Global Brokerage, Inc. - FORM 10-Q - November 8, 2016

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________ 
FORM 10-Q
__________________________ 

(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission File Number 001-34986
__________________________ 
FXCM Inc.
(Exact name of registrant as specified in its charter)
__________________________
Delaware
 
27-3268672
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
55 Water Street, FL 50
New York, NY 10041
(Address of principal executive offices) (Zip Code)

Telephone: (646) 432-2986
(Registrant’s telephone number, including area code)
__________________________
 
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 o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No 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):
Large accelerated filer
o 
Accelerated filer
x
 
 
 
 
Non-accelerated filer
o
Smaller reporting company
o
 
 
 
 
(Do not check if a 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 o No x

As of November 7, 2016, there were 5,602,534 shares outstanding of the registrant’s Class A common stock, par value $0.01 per share, and 25 shares outstanding of the registrant’s Class B common stock, par value $0.01 per share.


FXCM Inc.
QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended September 30, 2016

Table of Contents

Item Number
Page
PART I — FINANCIAL INFORMATION
 
PART II — OTHER INFORMATION
  

i

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, 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" in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 and as updated in this Quarterly Report. Additional risk factors may be described from time to time in our future filings with the Securities and Exchange Commission. 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.

ii

PART I

Item 1 — Financial Statements
FXCM Inc.

Condensed Consolidated Statements of Financial Condition (Unaudited)

 
As of
 
September 30, 2016
 
December 31, 2015
 
 
 
 
 
(In thousands, except share data)
Assets
  

 
  

Current assets
  

 
  

Cash and cash equivalents
$
220,211

 
$
203,854

Cash and cash equivalents, held for customers
725,375

 
685,043

Due from brokers
924

 
3,781

Accounts receivable, net
404

 
1,636

Tax receivable
259

 
1,766

Current assets held for sale
169,608

 
233,937

Total current assets
1,116,781

 
1,130,017

Deferred tax asset
15

 
14

Office, communication and computer equipment, net
34,984

 
35,891

Goodwill
24,727

 
28,080

Other intangible assets, net
7,763

 
13,782

Notes receivable
—

 
7,881

Other assets
10,583

 
11,421

Total assets
$
1,194,853

 
$
1,227,086

Liabilities, Redeemable Non-Controlling Interest and Stockholders' Deficit
  

 
  

Current liabilities
  

 
  

Customer account liabilities
$
725,375

 
$
685,043

Accounts payable and accrued expenses
51,977

 
38,298

Due to brokers
20,067

 
1,073

Due to related parties pursuant to tax receivable agreement
—

 
145

Current liabilities held for sale
10,084

 
14,510

Total current liabilities
807,503

 
739,069

Deferred tax liability
141

 
719

Senior convertible notes
159,606

 
154,255

Credit Agreement
189,686

 
147,262

Derivative liability — Letter Agreement
—

 
448,458

Other liabilities
11,294

 
16,044

Total liabilities
1,168,230

 
1,505,807

Commitments and Contingencies (See Note 14)


 


Redeemable non-controlling interest (see Note 3)
86,473

 
—

Stockholders’ Deficit
  

 
  

Class A common stock, par value $0.01 per share; 3,000,000,000 shares authorized, 5,602,534 shares issued and outstanding as of September 30, 2016 and December 31, 2015
56

 
56

Class B common stock, par value $0.01 per share; 1,000,000 shares authorized, 25 shares issued and outstanding as of September 30, 2016 and December 31, 2015
1

 
1

Additional paid-in capital
365,193

 
267,369

Accumulated deficit
(460,548
)
 
(531,550
)
Accumulated other comprehensive (loss) income
(1,044
)
 
1,004

Total stockholders’ deficit, FXCM Inc.
(96,342
)
 
(263,120
)
Non-controlling interests
36,492

 
(15,601
)
Total stockholders’ deficit
(59,850
)
 
(278,721
)
Total liabilities, redeemable non-controlling interest and stockholders’ deficit
$
1,194,853

 
$
1,227,086


See accompanying notes to the unaudited condensed consolidated financial statements.

1

FXCM Inc.

Condensed Consolidated Statements of Operations (Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
  
(In thousands, except per share data)
Revenues
  

 
  

 
 
 
 
Trading revenue
$
57,845


$
56,247

 
$
196,550

 
$
184,672

Interest income
791


494

 
1,900

 
1,232

Brokerage interest expense
(228
)

(212
)
 
(655
)
 
(589
)
Net interest revenue
563

 
282

 
1,245

 
643

Other income
2,984

 
3,053

 
5,668

 
149,969

Total net revenues
61,392

 
59,582

 
203,463

 
335,284

Operating Expenses
  

 
  

 
 
 
 
Compensation and benefits
24,222

 
23,948

 
73,399

 
72,444

Referring broker fees
9,535

 
13,032

 
29,114

 
43,702

Advertising and marketing
5,069

 
4,116

 
15,353

 
10,416

Communication and technology
6,878

 
7,312

 
20,999

 
26,072

Trading costs, prime brokerage and clearing fees
871

 
847

 
2,608

 
2,947

General and administrative
14,646

 
12,861

 
53,626

 
39,234

Bad debt (recovery) expense
—

 
—

 
(141
)
 
257,303

Depreciation and amortization
6,956

 
7,316

 
21,149

 
21,136

Goodwill impairment loss
—

 
—

 
—

 
9,513

Total operating expenses
68,177

 
69,432

 
216,107

 
482,767

Operating loss
(6,785
)
 
(9,850
)
 
(12,644
)
 
(147,483
)
Other Income (Expense)
 
 
 
 
 
 
 
(Loss) gain on derivative liabilities — Letter & Credit Agreements
(26,985
)
 
137,566

 
200,375

 
(254,730
)
Loss on equity method investments, net
140

 
111

 
478

 
299

Interest on borrowings
19,473

 
28,974

 
61,228

 
103,824

(Loss) income from continuing operations before income taxes
(53,383
)
 
98,631

 
126,025

 
(506,336
)
Income tax (benefit) provision
(85
)
 
295

 
58

 
181,616

(Loss) income from continuing operations
(53,298
)
 
98,336

 
125,967

 
(687,952
)
(Loss) income from discontinued operations, net of tax
(22,049
)
 
18,018

 
(53,635
)
 
(74,915
)
Net (loss) income
(75,347
)
 
116,354

 
72,332

 
(762,867
)
Net (loss) income attributable to non-controlling interest in FXCM Holdings, LLC
(18,493
)
 
39,038

 
33,411

 
(274,650
)
Net loss attributable to redeemable non-controlling interest in FXCM Group, LLC
(6,877
)
 
—

 
(6,877
)
 
—

Net (loss) income attributable to other non-controlling interests
(10,843
)
 
3,667

 
(25,204
)
 
(39,238
)
Net (loss) income attributable to FXCM Inc.
$
(39,134
)
 
$
73,649

 
$
71,002

 
$
(448,979
)
 
 
 
 
 
 
 
 
(Loss) income from continuing operations attributable to FXCM Inc.
$
(35,829
)
 
$
64,302

 
$
85,936

 
$
(427,909
)
(Loss) income from discontinued operations attributable to FXCM Inc.
(3,305
)
 
9,347

 
(14,934
)
 
(21,070
)
Net (loss) income attributable to FXCM Inc.
$
(39,134
)
 
$
73,649

 
$
71,002

 
$
(448,979
)
 
 
 
 
 
 
 
 
Weighted average shares of Class A common stock outstanding — Basic and Diluted
5,603

 
5,313

 
5,603

 
4,968

Net (loss) income per share attributable to stockholders of Class A common stock of FXCM Inc. — Basic and Diluted:
 
 
 
 
 
 
 
Continuing operations
$
(6.39
)
 
$
12.10

 
$
15.34

 
$
(86.13
)
Discontinued operations
(0.59
)
 
1.76

 
(2.67
)
 
(4.24
)
Net (loss) income attributable to FXCM Inc.
$
(6.98
)
 
$
13.86

 
$
12.67

 
$
(90.37
)

See accompanying notes to the unaudited condensed consolidated financial statements.

2

FXCM Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
  
(Amounts in thousands)
Net (loss) income
$
(75,347
)
 
$
116,354

 
$
72,332

 
$
(762,867
)
Other comprehensive (loss) income
 
 
  

 
 
 
 
Foreign currency translation loss
(276
)
 
(2,239
)
 
(2,871
)
 
(3,121
)
Realization of cumulative translation adjustment
—

 
—

 
—

 
23,407

Other comprehensive (loss) income, net of tax
(276
)
 
(2,239
)
 
(2,871
)
 
20,286

Comprehensive (loss) income
(75,623
)
 
114,115

 
69,461

 
(742,581
)
Comprehensive (loss) income attributable to non-controlling interest in FXCM Holdings, LLC
(18,624
)
 
38,244

 
32,447

 
(266,808
)
Comprehensive loss attributable to redeemable non-controlling interest in FXCM Group, LLC
(6,746
)
 
—

 
(6,746
)
 
—

Comprehensive (loss) income attributable to other non-controlling interests
(10,841
)
 
3,668

 
(25,194
)
 
(39,243
)
Comprehensive (loss) income attributable to FXCM Inc.
$
(39,412
)
 
$
72,203

 
$
68,954

 
$
(436,530
)




































See accompanying notes to the unaudited condensed consolidated financial statements.

