG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. Organization and Description of the Business
KCG Holdings, Inc. (collectively with its subsidiaries, "KCG" or the "Company") is a leading independent securities firm offering clients a range of services designed to address trading needs across asset classes, product types and time zones. The Company combines advanced technology with specialized client service across market making, agency execution and trading venues and also engages in principal trading via direct-to-client and non-client exchange-based electronic market making. KCG has multiple access points to trade global equities, options, futures, fixed income, currencies and commodities via voice or automated execution.
KCG was formed as a result of a strategic business combination (the “Mergers”) of Knight Capital Group, Inc.(“Knight”) and GETCO Holding Company, LLC (“GETCO”) in July 2013.
As of September 30, 2015, the Company's operating segments comprised the following: (i) Market Making; (ii) Global Execution Services; and (iii) Corporate and Other.
Market Making
The Market Making segment principally consists of market making in the cash, futures and options markets across global equities, options, fixed income, currencies and commodities. As a market maker, the Company commits capital on a principal basis by offering to buy securities from, or sell securities to, broker dealers, banks and institutions. Principal trading in the Market Making segment primarily consists of direct-to-client and non-client exchange-based electronic market making, including trade executions conducted as an equities Designated Market Maker (“DMM”) on the New York Stock Exchange ("NYSE") and NYSE Amex Equities ("NYSE Amex"). The Company is an active participant on all major global equity and futures exchanges and also trades on substantially all domestic electronic options exchanges. As a complement to electronic market making, the Company’s cash trading business handles specialized orders and also transacts in unlisted securities traded over-the-counter and through marketplaces operated by the OTC Markets Group Inc. and the Alternative Investment Market (“AIM”) of the London Stock Exchange.
Global Execution Services
The Global Execution Services segment comprises agency execution services and trading venues, offering trading in global equities, futures, options, and fixed income to institutions, banks and broker dealers. The Company generally earns commissions as an agent between principals for transactions that are executed within this segment; however, the Company may commit capital on behalf of clients as needed. Agency-based, execution-only trading in the segment is done primarily through a variety of access points including: (i) algorithmic trading and order routing in global equities and options; (ii) institutional sales traders executing program, block and riskless principal trades in global equities and exchange traded funds ("ETFs"); (iii) a fixed income electronic communications network ("ECN") that also offers trading applications; and (iv) an alternative trading system ("ATS") for global equities.
Corporate and Other
The Corporate and Other segment invests principally in strategic financial services-oriented opportunities; allocates, deploys and monitors all capital; and maintains corporate overhead expenses and all other income and expenses that are not attributable to the other segments.
Sales of Businesses
Management from time to time conducts a strategic review of its businesses and evaluates their potential value in the marketplace relative to their current and expected returns. To the extent management and the Company's Board of Directors determine a business may return a higher value to stockholders, or is no longer core to its strategy, the Company may divest or exit such business.
In November 2013, the Company sold Urban Financial of America, LLC, (“Urban”), the reverse mortgage origination and securitization business that was previously owned by Knight to an investor group.
In November 2014, the Company sold certain assets and liabilities related to its former Futures Commission Merchant (“FCM”) business to Wedbush Securities Inc.
In March 2015, the Company sold KCG Hotspot, the Company's former spot institutional foreign exchange ECN, to BATS Global Markets, Inc. ("BATS").
See Footnote 4 "Sales of Businesses" for further details.

8

KCG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

2. Significant Accounting Policies
Basis of consolidation and form of presentation
The Consolidated Financial Statements, prepared in conformity with generally accepted accounting principles ("GAAP"), include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated.
Certain reclassifications have been made to the prior periods’ Consolidated Financial Statements in order to conform to the current period presentation. Such reclassifications are immaterial to both current and all previously issued financial statements taken as a whole and have no effect on previously reported consolidated net income.
Change in accounting principle
As discussed in Footnote 10 "Investments", as a result of the merger of BATS and Direct Edge Holdings LLC ("Direct Edge") in the first quarter of 2014, the Company changed its method of accounting for its investment in BATS from the cost method to the equity method.
Cash and cash equivalents
Cash and cash equivalents include money market accounts, which are payable on demand, and short-term investments with an original maturity of less than 90 days. The carrying amount of such cash equivalents approximates their fair value due to the short-term nature of these instruments. These assets would be categorized as Level 1 in the fair value hierarchy if they were required to be recorded at fair value.
Cash and cash equivalents segregated under federal and other regulations
The Company maintains custody of customer funds and is obligated by rules and regulations mandated by the U.S. Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) to segregate or set aside cash and/or qualified securities to satisfy these regulations, which have been promulgated to protect customer assets. The amounts recognized as Cash and cash equivalents segregated under federal and other regulations approximate fair value. These assets would be categorized as Level 1 in the fair value hierarchy if they were required to be recorded at fair value.
Market making, sales, trading and execution activities
Financial instruments owned and Financial instruments sold, not yet purchased relate to market making and trading activities, and include listed and other equity securities, listed equity options and fixed income securities that are recorded on a trade date basis and are reported at fair value. Trading revenues, net, which comprises trading gains, net of trading losses on such financial instruments, are also recorded on a trade date basis.
Commissions, which primarily comprise commission equivalents earned on institutional client orders and volume based fees earned from providing liquidity to other trading venues, as well as related expenses, are also recorded on a trade date basis. Prior to its sale in November 2014, commissions earned by the Company’s former FCM were recorded net of any commissions paid to independent brokers and were recognized on a half-turn basis.
The Company’s third party clearing agreements call for payment or receipt of interest income, net of transaction-related interest charged by such clearing brokers, for facilitating the settlement and financing of securities transactions. Interest income and interest expense which have been netted within Interest, net on the Consolidated Statements of Operations are as follows (in thousands):
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Interest Income
$
2,768

 
$
3,650

 
$
9,841

 
$
10,779

Interest Expense
(3,848
)
 
(3,511
)
 
(11,540
)
 
(9,981
)
Interest, net
$
(1,080
)
 
$
139

 
$
(1,699
)
 
$
798

Dividend income relating to financial instruments owned and dividend expense relating to financial instruments sold, not yet purchased, are derived primarily from the Company’s market making activities and are included as a component of Trading revenues, net on the Consolidated Statements of Operations. Trading revenues, net includes dividend income and expense as follows (in thousands):

9

KCG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Dividend Income
$
14,879

 
$
11,967

 
$
45,596

 
$
31,581

Dividend Expense
$
(9,904
)
 
$
(10,454
)
 
$
(30,262
)
 
$
(26,232
)
Payments for order flow represent payments to broker dealer clients, in the normal course of business, for directing their order flow in U.S. equities and options to the Company.
 