3

FXCM Inc.

Condensed Consolidated Statement of Stockholders’ Deficit (Unaudited)
(Amounts in thousands, except share amounts)


 
 
FXCM Inc.
  
Non-
controlling
Interests
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Additional
Paid-in
Capital
 
Common Stock - 
Class A
 
Common Stock - 
Class B
 
Total
Stockholders’
Deficit
  
 
 
 
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Balance as of January 1, 2016
$
(15,601
)
 
$
(531,550
)
 
$
1,004

 
$
267,369

 
5,602,534

 
$
56

 
25

 
$
1

 
$
(278,721
)
Net income
8,207

 
71,002

 
—

 
—

 
—

 
—

 
—

 
—

 
79,209

Other comprehensive loss, net of tax
(954
)
 
—

 
(2,048
)
 
—

 
—

 
—

 
—

 
—

 
(3,002
)
Comprehensive income (loss)
7,253

 
71,002

 
(2,048
)
 
—

 
—

 
—

 
—

 
—

 
76,207

Class A common stock


 


 


 


 


 


 


 


 

Equity-based compensation
480

 
—

 
—

 
1,026

 
—

 
—

 
—

 
—

 
1,506

Distributions — non-controlling members
(1,203
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,203
)
Issuance of redeemable non-controlling interest (see Note 3)
45,563

 
—

 
—

 
96,798

 
—

 
—

 
—

 
—

 
142,361

Balance as of September 30, 2016
$
36,492

 
$
(460,548
)
 
$
(1,044
)
 
$
365,193

 
5,602,534

 
$
56

 
25

 
$
1

 
$
(59,850
)


















See accompanying notes to the unaudited condensed consolidated financial statements.


4

FXCM Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)


 
Nine Months Ended September 30,
  
2016
 
2015
  
(Amounts in thousands)
Cash Flows From Operating Activities
  

 
  

Net income (loss)
$
72,332

 
$
(762,867
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities
  

 
  

Depreciation and amortization
21,149

 
33,494

Equity-based compensation
1,504

 
3,644

Deferred tax expense
(518
)
 
188,175

Goodwill impairment losses
—

 
64,378

Loss on classification as held for sale assets
57,092

 
27,820

(Gain) loss on derivative liabilities — Letter & Credit Agreements
(200,375
)
 
254,730

Amortization of deferred bond discount
4,443

 
4,180

Amortization of deferred financing cost
906

 
2,351

Amortization of original issue discount — Credit Agreement
23,905

 
55,373

Amortization of issuance fee, deferred financing fee and acquisition costs — Credit Agreement
6,088

 
13,183

Loss on equity method investments, net
236

 
1,121

Gain on disposition of equity method investment
(679
)
 
—

Provision for debt forgiveness
8,249

 
—

Gain on business disposition
—

 
(14,427
)
Transaction costs associated with business dispositions
—

 
(6,693
)
Due to related parties pursuant to tax receivable agreement
44

 
(145,224
)
Changes in operating assets and liabilities


 


Cash and cash equivalents, held for customers
(39,929
)
 
271,231

Due from brokers
11,463

 
(8,300
)
Accounts receivable, net
935

 
2,471

Tax receivable, net
1,507

 
(1,099
)
Other assets
1,364

 
(4,092
)
Customer account liabilities
40,332

 
(270,403
)
Accounts payable and accrued expenses
12,531

 
6,379

Other liabilities
(3,275
)
 
6,254

Payments for tax receivable agreement
(188
)
 
(5,352
)
Due to brokers
19,365

 
(16,232
)
Securities sold, not yet purchased
(3,624
)
 
(530
)
Foreign currency remeasurement loss
(1,240
)
 
(682
)
Net cash provided by (used in) operating activities
33,617

 
(301,117
)
Cash Flows From Investing Activities
  

 
  

Purchases of office, communication and computer equipment, net
(14,521
)
 
(13,571
)
Proceeds from sale of office, communication and computer equipment
—

 
499

Purchase of intangible assets
(1,500
)
 
—

Proceeds from notes receivable
—

 
1,500

Proceeds from business dispositions, net of cash
—

 
52,155

Net cash (used in) provided by investing activities
(16,021
)
 
40,583

Cash Flows From Financing Activities
  

 
  

Distributions to non-controlling members
(104
)
 
(12,166
)
Payments on borrowings under the Revolving credit agreement
—

 
(25,000
)
Proceeds from the Leucadia Transaction
—

 
279,000

Principal payments on borrowings under the Credit Agreement
(141
)
 
(107,139
)
Debt acquisition costs — Credit Agreement
—

 
(1,876
)
Proceeds from issuance of stock options
—

 
321

Net cash (used in) provided by financing activities
(245
)
 
133,140

Effect of foreign currency exchange rate changes on cash and cash equivalents
1,481

 
(1,629
)
Net increase (decrease) in cash and cash equivalents
18,832

 
(129,023
)
Cash and cash equivalents (1)
  

 
  

Beginning of year
214,640

 
338,814

End of period
$
233,472

 
$
209,791


5

FXCM Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited) - (continued)

 
Nine Months Ended September 30,
 
2016
 
2015
 
(Amounts in thousands)
Supplemental disclosures of cash flow activities
 
 
 
Cash paid (received) for taxes
$
194

 
$
(135
)
Cash paid for interest
$
27,254

 
$
22,222

Supplemental disclosure of non-cash investing activities
 
 
 
Exchange of Holdings Units for shares of Class A common stock
$
—

 
$
2,889

Deferred payment for purchase of intangible assets
$
—

 
$
6,000

Proceeds receivable from business disposition
$
—

 
$
11,524

Supplemental disclosure of non-cash financing activities
 
 
 
Non-cash distribution — non-controlling members
$
1,099

 
$
—

Exchange of Letter Agreement for Redeemable non-controlling interest
$
235,509

 
$
—

The following amounts reflected in the statements of cash flows are included in discontinued operations:
 
 
 
Depreciation and amortization
$
—

 
$
12,359

Equity-based compensation
$
—

 
$
1,494

Deferred tax expense
$
—

 
$
5,321

Goodwill impairment losses
$
—

 
$
54,865

Loss on classification as held for sale assets
$
57,092

 
$
27,820

Gain on business dispositions
$
—

 
$
14,427

Transaction costs associated with business dispositions
$
—

 
$
(6,693
)
Gain (loss) on equity method investments, net
$
242

 
$
(821
)
Purchases of office, communication and computer equipment, net
$
(149
)
 
$
(240
)
Proceeds from sale of office, communication and computer equipment
$
—

 
$
499

Proceeds from business dispositions, net of cash
$
—

 
$
52,155

Gain on disposition of equity method investment
$
679

 
$
—


(1) Includes Cash and cash equivalents from continuing and discontinued operations

























See accompanying notes to the unaudited condensed consolidated financial statements.


6
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements



Note 1. Description of Business and Basis of Presentation

Description of Business

FXCM Inc. (the “Corporation” or the “Company”), a holding company, is an online provider of foreign exchange (“FX”) trading, contracts for difference ("CFD") trading, spread betting and related services to retail and institutional customers worldwide. The Corporation operates through its managing membership interest in FXCM Holdings, LLC (“Holdings”), the Corporation’s sole operating asset. Holdings is a majority-owned, controlled and consolidated subsidiary of the Corporation. In January 2015, Holdings transferred its interest in its operating subsidiaries to FXCM Newco, LLC (“Newco”), which was then a wholly-owned subsidiary of Holdings, formed in connection with the financing arrangement entered into with Leucadia National Corporation ("Leucadia") (the "Leucadia Transaction") (see Note 12). On September 1, 2016, the Company completed a restructuring transaction with Leucadia (the "Restructuring Transaction") (see Note 12). In connection with the Restructuring Transaction, the financing arrangement with Leucadia was amended, Newco was renamed FXCM Group, LLC ("Group") and Leucadia acquired a 49.9% membership interest in Group, with Holdings owning the remaining 50.1% membership interest in Group. As used in these notes, the term “Company” collectively refers to the Corporation, Holdings, Group and subsidiaries of Group.

Discontinued Operations

During the first quarter of 2015, the Company commenced the process of disposing of its interests in certain retail and institutional trading businesses. The retail businesses are FXCM Asia Limited, FXCM Japan Securities Co., Ltd. and the equity trading business of FXCM Securities Limited. The institutional businesses are Faros Trading LLC, Lucid Markets Trading Limited, V3 Markets, LLC and the Company's equity interest in FastMatch, Inc. ("FastMatch"). In April 2015, the Company completed the sale of FXCM Japan Securities Co., Ltd. and Faros Trading LLC. In September 2015, the Company completed the sale of FXCM Asia Limited. In December 2015, the Company completed the sale of the equity trading business of FXCM Securities Limited. The Company remains committed to a plan to sell the remaining businesses which continue to be actively marketed. As a result, these businesses are considered to be held for sale and their results of operations have been reported as discontinued operations (see Note 4).

Basis of Presentation

Basis of Consolidation

The accompanying condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company consolidates those entities in which it is the primary beneficiary of a variable interest entity ("VIE") as required by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic (“ASC”) 810, Consolidations (“ASC 810”), or entities where it has a controlling interest. Entities that do not qualify as VIEs are evaluated for consolidation as voting interest entities under the voting interest model. Under the voting interest model, the Company consolidates those entities where it has a controlling financial interest through a majority voting interest. Intercompany accounts and transactions are eliminated in consolidation.

At the time of Newco's formation in connection with the Leucadia Transaction, the Company determined that Newco was a VIE and concluded that Holdings was the primary beneficiary of Newco, which resulted in the consolidation of the financial results of Newco by Holdings. The Company determined that the Restructuring Transaction (see Note 12) is a reconsideration event under ASC 810 and re-evaluated the previous conclusion that Newco (subsequently renamed to Group) is a VIE. Upon reconsideration, the Company determined that Group remains a VIE and concluded that Holdings is the primary beneficiary of Group since Holdings has the ability to direct the activities of Group that most significantly impact Group’s economic performance and the obligation to absorb losses of Group or the right to receive benefits from Group that could be significant to Group. As a result, Holdings continues to consolidate the financial results of Group.

The Corporation records a non-controlling interest for the economic interest in Holdings not owned by the Corporation. The Corporation’s and the non-controlling unit holders’ economic interest in Holdings was 67.9% and 32.1%, respectively, as of both September 30, 2016 and December 31, 2015.


7
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Description of Business and Basis of Presentation - (continued)

The Company’s condensed consolidated financial statements include the following significant subsidiaries of Holdings:    
FXCM Group, LLC (1)
(“Group”)
FXCM Global Services, LLC
(“Global Services”)
Forex Capital Markets LLC
(“US”)
FXCM Asia Limited (2)
(“HK”)
Forex Capital Markets Limited
(“UK LTD”)
FXCM Australia Pty. Limited
(“Australia”)
ODL Group Limited
(“ODL”)
FXCM Securities Limited (3)
(“FSL”)
FXCM Japan Securities Co., Ltd. (4)
(“FXCMJ”)
FXCM UK Merger Limited
(“Merger”)
Lucid Markets Trading Limited
(“Lucid”)
Lucid Markets LLP
(“Lucid LLP”)
Faros Trading LLC (4)
(“Faros”)
V3 Markets, LLC
(“V3”)
____________________________________
(1) FXCM Newco, LLC was renamed FXCM Group, LLC effective September 1, 2016
(2) Sold by the Company in September 2015
(3) Sold by the Company in December 2015
(4) Sold by the Company in April 2015

Net income or loss attributable to the non-controlling interest in Holdings in the condensed consolidated statements of operations represents the portion of earnings or loss attributable to the economic interest in Holdings held by the non-controlling unit holders.

Net income or loss attributable to redeemable non-controlling interest in the condensed consolidated statements of operations represents the share of earnings or loss allocated to the non-controlling membership interest in Group held by Leucadia based on the hypothetical liquidation at book value method (see Note 2).

Net income or loss attributable to other non-controlling interests in the condensed consolidated statements of operations represents the portion of earnings or loss attributable to the non-controlling interests of Lucid, Faros (prior to the sale of Faros' operations in the second quarter of 2015), V3 and other consolidated entities based on the economic interests held by the non-controlling members. The non-controlling members of Lucid, Faros (prior to the sale of Faros' operations in the second quarter of 2015) and V3 each hold a 49.9% economic interest in the respective entity. The portion of the 49.9% of Lucid earnings allocated among the non-controlling members of Lucid that is contingent on services being provided is reported as a component of compensation expense and is included in the determination of Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations (see Note 4).

Redeemable non-controlling interest on the condensed consolidated statements of financial condition represents the non-controlling membership interest in Group held by Leucadia. Non-controlling interests on the condensed consolidated statements of financial condition represents the equity attributable to the non-controlling interests of Holdings, Lucid, V3 and other consolidated entities.

Investments where the Company is deemed to exercise significant influence, 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 records any dividends as a reduction in the investment balance. The carrying value of these investments is included in Other assets in the condensed consolidated statements of financial condition and earnings or losses are included in Income or loss on equity method investments, net in the condensed consolidated statements of operations. For the Company's equity method

8
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Description of Business and Basis of Presentation - (continued)

investments classified as discontinued operations, the carrying value of the investments is included in assets held for sale on the condensed consolidated statements of financial condition and earnings or losses are included in the determination of Income or loss from discontinued operations, net of tax in the condensed consolidated statements of operations (see Note 6).

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 condensed consolidated financial statements as well as the reported amount of revenue and expenses during the year. Actual results could differ from those estimates and could have a material impact on the condensed consolidated financial statements.

Reclassifications

Certain reclassifications of prior period amounts related to the Company's retrospective adoption of Accounting Standards Update (“ASU”) No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, have been made to conform to the current period's presentation in the condensed consolidated statements of financial condition (see Note 2).    

Interim Financial Statements

The Company believes that the condensed consolidated interim financial statements reflect all adjustments of a normal recurring nature and disclosures that are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the interim period are not necessarily indicative of the results of operations to be expected for the full year. The interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. As permitted under Rule 10-01 of the Securities and Exchange Commission Regulation S-X, certain notes or other financial information are condensed or omitted in the condensed consolidated interim financial statements.

Note 2. Significant Accounting Policies and Estimates

Our significant accounting policies are those that we believe are both important to the portrayal of our financial condition and results of operations. Other than as described below, management believes there have been no material changes to the significant accounting policies discussed in Note 2 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

Redeemable Non-controlling Interest

In connection with the Restructuring Transaction completed on September 1, 2016 (see Note 12), the Amended and Restated Letter Agreement dated January 24, 2015 (the "Letter Agreement") was terminated and the parties signed the Amended and Restated Limited Liability Company Agreement of FXCM Group, LLC (the "Group Agreement"). The Group Agreement replaced the existing FXCM Newco, LLC agreement and FXCM Newco, LLC was renamed FXCM Group, LLC. In exchange for terminating the Letter Agreement, the Company issued a 49.9% non-controlling membership interest in Group to Leucadia. The remaining 50.1% controlling membership interest in Group is owned by Holdings and Holdings consolidates the financial results of Group as discussed in Note 1. Following a Change of Control (as defined in the Group Agreement and described in Note 12), the membership units held by Leucadia are redeemable for cash at an amount equal to the fair market value of Leucadia's economic rights under the Group Agreement. Accordingly, the non-controlling interest held by Leucadia is recorded as Redeemable non-controlling interest and is classified outside of permanent equity on the condensed consolidated statements of financial condition pursuant to ASC 480, Distinguishing Liabilities from Equity ("ASC 480").

The cash distributions and earnings or loss from Group subsequent to September 1, 2016 are allocated among its members based on the contractual provisions in the Group Agreement (the "Revised Waterfall"), which differ from the members' stated ownership percentages. The Company determined that the Revised Waterfall represents a substantive profit sharing arrangement and concluded that the appropriate methodology for allocating profits and losses of Group is the hypothetical liquidation at book value method (the “HLBV method”). The Company applies the HLBV method using a balance

9
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 2. Significant Accounting Policies and Estimates - (continued)


sheet approach. Under the HLBV method, a calculation is performed at each balance sheet date to determine the amount each member would hypothetically receive assuming Group were liquidated at its recorded amount determined in accordance with U.S. GAAP and the cash distributed according to the Revised Waterfall. The difference between the liquidating distribution amounts calculated at the beginning and end of each period, after adjusting for capital contributions and distributions, is the member's share of the net income or loss from Group.

As indicated above, the membership units held by Leucadia are redeemable for cash following a change of control event (see Note 12), which is not solely within the control of the Company. The Company evaluates the probability of redemption at each reporting date. The Company concluded that the non-controlling interest in Group is not currently redeemable and it is not probable that it will become redeemable. Accordingly, subsequent adjustment of the Redeemable non-controlling interest to its estimated redemption value is not required pursuant to ASC 480. If the non-controlling interest in Group becomes redeemable, or if redemption becomes probable, an adjustment will be made to adjust the Redeemable non-controlling interest to its estimated redemption value.