Fair value of financial instruments
The Company values its financial instruments using a hierarchy of fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.
The fair value hierarchy can be summarized as follows:
Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
Changes in fair value are recognized in earnings each period for financial instruments that are carried at fair value. See Footnote 6 “Fair Value” for a description of valuation methodologies applied to the classes of financial instruments at fair value.
Collateralized agreements and financings
Collateralized agreements consist of securities borrowed. Collateralized financings include securities loaned and financial instruments sold under agreements to repurchase.
Securities borrowed and securities loaned transactions are recorded at the amount of cash collateral advanced or received. Securities borrowed transactions facilitate the securities settlement process and require the Company to deposit cash or other collateral with the lender. Securities loaned transactions help finance the Company’s securities inventory whereby the Company lends stock to counterparties in exchange for the receipt of cash or other collateral from the borrower. In these transactions, the Company receives or posts cash or other collateral in an amount generally in excess of the market value of the applicable securities borrowed or loaned. The Company monitors the market value of securities borrowed or loaned on a daily basis, and obtains additional collateral or refunds excess collateral as necessary.
Financial instruments sold under agreements to repurchase are used to finance inventories of securities and other financial instruments and are recorded at their contractual amount. The Company has entered into bilateral and tri-party term and overnight repurchase agreements which bear interest at negotiated rates. The Company receives cash and makes delivery of financial instruments to a custodian who monitors the market value of these instruments on a daily basis. The market value of the instruments delivered must be equal to or in excess of the principal amount loaned under the repurchase agreements plus the agreed upon margin requirement. The custodian may request additional collateral, if appropriate.
The Company’s securities borrowed, securities loaned and financial instruments sold under agreements to repurchase are recorded at amounts that approximate fair value. These items are recorded based upon their contractual terms and are not materially sensitive to shifts in interest rates because they are short-term in nature and are substantially collateralized pursuant to the terms of the underlying agreements. These items would be categorized as Level 2 in the fair value hierarchy if they were required to be recorded at fair value.
Investments
Investments primarily comprise noncontrolling equity ownership interests in financial services-related businesses and are held by the Company's non-broker dealer subsidiaries. These investments are accounted for under the equity

10

KCG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

method, at cost or at fair value. The equity method of accounting is used when the Company has significant influence over the operating and financial policies of the investee. Investments are held at cost, less impairment if any, when the investment does not have a readily determined fair value, and the Company is not considered to exert significant influence over operating and financial policies of the investee. Investments that are publicly traded are held at fair value and accounted for as available for sale securities on the Consolidated Statements of Financial Condition.
Investments are reviewed on an ongoing basis to ensure that the carrying values of the investments have not been impaired. If the Company determines that an impairment loss on an investment has occurred due to a decline in fair value or other market conditions, the investment is written down to its estimated fair value.
Included in the Company's investments is a non-qualified deferred compensation plan for certain employees. This plan provides a return to the participants based upon the performance of various investments. In order to hedge its liability under this plan, the Company generally acquires the underlying investments and holds such investments until the deferred compensation liabilities are satisfied. Changes in value of such investments are recorded in Investment income and other, net, with a corresponding charge or credit to Employee compensation and benefits on the Consolidated Statements of Operations. Deferred compensation investments primarily consist of mutual funds, which are accounted for at fair value.
Goodwill and intangible assets
The Company tests goodwill and intangible assets with an indefinite useful life for impairment annually or when an event occurs or circumstances change that signifies that the carrying amounts may not be recoverable. The Company capitalizes certain costs associated with the acquisition or development of internal-use software and amortizes the software over its estimated useful life of three years, commencing at the time the software is placed in service. The Company amortizes intangible assets with a finite life on a straight line basis over their estimated useful lives and tests for recoverability whenever events indicate that the carrying amounts may not be recoverable.
Payable to customers
Payable to customers primarily relate to amounts due on cash and margin transactions. Due to their short-term nature, such amounts approximate fair value.
Repurchases of common stock
The Company may repurchase shares of KCG Class A Common Stock in the open market or through privately negotiated transactions. The Company may structure such repurchases as either a purchase of treasury stock or a retirement of shares. The Company records its purchases of treasury stock, which include shares repurchased in satisfaction of tax withholding obligations upon vesting of restricted awards, at cost as a separate component of stockholders’ equity. The Company may re-issue treasury stock, at average cost, for the acquisition of new businesses and in certain other circumstances. For shares that are retired, the Company records its repurchases at cost, as a reduction in Class A Common Stock for the par value of such retired shares and a reduction in Retained earnings for the balance.
Foreign currency translation and foreign currency forward contracts
The Company's foreign subsidiaries generally use the U.S. dollar as their functional currency. The Company has a subsidiary in India that utilizes the Indian Rupee as its functional currency.
Assets and liabilities of the Indian subsidiary are translated at exchange rates at the end of a period. Revenues and expenses are translated at average exchange rates during the period. Gains and losses resulting from translating foreign currency financial statements into U.S. dollars are included in Accumulated other comprehensive income on the Consolidated Statements of Financial Condition and Cumulative translation adjustment, net of tax on the Consolidated Statements of Comprehensive Income.
Gains or losses resulting from foreign currency transactions are included in Investment income and other, net on the Company’s Consolidated Statements of Operations. For the three months ended September 30, 2015 and 2014, the Company recorded losses of $1.8 million and $0.9 million, respectively on foreign currency transactions. For the nine months ended September 30, 2015 and 2014, the Company recorded losses of $2.4 million and $1.6 million, respectively on foreign currency transactions.
The Company seeks to reduce the impact of fluctuations in foreign exchange rates on its net investment in certain non-U.S. operations through the use of foreign currency forward contracts. For foreign currency forward contracts