Management Incentive Plan

In connection with the Restructuring Transaction, the Company adopted the 2016 Incentive Bonus Plan for Founders and Executives (the "Management Incentive Plan") in order to retain and incentivize senior management to maximize cash flow generation and grow the business. The Management Incentive Plan is a long-term program with a five-year vesting period. Distributions under the plan will be made only after the principal and interest under the Credit Agreement have been repaid and will range from 10.0% to 14.0% of the distributions made from Group. If a participant terminates employment, he or she will receive either a non-voting membership interest in Group entitling the participant to the same share of distributions that would have otherwise been received, or a lump-sum cash payment, at the Company's discretion. The Company determined that the Management Incentive Plan is a share-based payment arrangement that will be accounted for as a liability award under ASC 718, Compensation-Stock Compensation (“ASC 718”).

Accounting Pronouncements Adopted in 2016

In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU No. 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction from the corresponding debt liability rather than as an asset. The costs will continue to be amortized and reported as interest expense. The Company adopted ASU No. 2015-03 on January 1, 2016 on a retrospective basis. The adoption of ASU No. 2015-03 resulted in the reclassification of $2.9 million of unamortized debt issuance costs as of December 31, 2015 related to the Company's Senior convertible notes from Other assets, as previously reported, to the Senior convertible notes liability within the condensed consolidated statements of financial condition (see Note 13). The adoption of ASU No. 2015-03 also resulted in the reclassification of $0.5 million of unamortized debt issuance costs as of December 31, 2015 related to the Company's Credit Agreement from Other assets, as previously reported, to the Credit Agreement liability within the condensed consolidated statements of financial condition (see Note 12). Other than these reclassifications, the adoption of ASU No. 2015-03 did not have an impact on the Company's condensed consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU No. 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Specifically, ASU No. 2015-02 (i) modifies the evaluation of whether limited partnership and similar legal entities are VIEs, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, (iii) affects the consolidation analysis of reporting entities that are involved with VIEs that have fee arrangements and related party relationships, and (iv) provides a scope exception from consolidation guidance for certain investment companies and similar entities. The Company adopted ASU No. 2015-02 on January 1, 2016, which did not have an impact on the Company's condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The new standard requires management to explicitly evaluate for each reporting period whether there are conditions or events that raise substantial doubt

10
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 2. Significant Accounting Policies and Estimates - (continued)


about an entity’s ability to continue as a going concern and to provide related footnote disclosure in certain circumstances. The new standard is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. The Company will adopt this standard for its annual period ending December 31, 2016 and is currently evaluating the impact it will have to the disclosures in its consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance in this update amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. The guidance in this update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption by public entities is permitted only for certain provisions. The adoption of this standard may result in a cumulative-effect adjustment to the consolidated statement of financial condition as of the beginning of the year of adoption. The Company expects to adopt this guidance beginning January 1, 2018 and is currently evaluating the impact that adoption of this standard will have on its consolidated financial statements.    

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-02 requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases classified as operating leases of greater than twelve months. The accounting by lessors will remain largely unchanged. The guidance in this update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The new standard must be adopted using a modified retrospective approach, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest period presented. The Company expects to adopt this guidance beginning January 1, 2019 and is currently evaluating the impact that adoption of this standard will have on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. ASU No. 2016-06 clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence in ASC 815-15-25-42. The guidance in this update is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. An entity should apply the amendments in this update on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. The Company expects to adopt this guidance beginning January 1, 2017 and is currently evaluating the impact that adoption of this standard will have on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. ASU No. 2016-07 eliminates the requirement that an investor retrospectively apply equity method accounting when an investment that it had accounted for by another method initially qualifies for the equity method. The guidance requires that an equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The guidance in this update is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Earlier application is permitted. The Company expects to adopt this guidance beginning January 1, 2017 and does not currently expect it will have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU No. 2016-09 simplifies certain aspects related to the accounting for share-based payment transactions, including income tax consequences, statutory withholding requirements, forfeitures and classification on the statement of cash flows. The guidance in this update is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. Certain of the amendments related to timing of the recognition of tax benefits and tax withholding requirements should be applied using a modified retrospective transition method. Amendments related to classification on the statement of cash flows should be applied retrospectively. All other provisions may be applied on a prospective or modified retrospective basis. The Company expects to adopt this guidance beginning January 1, 2017 and is currently evaluating the impact that adoption of this standard will have on its consolidated financial statements.
    

11
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 2. Significant Accounting Policies and Estimates - (continued)


In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this update supersedes nearly all existing revenue recognition guidance under U.S. GAAP and creates a single, principle-based revenue recognition framework that is codified in a new FASB ASC Topic 606. The new revenue standard establishes principles for recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services and allows for either the full retrospective or cumulative effect transition method of adoption. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of the new revenue standard by one year. The new effective date is for annual reporting periods beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, including interim periods within that year.     

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), an amendment to the guidance in ASU No. 2014-09 that clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. The amendments also reframe the indicators to focus on a principal rather than an agent and eliminated two of the indicators (“the entity’s consideration is in the form of a commission” and “the entity is not exposed to credit risk”). This amendment also clarifies that each indicator may be more or less relevant to the assessment depending on the terms and conditions of the contract.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, an amendment to the guidance in ASU No. 2014-09 which clarifies the following two aspects of Topic 606: (a) identifying performance obligations and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. ASU No. 2016-12, among other things: (1) clarifies the objective of the collectibility criterion for applying paragraph 606-10-25-7; (2) permits an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specifies that the measurement date for noncash consideration is contract inception; (4) provides a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarifies that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarifies that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. The amendments do not change the core principle of the guidance in Topic 606.

The effective date and transition requirements for the Topic 606 amendments are the same as the effective date and transition requirements in Topic 606. The updated standard is effective for the Company's first quarter of 2018. The Company is currently evaluating the impact of this guidance on its consolidated financial statements and has not yet selected a transition method.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 provides guidance on the following eight specific cash flow classification issues: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investments; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. Current U.S. GAAP does not include specific guidance on these eight cash flow classification issues. The amendments in ASU No. 2016-15 are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Earlier adoption is permitted, provided that all the amendments are adopted in the same period. The amendments in this update are to be applied on a retrospective basis. The Company expects to adopt this guidance beginning January 1, 2018 and is currently evaluating the impact that adoption of this standard will have on its consolidated financial statements.        

12
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 2. Significant Accounting Policies and Estimates - (continued)



In October 2016, the FASB issued ASU No. 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control. ASU No. 2016-17 amends the consolidation guidance in ASU No. 2015-02 on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control when performing the primary beneficiary analysis under the VIE model. Under ASU No. 2016-17, the single decision maker will consider an indirect interest held by a related party under common control on a proportionate basis. The amendments in ASU No. 2016-17 are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with early adoption permitted. Entities that already have adopted the amendments in ASU No. 2015-02 are required to apply the amendments in this update retrospectively to all relevant prior periods beginning with the fiscal year in which the amendments in ASU No. 2015-02 initially were applied. The Company expects to adopt this guidance beginning January 1, 2017 and does not currently expect that adoption of this standard will have a material impact on its consolidated financial statements.

Note 3. Non-Controlling Interests

Redeemable Non-controlling Interest

In connection with the Restructuring Transaction completed on September 1, 2016 (see Note 12), the Letter Agreement was terminated and the parties signed the Group Agreement as described in Note 2. In exchange for the Letter Agreement, the Company issued a 49.9% non-controlling membership interest in Group to Leucadia. The remaining 50.1% controlling membership interest in Group is owned by Holdings and Holdings consolidates the financial results of Group, as discussed in Note 1. The non-controlling interest held by Leucadia is redeemable for cash upon a contingent event that is not solely within the control of the Company and, accordingly, is classified outside of permanent equity on the condensed consolidated statements of financial condition as Redeemable non-controlling interest. As of September 30, 2016, the non-controlling interest in Group is not redeemable and is not probable of becoming redeemable and, consequently, has not been adjusted to its estimated redemption value.
    
The Company recorded the following activity related to Redeemable non-controlling interest for the nine months ended September 30, 2016, with amounts in thousands:

Balance as of January 1, 2016
$
—

Issuance of redeemable non-controlling interest (net of HLBV allocation, discussed below)
93,148

Net loss attributable to redeemable non-controlling interest
(6,877
)
Other comprehensive income attributable to redeemable non-controlling interest
131

Equity-based compensation
71

Balance as of September 30, 2016
$
86,473


On the date of the Restructuring Transaction, in exchange for the Letter Agreement Leucadia was issued a redeemable non-controlling interest in Group which had a fair value of $235.5 million, which was also the fair value of the derivative liability related to the Letter Agreement. As a result, the Company derecognized the derivative liability related to the Letter Agreement and recorded the Redeemable non-controlling interest at $93.1 million, which represented the amount that Leucadia would receive assuming Group were liquidated at its recorded amount determined in accordance with U.S. GAAP and the cash distributed according to the Revised Waterfall at that date. This change was recorded as an equity transaction within Additional paid-in capital of the Corporation for the impact to the controlling and non-controlling unit holders of Holdings based on Holdings' 50.1% controlling financial interest in Group.

Non-controlling Interests

Holdings

The Corporation consolidates the financial results of Holdings and records a non-controlling interest for the economic interest in Holdings not owned by the Corporation. Pursuant to an agreement between the Corporation and Holdings, whenever

13
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 3. Non-Controlling Interests - (continued)

the Corporation cancels, issues or repurchases shares of its Class A common stock, Holdings enters into an equivalent Holdings Unit transaction with the Corporation so that at all times the number of shares of Class A common stock is equal to the Corporation's membership units in Holdings. In addition, whenever the owners of Holdings prior to the initial public offering ("Existing Unit Holders") (other than the Corporation) exchange their Holdings Units for shares of the Corporation’s Class A common stock, Holdings is required to transfer an equal amount of Holdings Units to the Corporation.
    
There were no changes in the non-controlling and the Corporation's interests in Holdings for the nine months ended September 30, 2016:
 
Controlling
Units
 
Non-
Controlling
Units
 
Total
Units
 
FXCM Inc.
 
Non-
Controlling
 
Total
Balance as of January 1, 2016
5,602,534

 
2,637,089

 
8,239,623

 
67.9
%
 
32.1
%
 
100
%
Holdings Units acquired by FXCM Inc. related to exchanges of Holdings Units for shares of Class A common stock
—

 
—

 
—

 
—
%
 
—
%
 
—
%
Balance as of September 30, 2016
5,602,534

 
2,637,089

 
8,239,623

 
67.9
%
 
32.1
%
 
100.0
%
Lucid, V3 and Other Non-Controlling Interests

The Company owns controlling interests in Lucid, V3 and other entities and consolidates the financial results of these entities whereby it records a non-controlling interest for the economic interests not owned by the Company. Lucid and V3 are classified as discontinued operations and the assets and liabilities of Lucid and V3 are classified as held for sale on the condensed consolidated statements of financial condition (see Note 4). The Company no longer holds a controlling interest in Faros as a result of the sale of Faros' operations in the second quarter of 2015.

Note 4. Discontinued Operations

As a result of the losses incurred by the Company on January 15, 2015 related to the Swiss National Bank ("SNB") releasing the peg of the Swiss Franc to the Euro and the subsequent Leucadia financing arrangement entered into by the Company on January 16, 2015, the Company committed to a plan during the first quarter of 2015 to sell its interests in certain retail and institutional businesses in order to pay down the Leucadia debt. The retail businesses are HK, FXCMJ and the equity trading business of FSL. The institutional businesses are Faros, Lucid, V3 and the Company's equity interest in FastMatch. In April 2015, the Company completed the sales of FXCMJ and Faros. In September 2015, the Company completed the sale of HK. In December 2015, the Company completed the sale of the equity trading business of FSL. The Company remains committed to a plan to sell Lucid, V3 and its equity interest in FastMatch and continues to actively market these businesses. 

The Company considered the guidance in ASC 205-20 in evaluating the accounting and presentation in the condensed consolidated financial statements of the businesses that have been sold during the period and the remaining businesses to be sold. The operations and cash flows of these businesses are clearly distinguishable and, accordingly, have been determined to represent a group of components as defined in the guidance. It was further determined that the remaining businesses to be sold continue to meet the criteria for classification as held for sale as of September 30, 2016. Accordingly, the assets and liabilities of these businesses were classified as assets and liabilities held for sale on the condensed consolidated statements of financial condition as of September 30, 2016 and December 31, 2015.

In accordance with ASC 205-20, to qualify for reporting as a discontinued operation, components that are disposed of or classified as held for sale must represent a strategic shift that has or will have a major effect on the Company's operations and financial results. The Company believes that the dispositions of these businesses represent a strategic shift from the Company’s diversification strategy undertaken for the past several years and concluded that the businesses to be disposed of qualify for reporting as discontinued operations. Accordingly, the results of operations of these businesses are reported in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015.


14
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 4. Discontinued Operations - (continued)


Completed dispositions

In April 2015, the Company completed the sale of FXCMJ to Rakuten Securities, Inc. ("Rakuten Sec") for a cash purchase price of $62.2 million. The Company recognized a net gain of approximately $2.0 million related to the sale, which included a reversal of $23.4 million of foreign currency translation loss out of accumulated other comprehensive income. The net gain was recorded in earnings as a component of Income (loss) from discontinued operations, net of tax during the second quarter of 2015. In connection with the sale of FXCMJ, the Company agreed to provide certain transitional services, including use of the Company’s trading platform and data services, for no additional consideration for a period of nine months following the date of sale.  The Company estimated the value of these services to be approximately $2.1 million and accordingly allocated $2.1 million of proceeds received as deferred income.  The deferred income was amortized into other income over the nine-month period ending December 31, 2015.  The terms of the services agreement provide for the Company to receive a monthly fee for these services beginning January 1, 2016 for an expected period of ten months ending on October 31, 2016. The Company recorded other income for these transitional services of $0.5 million and $1.7 million for the three and nine months ended September 30, 2016, respectively.
 
In April 2015, Faros completed the sale of its operations to Jefferies Group LLC. Consideration will be determined quarterly pursuant to an earn-out formula based on Faros' results beginning on the closing date and ending on November 30, 2017. Any consideration received will be divided among the Company and the non-controlling members of Faros based on a formula in the sales agreement. No consideration was received during the three and nine months ended September 30, 2016 and 2015.

In September 2015, the Company completed the sale of HK to Rakuten Sec for a cash purchase price of $37.9 million. The Company recognized a net gain related to the sale of approximately $12.4 million. The net gain was recorded in earnings as a component of Income (loss) from discontinued operations, net of tax during the third quarter of 2015. In connection with the sale of HK, the Company agreed to provide certain transitional services, including use of the Company's trading platform, data services and professional support, for no additional consideration for a period of nine months following the date of sale. The Company estimated the value of these services to be approximately $1.0 million and accordingly allocated $1.0 million of proceeds received as deferred income. The deferred income was amortized into other income over the nine-month period following the date of sale.  The Company recorded nil and $0.6 million of other income for these transitional services for the three and nine months ended September 30, 2016, respectively. Beginning nine months after the date of sale, the Company will receive a monthly fee for such services for a minimum period of nine months.

In December 2015, the Company completed the sale of the equity trading business of FSL to AS Expobank for a cash purchase price of $2.3 million. The Company recognized a net loss of approximately $7.1 million related to the sale, which included a reversal of $1.5 million of foreign currency translation loss out of accumulated other comprehensive income. The net loss was recorded in earnings as a component of Income (loss) from discontinued operations, net of tax for the fourth quarter of 2015. In connection with the sale of the equity trading business of FSL, the Company agreed to provide certain transitional services, primarily professional support, for no additional consideration for a period of twelve months following the date of sale. The Company estimated the value of these services to be approximately $0.5 million and accordingly allocated $0.5 million of proceeds received as deferred income. The deferred income will be amortized into other income over the twelve-month period following the date of sale. The Company recorded $0.1 million and $0.4 million of other income for these transitional services for the three and nine months ended September 30, 2016, respectively.     
    
    

15
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 4. Discontinued Operations - (continued)


The following table presents the major classes of line items constituting the pretax and after-tax profit or loss of discontinued operations for the three and nine months ended September 30, 2016 and 2015, with amounts in thousands:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Trading revenue
$
8,806

 
$
13,386

 
$
22,610

 
$
60,154

Interest income
12

 
29

 
151

 
247

Brokerage interest expense
—

 
(29
)
 
—

 
(100
)
Net interest revenue
12

 
—

 
151

 
147

Other income
12

 
1,430

 
36

 
4,802

Total net revenues
8,830

 
14,816

 
22,797

 
65,103

Operating Expenses
 
 
 
 

 
 
Compensation and benefits
(111
)
 
731

 
402

 
11,532

Allocation of net income to Lucid members for services provided
1,218

 
2,249

 
3,779

 
6,916

Total compensation and benefits
1,107

 
2,980

 
4,181

 
18,448

Referring broker fees
—

 
—

 
—

 
208

Advertising and marketing
—

 
15

 
—

 
736

Communication and technology
1,412

 
2,061

 
4,335

 
6,528

Trading costs, prime brokerage and clearing fees
2,967

 
4,178

 
9,676

 
14,716

General and administrative
447

 
978

 
2,069

 
4,215

Bad debt expense
—

 
—

 
—

 
8,408

Depreciation and amortization
—

 
—

 
—

 
12,359

Goodwill impairment loss
—

 
—

 
—

 
54,865

Total operating expenses
5,933

 
10,212

 
20,261

 
120,483

Operating income (loss)
2,897

 
4,604

 
2,536

 
(55,380
)
Other Income (Expense)
 
 
 
 

 
 
Income (loss) on equity method investments, net
149

 
(320
)
 
242

 
(821
)
Gain on disposition of equity method investment (see Note 6)
—

 
—

 
679

 
—

Income (loss) from discontinued operations before income taxes
3,046

 
4,284

 
3,457

 
(56,201
)
Gain on completed dispositions
—

 
12,449

 
—

 
14,427

(Loss) gain on classification as held for sale before income taxes
(25,095
)
 
979

 
(57,092
)
 
(27,820
)
Total (loss) income from discontinued operations before income taxes*
(22,049
)
 
17,712

 
(53,635
)
 
(69,594
)
Income tax provision (benefit)
—

 
(306
)
 
—

 
5,321

(Loss) income from discontinued operations, net of tax
$
(22,049
)
 
$
18,018

 
$
(53,635
)
 
$
(74,915
)
* Total (loss) income from discontinued operations before income taxes attributable to FXCM Inc. was $(3.3) million and $(14.9) million for the three and nine months ended September 30, 2016, respectively, and $9.1 million and $(19.8) million for the three and nine months ended September 30, 2015, respectively.