11

KCG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

designated as hedges, the Company assesses its risk management objectives and strategy, including identification of the hedging instrument, the hedged item and the risk exposure and how effectiveness is to be assessed prospectively and retrospectively. The effectiveness of the hedge is assessed based on the overall changes in the fair value of the forward contracts. For qualifying net investment hedges, any gains or losses, to the extent effective, are included in Accumulated other comprehensive income on the Consolidated Statements of Financial Condition and Cumulative translation adjustment, net of tax, on the Consolidated Statements of Comprehensive Income. The ineffective portion, if any, is recorded in Investment income and other, net on the Consolidated Statements of Operations.
Stock and unit based compensation
Stock and unit based compensation is primarily measured based on the grant date fair value of the awards. These costs are amortized over the requisite service period, if any. Expected forfeitures are considered in determining stock-based employee compensation expense. See Footnote 14 "Stock-Based Compensation" for further discussion.
Soft dollar expense
Under a commission management program, the Company allows institutional clients to allocate a portion of their gross commissions to pay for research and other services provided by third parties. As the Company acts as an agent in these transactions, it records such expenses on a net basis within Commissions and fees on the Consolidated Statements of Operations.
Depreciation, amortization and occupancy
Fixed assets are depreciated on a straight-line basis over their estimated useful lives of three to seven years. Leasehold improvements are being amortized on a straight-line basis over the shorter of the term of the related office lease or the expected useful life of the assets. The Company reviews fixed assets and leasehold improvements for impairment and their remaining useful lives whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable.
The Company recognizes rent expense under operating leases with fixed rent escalations, lease incentives and free rent periods on a straight-line basis over the lease term beginning on the date the Company takes possession of or controls the use of the space, including during free rent periods.
Lease loss accrual
The Company’s policy is to identify excess real estate capacity and where applicable, accrue for related future costs, net of projected sub-lease income upon the date the Company ceases to use the excess real estate. Such accrual is adjusted to the extent the actual terms of sub-leased property differ from the assumptions used in the calculation of the accrual.
Income taxes
The Company is a corporation subject to U.S. corporate income tax as well as non-U.S. income taxes in the jurisdictions in which it operates. The Company records deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and measures them using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. The Company evaluates the recoverability of future tax deductions by assessing the adequacy of future expected taxable income from all sources, including reversal of temporary differences and forecasted operating earnings.
Variable interest entities
A variable interest entity (“VIE”) is an entity that lacks one or more of the following characteristics (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity.
The Company will be considered to have a controlling financial interest and will consolidate a VIE if it has both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

12

KCG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

Since January 2015, the Company has owned 50% of the voting shares and 50% of the equity of a joint venture, (“JV”) which maintains microwave communication networks in the U.S. and Europe, which is considered to be a VIE. The Company and its JV partner each use the microwave communication networks in connection with their respective trading activities, and the JV may sell excess bandwidth that is not utilized by the JV members to third parties. The Company pays the JV for the communication services that it uses, and such amounts are recorded within Communications and data processing on the Consolidated Statements of Operations.
The Company does not have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; therefore it does not have a controlling financial interest in the JV and does not consolidate the JV. The Company records its interest in the JV under the equity method of accounting and records its investment in the JV within Investments and its amounts payable for communication services provided by the JV within Accrued expenses and other liabilities on the Consolidated Statements of Financial Condition. The Company records its pro-rata share of the JV’s earnings or losses within Investment income and other, net and communication services provided by the JV within Communications and data processing on the Consolidated Statements of Operations.
The Company’s exposure to the obligations of this VIE is generally limited to its interests in the JV, which is the carrying value of the equity investment in the JV.
The following table presents the Company’s nonconsolidated VIE at September 30, 2015 (in thousands):
 
 
Carrying Amount
 
Maximum Exposure to loss
 
 
 
 
Asset
 
Liability
 
 
VIE's assets
Equity investment
 
$
5,592

 
$
1,664

 
$
5,592

 
$
13,495

Use of estimates
The preparation of financial statements in conformity with 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Recently adopted accounting guidance
In April 2014, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standard Update (“ASU”) that amends the requirements for reporting discontinued operations. Under the new guidance, discontinued operations reporting are limited to disposal transactions that represent strategic shifts having a major effect on operations and financial results. The amended guidance also enhances disclosures and requires assets and liabilities of a discontinued operation to be classified as such for all periods presented in the financial statements. The updated guidance is effective prospectively to all disposals occurring for interim and annual reporting periods beginning after December 15, 2014, with early adoption permitted. The Company early adopted this ASU in 2014, which resulted in additional disclosures within the Company's Consolidated Financial Statements.
In June 2014, the FASB issued an ASU that amends the accounting and disclosure guidance on repurchase agreements. The amended guidance requires entities to account for repurchase-to-maturity transactions as secured borrowings. Additional disclosures will be required for the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The accounting changes and additional disclosures about certain transferred financial assets accounted for as sales were effective for reporting periods beginning after December 15, 2014. The additional disclosures for securities financing transactions are required for annual reporting periods beginning after December 15, 2014 and for interim reporting periods beginning after March 15, 2015. Other than additional disclosure requirements, the adoption of this ASU did not have an impact on the Company’s Consolidated Financial Statements.
Recent accounting guidance to be adopted in future periods
In May 2014, the FASB issued an ASU that updates the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is evaluating the impact of this ASU on its Consolidated Financial Statements.