    

16
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 4. Discontinued Operations - (continued)


The following is a summary of the carrying amounts of the assets and liabilities included as part of discontinued operations as of September 30, 2016 and December 31, 2015, with amounts in thousands:
 
As of
 
September 30, 2016
 
December 31, 2015
Assets
 
 
 
Cash and cash equivalents
$
13,261

 
$
10,786

Due from brokers (1)
13,628

 
22,234

Accounts receivable, net
106

 
178

Office, communication and computer equipment, net
1,303

 
1,154

Goodwill
223,613

 
223,613

Other intangible assets, net
27,269

 
27,269

Other assets (2) (3)
14,181

 
15,363

Loss recognized on classification as held for sale
(123,753
)
 
(66,660
)
Total assets classified as held for sale on the condensed consolidated statements of financial condition
$
169,608

 
$
233,937

 
 
 
 
 
 
 
 
Liabilities
 
 
 
Accounts payable and accrued expenses (4)
$
9,690

 
$
10,838

Due to brokers (1)
371

 
—

Securities sold, not yet purchased
—

 
3,624

Deferred tax liability
—

 
—

Other liabilities
23

 
48

Total liabilities classified as held for sale on the condensed consolidated statements of financial condition
$
10,084

 
$
14,510

____________________________________
(1) Includes as of September 30, 2016 and December 31, 2015: a) derivative assets, net of $1.4 million and $0.9 million, respectively; b) Unsettled spot FX net asset of an immaterial amount and $0.3 million, respectively; c) Unsettled common stock of nil and $3.0 million, respectively; and d) Excess cash collateral of $11.8 million and $18.0 million, respectively.

(2) Includes the Company's exchange memberships, which represent ownership interests and shares owned in CME Group Inc. and provide the Company with the right to conduct business on the exchange. The exchange memberships are recorded at cost or, if an other-than-temporary impairment in value has occurred, at a value that reflects management's estimate of the impairment. The Company had previously owned shares in the Intercontinental Exchange which were sold in April 2015. The Company recognized a gain of $0.1 million related to the sale which was recorded in earnings as a component of Income (loss) from discontinued operations, net of tax during the second quarter of 2015. In the fourth quarter of 2015, the Company acquired additional ownership interests and shares in CME Group Inc. from one of the non-controlling members of Lucid which were recorded at a total cost of $3.7 million. There were no exchange membership impairments as of September 30, 2016 or December 31, 2015. As of both September 30, 2016 and December 31, 2015, the carrying value of ownership interests was $4.6 million and the carrying value of shares owned was $4.8 million.

(3) Includes the carrying value of the Company's equity interest in FastMatch of $4.4 million and $4.2 million as of September 30, 2016 and December 31, 2015, respectively. The carrying value of the Company's previously-held equity interest in the V3-related LLC of $1.5 million is included in the balance as of December 31, 2015 (see Note 6).

(4) Includes as of September 30, 2016 and December 31, 2015 amounts due related to the allocation of income to Lucid non-controlling members for services provided of $6.6 million and $6.5 million, respectively.

Note 5. Notes Receivable

In January 2014, in connection with the formation of V3 by the Company and the non-controlling members of Lucid, the non-controlling members of Lucid borrowed approximately $7.9 million from the Company to assist with funding their portion of the capital contribution. The amount borrowed was due in 2017 and bore interest at the rate of 2% per annum.

17
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 5. Notes Receivable - (continued)

During the second quarter of 2016, management determined that the non-controlling members of Lucid would not be required to repay the notes receivable and the debt would be forgiven. Accordingly, the Company recorded a provision for the debt forgiveness in the amount of $8.2 million for the principal amount thereof plus accrued interest, which is included in General and administrative expense in the condensed consolidated statements of operations for the nine months ended September 30, 2016.
    
Note 6. Equity Method Investments

The Company has a 22.2% equity interest in a developer of FX trading software which is accounted for using the equity method. The carrying value of the Company's equity interest in the FX trading software developer of $2.1 million and $2.6 million as of September 30, 2016 and December 31, 2015, respectively, is included as a component of Other assets in the condensed consolidated statements of financial condition. The Company's share of the loss of the FX trading software developer was $0.2 million and $0.5 million for the three and nine months ended September 30, 2016, respectively, and $0.1 million and $0.3 million for the three and nine months ended September 30, 2015, respectively, and is included in Loss on equity method investments, net in the condensed consolidated statements of operations.

The Company has a 35.1% non-controlling equity interest in FastMatch, an electronic communication network for foreign exchange trading, and exerts significant influence. The investment is accounted for using the equity method. As discussed in Note 4, the Company's equity interest in FastMatch is classified as a discontinued operation.    

In conjunction with the V3 acquisition in January 2014, the Company acquired a 66.3% non-controlling interest in a limited liability company ("V3-related LLC") that held a 17.26% interest in a firm that delivers investment information to investment professionals. Until December 31, 2015, the other members of the V3-related LLC had not consented to the transfer of the 66.3% non-controlling interest to the Company and the investment had been accounted for using the equity method. On December 31, 2015, the other members of the V3-related LLC approved a resolution to transfer the 66.3% non-controlling interest to the Company and, in a related transaction, to distribute the assets held by the V3-related LLC to its members, including the Company, and subsequently liquidate the V3-related LLC. These transactions were completed during the first quarter of 2016 and resulted in the Company's acquisition of an equity interest in the firm described above which is accounted for using the cost method. The carrying value of the investment was $1.1 million as of September 30, 2016 and is included as a component of Other assets in the condensed consolidated statements of financial condition. As discussed in Note 4, V3, including the equity interest previously held in the V3-related LLC, is classified as a discontinued operation. Income (loss) from discontinued operations, net of tax for the nine months ended September 30, 2016 includes a gain of $0.7 million related to the disposition of the V3-related LLC in the first quarter of 2016.

The carrying values of the Company's equity interests in FastMatch and the V3-related LLC (prior to its disposition) are included in assets held for sale on the condensed consolidated statements of financial condition. As of September 30, 2016 and December 31, 2015, the carrying values of the Company's equity method investments included in assets held for sale were $4.4 million and $5.7 million, respectively. The Company's share of the income or loss of FastMatch and the V3-related LLC (prior to its disposition) is included in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations. Total income (loss) on equity method investments included in Income (loss) from discontinued operations, net of tax was $0.1 million and $0.2 million for the three and nine months ended September 30, 2016, respectively, and $(0.3) million and $(0.8) million for the three and nine months ended September 30, 2015, respectively.

The Company did not receive any dividend distributions from its equity method investments during the three months ended September 30, 2016 and the three and nine months ended September 30, 2015. Dividend distributions received by the Company from its equity method investments during the nine months ended September 30, 2016 were not material.

Note 7. Goodwill

During the first quarter of 2015, the Company performed an interim impairment assessment of goodwill due to the events of January 15, 2015 and the Company's plan to sell certain businesses. This assessment resulted in the Company recording goodwill impairment losses of $9.5 million from continuing operations during the first quarter of 2015 primarily due to a decline in the implied fair value of certain institutional businesses subsequent to January 15, 2015. The impairment loss is presented as a separate line item in the condensed consolidated statements of operations and included as a component of (Loss) income from continuing operations for the nine months ended September 30, 2015.

18
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 7. Goodwill - (continued)


During the fourth quarter of 2015, the Company completed its annual testing for impairment of goodwill and, based on the evaluation performed, concluded that goodwill was not impaired as of October 1, 2015. During the nine months ended September 30, 2016, no triggering events have occurred that would indicate that it is more likely than not that goodwill is impaired.
    
Changes in goodwill for the nine months ended September 30, 2016 are presented in the following table and reflect the Company's single operating segment, with amounts in thousands:
 
 
 
Balance as of January 1, 2016
 
$
28,080

Foreign currency translation adjustments
 
(3,353
)
Balance as of September 30, 2016
 
$
24,727


Note 8. Other Intangible Assets, net

The Company’s intangible assets consisted of the following as of September 30, 2016 and December 31, 2015, with amounts in thousands:
 
September 30, 2016
 
December 31, 2015
  
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Finite-lived intangible assets
 
 
 
 
 
 
 
 
  

 
  

Customer relationships
$
35,460

 
$
(26,157
)
 
$
9,303

 
$
35,460

 
$
(21,223
)
 
$
14,237

Foreign currency translation adjustment
(3,963
)
 
1,823

 
(2,140
)
 
(1,910
)
 
855

 
(1,055
)
Total finite-lived intangible assets
31,497

 
(24,334
)
 
7,163

 
33,550

 
(20,368
)
 
13,182

Indefinite-lived intangible assets
 
 
 
 
 
 
 
 
 
 
 
License
600

 
—

 
600

 
600

 
—

 
600

Total Other intangible assets, net
$
32,097

 
$
(24,334
)
 
$
7,763

 
$
34,150

 
$
(20,368
)
 
$
13,782


In the second quarter of 2015, the Company acquired certain margin FX trading accounts from Citibank, N.A. and Citibank International Limited. The asset purchase agreement provides for cash consideration payable quarterly based on a pre-determined formula until total payments reach $6.0 million ("Threshold"). Additional cash consideration ("Contingent Consideration") is payable if total payments meet the Threshold before the expiration of an initial 30-month period. The acquired accounts represent customer relationships and are recorded as intangible assets at an initial cost of $6.0 million. Transaction costs incurred were not material. The Contingent Consideration is recognizable when it becomes payable, i.e., when it is probable and reasonably estimable, consistent with the guidance in ASC 450-20, Loss Contingencies, and, to the extent any amounts are recorded, included in the cost basis of the acquired intangible assets. There was no Contingent Consideration recorded as of September 30, 2016. The customer relationships are amortized on a straight-line basis over a weighted-average amortization period of three years.

During the first quarter of 2015, the Company performed an interim impairment evaluation of intangible assets due to the events of January 15, 2015 and the Company's plans to sell certain businesses. This evaluation resulted in the Company recording impairment losses of $5.4 million due to a decline in the implied fair value of certain institutional businesses subsequent to the events of January 15, 2015. The impairment charge is included as a component of amortization expense within discontinued operations for the nine months ended September 30, 2015. No impairment of intangible assets has been identified as of September 30, 2016.

Intangible assets related to businesses to be disposed of are included as a component of assets held for sale on the condensed consolidated statements of financial condition and are not included in the table above. Amortization related to these intangible assets ceased as of the date they were determined to be held for sale.


19
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 8. Other Intangible Assets, net - (continued)

Amortization expense from continuing operations included in the condensed consolidated statements of operations was $1.9 million and $5.8 million for the three and nine months ended September 30, 2016, respectively, and $2.0 million and $5.0 million for the three and nine months ended September 30, 2015, respectively. Amortization expense related to intangible assets to be disposed of (prior to the date they were determined to be held for sale) is included in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations.        
    
Estimated future amortization expense for intangible assets outstanding as of September 30, 2016 is as follows, with amounts in thousands:
Year Ending December 31,
 
Remainder of 2016
$
1,374

2017
4,049

2018
1,423

2019
317

2020
—

Thereafter
—

  
$
7,163


Note 9. Earnings per Share

On October 1, 2015, the Corporation effected a one-for-ten reverse stock split of its issued and outstanding Class A common stock (see Note 17). As a result, all references to number of Class A common shares, number of Holdings Units, price per share and weighted average shares of Class A common stock have been adjusted to reflect the one-for-ten reverse stock split on a retroactive basis for the prior periods presented, unless otherwise noted.

Basic earnings per share (“EPS”) measures the performance of an entity over the reporting period. Diluted EPS measures the performance of an entity over the reporting period while giving effect to all potentially dilutive instruments that were outstanding during the period. The Company uses the treasury stock method in accordance with ASC 260, Earnings per Share (“ASC 260”), to determine diluted EPS. Due to the Corporation's loss from continuing operations for the three months ended September 30, 2016 and the nine months ended September 30, 2015, any potential common shares were not included in the computation of diluted EPS as they would have had an antidilutive effect since the shares would decrease the loss per share. As a result, basic and diluted net loss per share of Class A common stock are equal for these periods.

In accordance with ASC 260, all outstanding unvested share-based payments that contain rights to non-forfeitable dividends participate in the undistributed earnings with the common stockholders and are therefore participating securities. The Company's unvested restricted stock units ("RSUs") do not contain rights to dividends or dividend equivalents. As a result, unvested RSUs are not considered participating securities and are therefore not required to be included in computing basic EPS under the two-class method. The shares of Class B common stock do not share in the earnings of the Company and are not considered participating securities. Accordingly, basic and diluted net earnings per share of Class B common stock have not been presented.

In April 2015, the Company entered into an option agreement with a customer as part of a negative equity balance settlement and issued an immediately vested, two-year option to purchase 56,934 shares of Class A common stock of FXCM Inc. The option has a strike price of $22.50. For the three and nine months ended September 30, 2016 and 2015, the stock option was not included in the computation of diluted EPS because it was antidilutive under the treasury method.

In computing diluted EPS, outstanding stock options and other equity awards granted to certain employees, non-employees and independent directors in the aggregate of 734,518 for each of the three and nine months ended September 30, 2016 and 766,823 for each of the three and nine months ended September 30, 2015 were excluded because they were antidilutive under the treasury method.

In June 2012, the Company issued 720,000 shares of the Corporation’s Class A common stock in connection with the acquisition of Lucid subject to the achievement of certain targets related to the financial performance of Lucid (the "Profit

20
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 9. Earnings per Share - (continued)


Targets") over a three-year term. In accordance with ASC 260, the anniversary shares are considered outstanding common shares and included in basic EPS as of the date that all necessary conditions to receiving the shares have been satisfied (that is, when issuance of the shares is no longer contingent) and there is no circumstance under which those shares would not be issued. The shares are considered for inclusion in diluted EPS prior to issuance if all necessary conditions have been satisfied by the end of the period. The Lucid sellers received 120,000 shares in June 2013 and 300,000 shares in June 2014. The Lucid sellers achieved the Profit Targets for the third anniversary shares during the quarter ended June 30, 2015 and received 300,000 shares in June 2015 which are included in the computation of basic EPS for the three and nine months ended September 30, 2015.

As described in Note 13, in June 2013 the Corporation issued $172.5 million principal amount of 2.25% senior convertible notes maturing on June 15, 2018 (the “Convertible Notes”). The Convertible Notes will be convertible at an initial conversion rate of 5.32992 shares of the Corporation's Class A common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $187.62. In accordance with ASC 260, the shares of the Corporation's Class A common stock issuable upon conversion of the Convertible Notes are included in the calculation of diluted EPS to the extent that the conversion value of the securities exceeds the principal amount. For diluted EPS purposes, the number of shares of the Corporation's Class A common stock that is necessary to settle such excess is considered issued. For the three and nine months ended September 30, 2016 and 2015, the conversion value did not exceed the principal amount and therefore the conversion effect was not included in the computation of diluted EPS because it was antidilutive under the treasury method.

As described in Note 13, the Corporation also entered into a warrant transaction in June 2013 whereby the Corporation sold to the counterparties warrants to purchase shares of the Corporation's Class A common stock. For the three and nine months ended September 30, 2016 and 2015, the warrants were not included in the computation of diluted EPS because they were antidilutive under the treasury method.
    
Additionally, the non-controlling members of Holdings have the right to exchange their Holdings Units for shares of the Corporation’s Class A common stock on a one-for-one basis at fair value, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. These shares were also excluded from the computation of diluted EPS because the shares have no impact, or would not be dilutive or antidilutive under the treasury method. There were no exchanges of Holdings Units during three and nine months ended September 30, 2016. During the three and nine months ended September 30, 2015, certain members of Holdings exchanged 0.2 million and 0.6 million, respectively, of their Holdings Units on a one-for-one basis, for shares of Class A common stock of the Corporation.

    

21
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 9. Earnings per Share - (continued)


The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations, with amounts in thousands except per share data:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
2016
 
2015
 
2016
 
2015
Basic and diluted net (loss) income per share of Class A common stock:
  

 
  

 
 
 
 
Numerator
  

 
  

 
 
 
 
(Loss) income from continuing operations attributable to FXCM Inc.
$
(35,829
)
 
$
64,302

 
$
85,936

 
$
(427,909
)
(Loss) income from discontinued operations attributable to FXCM Inc.
(3,305
)
 
9,347

 
(14,934
)
 
(21,070
)
Net (loss) income available to holders of Class A common stock
(39,134
)
 
73,649

 
71,002

 
(448,979
)
Earnings allocated to participating securities
—

 
—

 
—

 
—

(Loss) income available to common stockholders
$
(39,134
)
 
$
73,649

 
$
71,002

 
$
(448,979
)
Denominator
  

 
  

 
 
 
 
Weighted average shares of Class A common stock
5,603

 
5,313

 
5,603

 
4,968

Add dilutive effect of the following:
 
 
 
 
 
 
 
Stock options and RSUs(1)
—

 
—

 
—

 


Convertible note hedges
—

 
—

 
—

 


Warrants
—

 
—

 
—

 
—

Assumed conversion of Holdings Units for Class A common stock
—

 
—

 
—

 
—

Dilutive weighted average shares of Class A common stock
5,603

 
5,313

 
5,603

 
4,968

Net (loss) income per share of Class A common stock — Basic and Diluted:
 
 
 
 
 
 


Continuing operations
$
(6.39
)
 
$
12.10

 
$
15.34

 
$
(86.13
)
Discontinued operations
(0.59
)
 
1.76

 
(2.67
)
 
(4.24
)
Net (loss) income per share of Class A common stock
$
(6.98
)
 
$
13.86

 
$
12.67

 
$
(90.37
)
____________________________________
(1) No dilutive effect for any period presented, therefore zero incremental shares included.