13

KCG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

In June 2014, the FASB issued an ASU to resolve diverse accounting treatment for share based awards in which the terms of the award are related to a performance target that affects vesting. The ASU requires an entity to treat a performance target that could be achieved after the requisite service period as a performance condition. Additionally, compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved, and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered; if the performance target becomes probable of being achieved before the end of the requisite service period, then the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The guidance is effective for reporting periods beginning after December 15, 2015 and may be applied prospectively or retrospectively. The Company does not expect adoption of this ASU to have an impact on its Consolidated Financial Statements.
In August 2014, the FASB issued an ASU that requires an entity’s management to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The guidance is effective for reporting periods beginning after December 15, 2016. Other than additional disclosure requirements, the Company does not expect the adoption of this ASU to have an impact on its Consolidated Financial Statements.
In February 2015, the FASB issued an ASU which requires entities to evaluate whether they should consolidate certain legal entities. The ASU simplifies consolidation accounting by reducing the number of consolidation models that an entity may apply. The guidance is effective for reporting periods beginning after December 15, 2015 and early adoption is permitted. The Company is evaluating the impact of this ASU on its Consolidated Financial Statements.
In April 2015, the FASB issued an ASU regarding simplification of the presentation of debt issuance costs. The ASU requires that debt issuance costs related to a recognized debt liability be presented in the Consolidated Statements of Financial Condition as a direct deduction from the carrying amount of that debt liability. The guidance is effective retrospectively for reporting periods beginning after December 15, 2015 and early adoption is permitted. The Company is evaluating the impact of this ASU on its Consolidated Financial Statements.
3. Tender Offer and Stock Repurchase
On April 2, 2015, the Company’s Board of Directors authorized the repurchase of up to $400.0 million (including the previously unused $55.0 million of authority under the previously authorized repurchase program) of KCG Class A Common Stock and warrants to purchase shares of KCG Class A Common Stock (the "Warrants"). On May 4, 2015, the Company commenced a “modified Dutch auction” tender offer ("Tender Offer") that expired on June 2, 2015. Under the terms of the Tender Offer, stockholders had the opportunity to sell up to $330.0 million of KCG Class A Common Stock to the Company at specified prices per share of not less than $13.50 and not greater than $14.00, or at the purchase price determined by KCG in accordance with the terms of the Tender Offer.
Following the expiration of the Tender Offer on June 2, 2015 and based on the number of shares tendered and the prices specified by the tendering stockholders, the Company accepted for purchase 23.6 million shares of the Company’s Class A Common Stock at a purchase price of $14.00 per share, for a cost of $330.0 million excluding fees and expenses related to the Tender Offer. The 23.6 million shares of KCG Class A Common Stock that the Company accepted for purchase in the Tender Offer were retired as of June 9, 2015. As a result, the Company reduced Class A Common Stock and Retained earnings on the Consolidated Statements of Financial Condition by $0.2 million and $329.8 million, respectively.
As the Tender Offer was oversubscribed, shares of KCG Common Stock were accepted on a pro rata basis (except for tenders of odd lots, which were accepted in full) at a proration factor, after giving effect to the priority of odd lots, of approximately 29.1%.
The Company incurred expenses of $2.1 million in connection with the Tender Offer, which were recorded within Professional fees in the Consolidated Statements of Operations for the nine months ended September 30, 2015.
In addition, in the third quarter of 2015, the Company repurchased 1.2 million shares for $12.2 million. As of September 30, 2015, approximately $57.8 million in authority remained under the share repurchase program, which is subject to the restrictive covenants in the 6.875% Senior Secured Notes Indenture. See Footnote 23 "Subsequent Events" for further information.

14

KCG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

Warrants
As a portion of the consideration in the Mergers, former GETCO unitholders received, in addition to KCG Class A Common Stock, 24.3 million Class A, Class B and Class C Warrants, which were issued in accordance with the Warrant Agreement, dated July 1, 2013, between KCG and Computershare Shareowner Services LLC (the “Warrant Agreement”) and which are subject to the terms and conditions of the Warrant Agreement.
The Warrant Agreement includes various anti-dilution and similar provisions that require adjustments to the exercise prices of the Class A, Class B and Class C Warrants and/or the number of shares of KCG Class A Common Stock issuable upon exercise of the Warrants upon certain events and actions taken by the Company, including the Company’s repurchase of KCG Class A Common Stock through a public tender offer.
As a result of the Company’s Tender Offer, as described above, the exercise price of each of the Class A, Class B and Class C Warrants was adjusted in accordance with the terms of the Warrant Agreement. All other terms of the Warrants remained the same.
The adjusted exercise price for each class of Warrants and the activity for the period ended September 30, 2015 was as follows (Warrants in thousands):
 
Class A
 
Class B
 
Class C
 
Original Exercise Price
$
12.00

 
$
13.50

 
$
15.00

 
Adjusted Exercise Price
$
11.70

 
$
13.16

 
$
14.63

 
Initial term (years)
4

 
5

 
6

 
Expiration
7/1/2017

 
7/1/2018

 
7/1/2019

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
Warrants - Outstanding at January 1, 2015
8,114

 
8,114

 
8,113

24,341

Exercised
(133
)
 

 

(133
)
Warrants - Outstanding at September 30, 2015
7,980

 
8,114

 
8,113

24,207

4. Sales of Businesses
In July 2013, the Company entered into an agreement to sell to an investor group Urban, the reverse mortgage origination and securitization business that was previously owned by Knight. The transaction was completed in November 2013, and, as a result, residual revenues and expenses of Urban's operations and costs of the related sale have been included in Loss from discontinued operations, net of tax within the Consolidated Statements of Operations for the three and nine months ended September 30, 2014.
The revenues and results of operations of discontinued operations are summarized as follows (in thousands):
 
For the three months ended September 30, 2014
 
For the nine months ended September 30, 2014
Adjustment to Loss on Sale
$
65

 
$
(1,248
)
 
 
 
 
Expenses:
 
 
 
   Compensation
$
120

 
$
291

   Other expenses
231

 
875

Total expenses
351

 
1,166

Loss from discontinued operations
(286
)
 
(2,414
)
Income tax benefit
109

 
917

Loss from discontinued operations, net of tax
$
(177
)
 
$
(1,497
)
In September 2014, KCG entered into an agreement to sell certain assets and liabilities related to its FCM business to Wedbush Securities Inc. The transaction closed on November 30, 2014. The FCM is not considered a discontinued

15

KCG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

operation, and therefore the results of the FCM’s operations for the three and nine months ended September 30, 2014 are included in the Global Execution Services segment and in Continuing Operations on the Consolidated Statements of Operations.
In October 2014, the Company announced that it began to explore strategic options for KCG Hotspot. KCG Hotspot was a single disposal group that was considered to be held-for-sale as of December 31, 2014 and, as a result, certain assets and liabilities related to KCG Hotspot were included in Assets of business held for sale and Liabilities of business held for sale on the Consolidated Statement of Financial Condition as of December 31, 2014. The Company determined that the sale of KCG Hotspot did not represent a strategic shift that would have a major effect on its operations and financial results, and therefore KCG Hotspot did not meet the requirements to be treated as a discontinued operation. As such, the results of KCG Hotspot's operations through the sale date of March 13, 2015 are included in the Global Execution Services segment and in Continuing Operations on the Consolidated Statements of Operations for all applicable periods presented, including the first nine months of 2015.
In March 2015, the Company completed the sale of KCG Hotspot to BATS. The Company and BATS have agreed to share certain tax benefits, which could result in future payments to the Company of up to approximately $70.0 million in the three-year period following the close, consisting of a $50 million payment in 2018 and annual payments of up to $6.6 million per year (the "Annual Payments"), from 2016 up to and including 2018. The additional potential payments are recorded at fair value in Other assets on the Consolidated Statements of Financial Condition and as of September 30, 2015, have a fair value of $63.5 million. The Annual Payments were contingent on KCG Hotspot achieving various levels of trading volumes through June 2015. That contingency has been removed because the trading levels were achieved. However, the Annual Payments remain contingent on BATS generating sufficient taxable net income to receive the tax benefits.
The Company recorded a gain upon completion of the sale of $385.0 million, which is recorded as Investment income and other, net on the Consolidated Statements of Operations for the nine months ended September 30, 2015. The net gain on the date of the sale of Hotspot of $373.8 million included direct costs associated with the sale which comprised professional fees of $6.7 million and compensation of $4.5 million, which are recorded in Professional fees and Employee compensation and benefits, respectively, on the Consolidated Statements of Operations for the nine months ended September 30, 2015.
The Company has elected the fair value option related to the $63.5 million receivable from BATS. It considers the receivable to be a Level 2 asset in the fair value hierarchy as the fair value is derived from observable inputs such as projected cash flows and market discount rates.
The KCG Hotspot assets and liabilities held for sale as of December 31, 2014 are summarized as follows (in thousands):
 
 
December 31,
 
 
2014
Assets:
 
 
Fixed assets, less accumulated depreciation
 
$
391

Intangible assets, net of accumulated amortization
 
34,696

Other assets
 
5,397

Total assets of business held for sale
 
$
40,484

 
 
 
Liabilities:
 
 
  Accrued compensation expense
 
$
2,298

  Accrued expenses and other liabilities
 
58

Total liabilities of business held for sale
 
$
2,356


16

KCG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

5. Assets Segregated or Held in Separate Accounts Under Federal or Other Regulations
Cash and securities segregated under U.S. federal and other regulations relate to the Company’s regulated businesses and consist of the following (in thousands): 
 
September 30,
2015
 
December 31, 2014
   Cash and cash equivalents segregated under federal or other regulations
$
8,400

 
$
3,361

Total assets segregated or held in separate accounts under federal or other regulations
$
8,400

 
$
3,361


6. Fair Value
The Company’s financial instruments recorded at fair value have been categorized based upon a fair value hierarchy in accordance with accounting guidance, as described in Footnote 2 “Significant Accounting Policies.” The following fair value hierarchy table presents information about the Company’s financial assets and liabilities measured at fair value (in thousands):
 
Assets and Liabilities Measured at
Fair Value on a Recurring Basis
September 30, 2015
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Financial instruments owned, at fair value:
 
 
 
 
 
 
 
Equities (1)
$
2,440,852

 
$

 
$

 
$
2,440,852

Listed options
194,068

 

 

 
194,068

U.S. government obligations (2)
146,222

 

 

 
146,222

Corporate debt (3)
68,473

 

 

 
68,473

Foreign currency forward contracts

 
284

 

 
284

Total Financial instruments owned, at fair value
2,849,615

 
284

 

 
2,849,899

Investment in CME Group (4)
1,857

 

 

 
1,857

Other (5)

 
65,054

 

 
65,054

Total assets held at fair value
$
2,851,472

 
$
65,338

 
$

 
$
2,916,810

Liabilities

 
 
 

 

Financial instruments sold, not yet purchased, at fair value:
 
 
 
 
 
 
 
Equities (1)
$
1,948,136

 
$

 
$

 
$
1,948,136

Listed options
143,610

 

 

 
143,610

U.S. government obligations (2)
159,087

 

 

 
159,087

Corporate debt (3)
69,190

 

 

 
69,190

Total liabilities held at fair value
$
2,320,023

 
$

 
$

 
$
2,320,023

(1) 
Equities of $775.1 million have been netted by their respective long and short positions by CUSIP number.
(2) 
U.S. government obligations of $2.3 million have been netted by their respective long and short positions by CUSIP number.
(3) 
Corporate debt instruments of $0.2 million have been netted by their respective long and short positions by CUSIP number.
(4) 
Investment in CME Group is included within Investments on the Consolidated Statements of Financial Condition. See Footnote 10 "Investments" for additional information.
(5) 
Other primarily consists of a $63.5 million receivable from BATS related to the sale of KCG Hotspot and $1.6 million of deferred compensation investments which are included within Other assets and Investments, respectively, on the Consolidated Statements of Financial Condition.


17

KCG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

 
Assets and Liabilities Measured at
Fair Value on a Recurring Basis
December 31, 2014
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Financial instruments owned, at fair value:
 
 
 
 
 
 
 
Equities (1)
$
2,479,910

 
$

 
$

 
$
2,479,910

Listed options
144,586

 

 

 
144,586

U.S. government and Non-U.S. government obligations
22,983

 

 

 
22,983

Corporate debt (2)
59,832

 

 

 
59,832

Foreign currency forward contracts

 
60

 

 
60

Total Financial instruments owned, at fair value
2,707,311

 
60

 

 
2,707,371

Investment in CME Group (3)
4,435

 

 

 
4,435

Other investments (3)

 
1,014

 

 
1,014

Total assets held at fair value
$
2,711,746

 
$
1,074

 
$

 
$
2,712,820

Liabilities
 
 
 
 
 
 
 
Financial instruments sold, not yet purchased, at fair value:
 
 
 
 
 
 
 
Equities (1)
$
2,069,342

 
$

 
$

 
$
2,069,342

Listed options
115,362

 

 

 
115,362

U.S. government obligations
18,953

 

 

 
18,953

Corporate debt (2)
82,050

 

 

 
82,050

Total liabilities held at fair value
$
2,285,707

 
$

 
$

 
$
2,285,707

(1) Equities of $743.1 million have been netted by their respective long and short positions by CUSIP number.
(2) Corporate debt instruments of $0.3 million have been netted by their respective long and short positions by CUSIP number.
(3) Investment in CME Group and Other investments, which primarily consist of deferred compensation investments, are included within Investments on the Consolidated Statements of Financial Condition.
The Company’s equities, listed options, U.S. government and non-U.S. government obligations, corporate debt and strategic investments that are publicly traded are generally classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices or broker or dealer quotations with reasonable levels of price transparency.
The types of instruments that trade in markets that are not considered to be active, but are valued based on observable inputs such as quoted market prices or alternative pricing sources with reasonable levels of price transparency are generally classified within Level 2 of the fair value hierarchy.
As of September 30, 2015 and December 31, 2014 the Company had no financial instruments classified within Level 3 of the fair value hierarchy.
The Company’s assets measured at fair value on a nonrecurring basis solely relate to goodwill and intangible assets arising from various acquisitions which would be classified as Level 3 within the fair value hierarchy. See Footnote 11 “Goodwill and Intangible Assets” for additional information.
There were no transfers of assets or liabilities held at fair value between levels of the fair value hierarchy for any periods presented.
The following is a description of the valuation basis, techniques and significant inputs used by the Company in valuing its Level 2 assets and liabilities:
Foreign currency forward contracts
At September 30, 2015 and December 31, 2014, the Company had foreign currency forward contracts with a notional value of 825.0 million Indian Rupees ($12.5 million U.S. dollars) and 700.0 million Indian Rupees ($10.9 million U.S. dollars), respectively. These forward contracts are used to hedge the Company’s investment in its Indian subsidiary.
The fair value of these forward contracts were determined based upon spot foreign exchange rates and dealer quotations.

18

KCG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

Other
Other primarily consists of the fair value of the Company's receivable from BATS as more fully described in Footnote 4 "Sales of Businesses". Also included in this category are deferred compensation investments which comprise investments in liquid mutual funds that the Company acquires to hedge its obligations to employees under certain non-qualified deferred compensation arrangements. These mutual fund investments can generally be redeemed at any time and are valued based upon quoted market prices.
7. Derivative Financial Instruments
The Company enters into derivative transactions as part of its trading activities and to manage foreign currency exposure. Cash flows associated with such derivative activities are included in cash flows from operating activities on the Consolidated Statements of Cash Flows.
During the normal course of business, the Company enters into futures contracts. These financial instruments are subject to varying degrees of risks whereby the fair value of the securities underlying the financial instruments, may be in excess of, or less than, the contract amount. The Company is obligated to post collateral against certain futures contracts.
The amounts and positions included in the tables below for futures contracts are classified as Level 1 while swaps and forward contracts are classified as Level 2 in the fair value hierarchy.
The following tables summarize the fair value and number of derivative instruments held at September 30, 2015 and December 31, 2014 and the gains and losses included in the Consolidated Statements of Operations for the periods then ended. These instruments include those classified as Financial Instruments, owned at fair value, Financial instruments sold, not yet purchased at fair value, as well as futures contracts which are reported within Receivable from or Payable to brokers, dealers and clearing organizations in the Consolidated Statements of Financial Condition (fair value and gain (loss) in thousands):
 
 
 
September 30, 2015
 
Financial Statements
 
Assets
 
Liabilities
 
Location
 
Fair Value
 
Contracts
 
Fair Value
 
Contracts
Foreign currency
 
 
 
 
 
 
 
 
 
Futures contracts
Receivable from/Payable to brokers, dealers and clearing organizations
 
$
617

 
7,390

 
$
706

 
7,528

Forward contracts
Financial instruments owned, at fair value
 
284

 
1

 

 

Equity
 
 
 
 
 
 
 
 
 
Futures contracts
Receivable from/Payable to brokers, dealers and clearing organizations
 
2,627

 
2,251

 
1,523

 
2,569

Swap contracts
Receivable from brokers, dealers and clearing organizations
 
128

 
1

 

 

Listed options
Financial instruments owned/sold, not yet purchased, at fair value
 
194,068

 
403,903

 
143,610

 
424,900

Fixed income
 
 
 
 
 
 
 
 
 
Futures contracts
Receivable from/Payable to brokers, dealers and clearing organizations
 
4,294

 
5,245

 
6,330

 
6,844

Commodity
 
 
 
 
 
 
 
 
 
Futures contracts
Receivable from/Payable to brokers, dealers and clearing organizations
 
22,119

 
15,654

 
21,644

 
16,011

Total
 
 
$
224,137

 
434,445

 
$
173,813

 
457,852


19

KCG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

 
 
 
December 31, 2014
 
Financial Statements
 
Assets
 
Liabilities
 
Location
 
Fair Value
 
Contracts
 
Fair Value
 
Contracts
Foreign currency
 
 
 
 
 
 
 
 
 
Futures contracts
Receivable from/Payable to brokers, dealers and clearing organizations
 
$
1,212

 
8,108

 
$
651

 
9,090

Forward contracts
Financial instruments owned, at fair value
 
60

 
1

 

 

Equity
 
 
 
 
 
 
 
 
 
Futures contracts
Receivable from/Payable to brokers, dealers and clearing organizations
 
1,790

 
2,590

 
2,047

 
3,085

Swap contracts
Receivable from/Payable to brokers, dealers and clearing organizations
 
98

 
1

 
13

 
1

Listed options
Financial instruments owned/sold, not yet purchased, at fair value
 
144,586

 
426,747

 
115,362

 
437,383

Fixed income
 
 
 
 
 
 
 
 
 
Futures contracts
Receivable from/Payable to brokers, dealers and clearing organizations
 
6,432

 
11,901

 
6,891

 
10,628

Commodity
 
 
 
 
 
 
 
 
 
Futures contracts
Receivable from/Payable to brokers, dealers and clearing organizations
 
15,246

 
8,894

 
14,847

 
9,105

Total
 
 
$
169,424

 
458,242

 
$
139,811

 
469,292

 
 
 
 
Gain (Loss) Recognized
 
 
Financial Statements
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
 
Location
 
2015
 
2014
 
2015
 
2014
Derivative instruments not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
Foreign currency
 
 
 
 
 
 
 
 
 
 
Futures contracts
 
Trading revenues, net
 
$
1,868

 
$
2,968

 
$
2,674

 
$
8,762

Forward contracts
 
Investment income and other, net
 

 
122

 
(10
)
 
434

Equity
 
 
 
 
 
 
 
 
 
 
  Futures contracts
 
Trading revenues, net
 
(2,122
)
 
4,425

 
11,616

 
19,206

  Swap contracts
 
Trading revenues, net
 
1,792

 
1,252

 
2,860

 
3,595

  Listed options (1)
 
Trading revenues, net
 
1,149

 
(7,208
)
 
(15,032
)
 
(78,872
)
Fixed income
 
 
 
 
 
 
 
 
 
 
  Futures contracts
 
Trading revenues, net
 
5,256

 
3,159

 
30,177

 
17,106

Commodity
 
 
 
 
 
 
 
 
 
 
  Futures contracts
 
Trading revenues, net
 
12,339

 
13,462

 
37,342

 
39,467

 
 
 
 
$
20,282

 
$
18,180

 
$
69,627

 
$
9,698

Derivative instruments designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
   Foreign exchange - forward contract
 
Accumulated other comprehensive income
 
$
(44
)
 
$

 
$
(50
)
 
$

(1) 
Realized gains and losses on listed equity options relate to the Company’s market making activities in such options. Such market making activities also comprise trading in the underlying equity securities with gains and losses on such securities generally offsetting the gains and losses reported in this table. Gains and losses on such equity securities are also included in Trading revenues, net on the Company’s Consolidated Statements of Operations.
The Company has entered into and may continue to enter into International Swaps and Derivative Association, Inc. (“ISDA”) master netting agreements with counterparties. Master agreements provide protection in bankruptcy in certain circumstances and, where legally enforceable, enable receivables and payables with the same counterparty to be settled or otherwise eliminated by applying amounts due against all or a portion of an amount due from the counterparty or a third party. The Company may also enter into bilateral trading agreements and other customer agreements that provide for the netting of receivables and payables with a given counterparty as a single net obligation.

20

KCG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

Under the ISDA master netting agreements, the Company typically also executes credit support annexes, which provide for collateral, either in the form of cash or securities, to be posted or paid by a counterparty based on the fair value of the derivative receivable or payable based on the rates and parameters established in the credit support annex. In the event of counterparty’s default, provisions of the ISDA master agreement permit acceleration and termination of all outstanding transactions covered by the agreement such that a single amount is owed by, or to, the non-defaulting party. Any collateral posted can be applied to the net obligations, with any excess returned and the collateralized party has a right to liquidate the collateral. Any residual claim after netting is treated along with other unsecured claims in bankruptcy court.
The Company is also a party to clearing agreements with various central clearing parties. Under these arrangements, the central clearing counterparty facilitates settlement between counterparties based on the net payable owed or receivable due and, with respect to daily settlement, cash is generally only required to be deposited to the extent of the net amount. In the event of default, a net termination amount is determined based on the market values of all outstanding positions and the clearing organization or clearing member provides for the liquidation and settlement of the net termination amount among all counterparties to the open derivative contracts.
The table below provides information regarding (1) the extent to which, under enforceable master netting arrangements, such balances are presented net in the Consolidated Statements of Financial Condition as appropriate under GAAP and (2) the extent to which other rights of offset associated with these arrangements exist and could have had an effect on our financial position (in thousands):
 
September 30, 2015
Gross Amounts Recognized
 
Gross Amounts Offset in the Statements of Financial Condition (3)
 
Net Amounts Presented in the Statements of Financial Condition
 
Gross Amounts Not Offset in the Statement of Financial Condition
 
Net Amount
 
Available Collateral(1)
 
Counterparty Netting(2)
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Listed options
$
194,068

 
$

 
$
194,068

 
$

 
$

 
$
194,068

 
Foreign currency forward contracts
284

 

 
284

 

 

 
284

 
Swaps
128

 

 
128

 

 

 
128

 
Futures
29,657

 
27,654

 
2,003

 

 

 
2,003

 
Total Assets
$
224,137

 
$
27,654

 
$
196,483

 
$

 
$

 
$
196,483

 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Listed options
$
143,610

 
$

 
$
143,610

 
$

 
$
20,216

 
$
123,394

 
Futures
30,203

 
30,203

 

 

 

 

 
Total Liabilities
$
173,813

 
$
30,203

 
$
143,610

 
$

 
$
20,216

 
$
123,394

(1) Includes securities received or delivered under collateral arrangements with counterparties that could be liquidated in the event of a counterparty default and thus offset against a counterparty's rights and obligations under the respective repurchase agreements or securities borrowing or lending arrangements.
(2) Under master netting agreements with its counterparties, the Company has the legal right of offset with a counterparty, which incorporates all of the counterparty's outstanding rights and obligations under the arrangement.  These balances reflect additional credit risk mitigation that is available by counterparty in the event of a counterparty's default, but which are not netted in the Statement of Financial Condition because other netting provisions under U.S. GAAP are not met.
(3) The full amount of the liabilities related to futures of $30.2 million has been netted against the assets related to futures of $22.8 million as the Company maintains margin in excess of the net liability and such margin is utilized to offset any excess liability.



21

KCG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

 
December 31, 2014
Gross Amounts Recognized
 
Gross Amounts Offset in the Statements of Financial Condition
 
Net Amounts Presented in the Statements of Financial Condition
 
Gross Amounts Not Offset in the Statement of Financial Condition
 
Net Amount
 
Available Collateral(1)
 
Counterparty Netting(2)
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Listed options
$
144,586

 
$

 
$
144,586

 
$

 
$

 
$
144,586

 
Foreign currency forward contracts
60

 

 
60

 

 

 
60

 
Swaps
98

 
13

 
85

 

 

 
85

 
Futures
24,680

 
24,436

 
244

 

 

 
244

 
Total Assets
$
169,424

 
$
24,449

 
$
144,975

 
$

 
$

 
$
144,975

 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Listed options
$
115,362

 
$

 
$
115,362

 
$

 
$
17,359

 
$
98,003

 
Futures
24,436

 
24,436

 

 

 

 

 
Swaps
13

 
13

 

 

 

 

 
Total Liabilities
$
139,811

 
$
24,449

 
$
115,362

 
$

 
$
17,359

 
$
98,003

(1) Includes securities received or delivered under collateral arrangements with counterparties that could be liquidated in the event of a counterparty default and thus offset against a counterparty's rights and obligations under the respective repurchase agreements or securities borrowing or lending arrangements.
(2) Under master netting agreements with its counterparties, the Company has the legal right of offset with a counterparty, which incorporates all of the counterparty's outstanding rights and obligations under the arrangement.  These balances reflect additional credit risk mitigation that is available by counterparty in the event of a counterparty's default, but which are not netted in the Statement of Financial Condition because other netting provisions under U.S. GAAP are not met.
8. Collateralized Transactions
The Company receives financial instruments as collateral in connection with securities borrowed and financial instruments purchased under agreements to resell. Such financial instruments generally consist of equities, corporate obligations and obligations of the U.S. government, but may also include obligations of federal agencies, foreign governments and convertible securities. In most cases the Company is permitted to deliver or repledge these financial instruments in connection with securities lending, other secured financings or for meeting settlement obligations.
The table below presents financial instruments at fair value received as collateral and included within Securities borrowed or Receivable from brokers, dealers and clearing organizations on the Consolidated Statements of Financial Condition that were permitted to be delivered or repledged and that were delivered or repledged by the Company as well as the fair value of financial instruments which could be further repledged by the receiving party (in thousands):
 
September 30,
2015
 
December 31,
2014
Collateral permitted to be delivered or repledged
$
1,640,949

 
$
1,586,700

Collateral that was delivered or repledged
1,564,514

 
1,485,267

Collateral permitted to be further repledged by the receiving counterparty
239,266

 
147,696

In order to finance securities positions, the Company also pledges financial instruments that it owns to counterparties who, in turn, are permitted to deliver or repledge them. Under these transactions, the Company pledges certain financial instruments owned to collateralize repurchase agreements and other secured financings. Repurchase agreements and other secured financings are short-term and mature within one year. Financial instruments owned and pledged to counterparties that do not have the right to sell or repledge such financial instruments consist of equities, corporate obligations and obligations of the U.S. government, but may also include obligations of federal agencies, foreign governments and convertible securities.

22

KCG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

The table below presents information about assets pledged by the Company (in thousands):
 
September 30,
2015
 
December 31,
2014
Financial instruments owned, at fair value, pledged to counterparties that have the right to deliver or repledge
$
598,088

 
$
536,124

Financial instruments owned, at fair value, pledged to counterparties that do not have the right to deliver or repledge
951,480

 
979,652

The table below presents the gross carrying value of Securities loaned and Financial instruments sold under agreements to repurchase by class of collateral pledged (in thousands):
September 30, 2015
 
 
 
Financial instruments sold under agreements to repurchase
Asset Class
 
Securities Loaned
 
Equities
 
$
752,643

 
$
771,456

U.S. government obligations
 

 
313,751

Corporate debt
 
16,497

 
28,544

Total
 
$
769,140

 
$
1,113,751

December 31, 2014
 
 
 
Financial instruments sold under agreements to repurchase
Asset Class
 
Securities Loaned
 
Equities
 
$
696,162

 
$
832,614

U.S. government obligations
 

 
73,576

Corporate debt
 
11,582

 
27,386

Total
 
$
707,744

 
$
933,576

The Company may enter into master netting agreements and collateral arrangements with counterparties in order to manage its exposure to credit risk associated with securities financing transactions. Such transactions are generally executed under standard industry agreements, including, but not limited to, master securities lending agreements (securities lending transactions) and master repurchase agreements (repurchase transactions). Master agreements provide protection in bankruptcy in certain circumstances and, where legally enforceable, enable receivables and payables with the same counterparty to be settled or otherwise eliminated by applying amounts due against all or a portion of an amount due from the counterparty or a third party. The Company may also enter into bilateral trading agreements and other customer agreements that provide for the netting of receivables and payables with a given counterparty as a single net obligation.
In the event of counterparty’s default, provisions of the master agreement permit acceleration and termination of all outstanding transactions covered by the agreement such that a single amount is owed by, or to, the non-defaulting party. Any collateral posted can be applied to the net obligations, with any excess returned and the collateralized party has a right to liquidate the collateral. Any residual claim after netting is treated along with other unsecured claims in bankruptcy court.
The Company is also a party to clearing agreements with various central clearing parties. Under these arrangements, the central clearing counterparty facilitates settlement between counterparties based on the net payable owed or receivable due and, with respect to daily settlement, cash is generally only required to be deposited to the extent of the net amount. In the event of default, a net termination amount is determined based on the market values of all outstanding positions and the clearing organization or clearing member provides for the liquidation and settlement of the net termination amount among all counterparties to the open repurchase and/or securities lending transactions.

23

KCG HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – Continued
(Unaudited)

The gross amounts of assets and liabilities subject to netting and gross amounts offset in the Consolidated Statements of Financial Condition were as follows (in thousands):
 
September 30, 2015
Gross Amounts Recognized
 
Gross Amounts Offset in the Statements of Financial Condition
 
Net Amounts Presented in the Statements of Financial Condition
 
Gross Amounts Not Offset in the Statement of Financial Condition
 
Net Amount
 
Available Collateral(1)
 
Counterparty Netting(2)
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Securities borrowed
$
1,619,512

 
$

 
$
1,619,512

 
$
1,582,024

 
$
4,405

 
$
33,083

 
Receivable from brokers, dealers and clearing organizations (3)
59,438

 

 
59,438

 
59,299

 

 
139

 
Total Assets
$
1,678,950

 
$

 
$
1,678,950

 
$
1,641,323

 
$
4,405

 
$
33,222

 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Securities loaned
$
769,140

 
$

 
$
769,140

 
$
754,698

 
$
4,405

 
$
10,037

 
Financial instruments sold under agreements to repurchase
1,113,751

 

 
1,113,751

 
1,113,411

 

 
340

 
Total Liabilities
$
1,882,891

 
$

 
$
1,882,891

 
$
1,868,109

 
$
4,405

 
$
10,377

(1) Includes securities received or delivered under collateral arrangements with counterparties that could be liquidated in the event of a counterparty default and thus offset against a counterparty's rights and obligations under the respective repurchase agreements or securities borrowing or lending arrangements.
(2) Under master netting agreements with its counterparties, the Company has the legal right of offset with a counterparty, which incorporates all of the counterparty's outstanding rights and obligations under the arrangement.  These balances reflect additional credit risk mitigation that is available by counterparty in the event of a counterparty's default, but which are not netted in the Statement of Financial Condition because other netting provisions under U.S. GAAP are not met.
(3) Represents financial instruments purchased under agreement to resell.
 
December 31, 2014
Gross Amounts Recognized
 
Gross Amounts Offset in the Statements of Financial Condition
 
Net Amounts Presented in the Statements of Financial Condition
 
Gross Amounts Not Offset in the Statement of Financial Condition
 
Net Amount
 
Available Collateral(1)
 
Counterparty Netting