22
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


Note 10. Related Party Transactions

Amounts receivable from, and payable to, related parties are set forth below, with amounts in thousands:
 
As of
 
September 30, 2016
 
December 31, 2015
Receivables
  

 
  

Advances to Holdings non-controlling members
$
43

 
$
112

Accounts receivable — Lucid non-controlling members
15

 
15

Advances to employees
59

 
201

Notes receivable and interest — Lucid non-controlling members
—

 
8,171

Total receivables from related parties
$
117

 
$
8,499

 


 


Payables
  

 
  

Employees
$
558

 
$
1,104

Due to Lucid non-controlling members in connection with the allocation of income to Lucid non-controlling members for services provided
6,584

 
6,500

Tax receivable agreement
—

 
145

Total payables to related parties
$
7,142

 
$
7,749


The Company has advanced funds for withholding taxes to several non-controlling members of Holdings. The outstanding balances as of September 30, 2016 and December 31, 2015, included in the table above, are included in Accounts receivable, net in the condensed consolidated statements of financial condition.

Included in Current assets held for sale in the condensed consolidated statements of financial condition are advances to the Lucid non-controlling members. As of September 30, 2016 and December 31, 2015, advances to the Lucid non-controlling members were not material.

Prior to July 1, 2015, the Company received commission or mark-up income from institutional customers’ trades executed on FastMatch's electronic trading platform, an entity in which the Company owns a 35.1% equity interest (see Note 6). The Company paid a per trade fee to FastMatch for use of the platform. Effective July 1, 2015, institutional customers trading via the FastMatch platform became direct customers of FastMatch. Fees collected from customers for trades executed on the FastMatch platform were nil for both the three and nine months ended September 30, 2016 and nil and $6.3 million for the three and nine months ended September 30, 2015, respectively, and are included in Trading revenue in the condensed consolidated statements of operations. Fees paid to FastMatch were nil for both the three and nine months ended September 30, 2016 and nil and $4.3 million for the three and nine months ended September 30, 2015, respectively, and are reflected as a component of Communication and technology in the condensed consolidated statements of operations. The Company received nil and $0.1 million from FastMatch during the three and nine months ended September 30, 2016, respectively, for occupancy and operational costs, which is included in Other income in the condensed consolidated statements of operations.
    
The Company has advanced funds to several employees. The outstanding balances as of September 30, 2016 and December 31, 2015, included in the table above, are included in Accounts receivable, net in the condensed consolidated statements of financial condition.

In January 2014, in connection with the formation of V3 by the Company and the non-controlling members of Lucid, the non-controlling members of Lucid borrowed approximately $7.9 million from the Company to assist with funding their portion of the capital contribution, which is included in Notes receivable in the condensed consolidated statements of financial condition as of December 31, 2015. The amount borrowed was due in 2017 and bore interest at the rate of 2% per annum. During the second quarter of 2016, management determined that the non-controlling members of Lucid would not be required to repay the notes receivable and the debt would be forgiven. Accordingly, the Company recorded a provision for the debt forgiveness in the amount of $8.2 million for the principal amount thereof plus accrued interest, which is included in General and administrative expense in the condensed consolidated statements of operations for the nine months ended September 30, 2016.

23
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 10. Related Party Transactions - (continued)


During the fourth quarter of 2015, Lucid acquired ownership interests and shares in CME Group Inc. from one of the non-controlling members of Lucid in a market-based transaction. The total carrying value of the ownership interests and shares was $3.7 million as of both September 30, 2016 and December 31, 2015 and are included in assets held for sale (see Note 4).

Customer account liabilities in the condensed consolidated statements of financial condition include balances for employees.

Amounts due related to the allocation of income to Lucid non-controlling members for services provided were $6.6 million and $6.5 million as of September 30, 2016 and December 31, 2015, respectively, and are included in Current liabilities held for sale in the condensed consolidated statements of financial condition (see Note 4).

Exchange Agreement

The members of Holdings (other than the Corporation) entered into an exchange agreement under which they (or certain permitted transferees thereof) have the right (subject to the terms of the exchange agreement as described therein) to exchange their Holdings Units for shares of the Corporation’s Class A common stock on a one-for-one basis at fair value, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. During the nine months ended September 30, 2016 and 2015, certain members of Holdings exchanged nil and 0.6 million, respectively of their Holdings Units, on a one-for-one basis, for shares of Class A common stock of the Corporation pursuant to the exchange agreement (after giving effect to the one-for-ten reverse stock split).

Equity Distribution Agreement

Pursuant to the terms of the Equity Distribution Agreement (see Note 20), the Company may, from time to time, issue and sell shares of its Class A common stock, having an aggregate offering price of up to $15.0 million through Jefferies Group, LLC (“Jefferies”), a wholly owned subsidiary of Leucadia, as sales agent. Jefferies will receive a commission of 3.0% of the gross sales price per share for any shares sold through it as the Company’s sales agent under the Equity Distribution Agreement. For both the three and nine months ended September 30, 2016, no amounts have been paid to Jefferies. The Company has agreed to reimburse a portion of the expenses that Jefferies incurs in connection with the offer and sale of the common stock. The Company recorded $0.2 million for both the three and nine months ended September 30, 2016 for reimbursements of such expenses.

Payments under Tax Receivable Agreement

The Corporation entered into a tax receivable agreement with the members of Holdings, including former members of Holdings (other than the Corporation) that will provide for the payment by the Corporation to Holdings’ members (other than the Corporation) as defined therein. Assuming sufficient taxable income is generated such that the Corporation fully realizes the tax benefits of the amortization specified in the tax receivable agreement, the aggregate payments currently estimated that would be due are $144.8 million and $146.8 million as of September 30, 2016 and December 31, 2015, respectively. During the first quarter of 2015, the Corporation determined that it was not more likely than not that it would benefit from the tax deduction attributable to the tax basis step-up for which a portion of the benefit would be owed to the non-controlling members of Holdings under the tax receivable agreement and reduced the contingent liability under the tax receivable agreement to zero. As of September 30, 2016, the Corporation continues to believe it will not benefit from the tax deduction and the contingent liability remains zero. During the nine months ended September 30, 2016 and 2015, payments of $0.2 million and $5.4 million, respectively, were made pursuant to the tax receivable agreement. The payment made during the nine months ended September 30, 2016 relates to the 2014 tax return year. The Corporation does not currently expect to make a payment for the 2015 tax year.

Other

UK LTD was party to an arrangement with Global Finance Company (Cayman) Limited (“Global Finance”) and Master Capital Group, S.A.L. (“Master Capital”). An affiliated shareholder of the Company beneficially owns more than 90% of the equity of Global Finance and Master Capital. Pursuant to the arrangement, Global Finance and Master Capital were permitted to use the brand name “FXCM” and the Company's technology platform to act as its local presence in certain countries in the Middle East and North Africa (“MENA”). UK LTD collected and remitted to Global Finance and Master

24
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 10. Related Party Transactions - (continued)

Capital fees and commissions charged by Global Finance and Master Capital to customers in MENA countries. Effective May 4, 2015, UK LTD terminated the arrangement with Global Finance and Master Capital. For the three and nine months ended September 30, 2015, the fees and commissions related to the arrangement were nil and $0.2 million and are included in Referring broker fees in the condensed consolidated statements of operations.     

Note 11. Net Capital Requirements
    
The Company's regulated entities are subject to minimum capital requirements in their respective jurisdictions. The minimum capital requirements of the entities below may effectively restrict the payment of cash distributions by the subsidiaries. The tables below present the capital, as defined by the respective regulatory authority, the minimum capital requirement and the excess capital for the following regulated entities as of September 30, 2016 and December 31, 2015, with amounts in millions:

 
As of September 30, 2016
  
US
 
UK LTD
 
Australia
 
Lucid LLP
Capital
$
49.5

 
$
79.0

 
$
12.8

 
$
9.9

Minimum capital requirement
33.1

 
21.9

 
0.8

 
4.5

Excess capital
$
16.4

 
$
57.1

 
$
12.0

 
$
5.4


 
As of December 31, 2015
  
US
 
UK LTD
 
Australia
 
Lucid LLP
Capital
$
43.6

 
$
76.3

 
$
12.0

 
$
10.9

Minimum capital requirement
28.3

 
27.6

 
0.7

 
4.0

Excess capital
$
15.3

 
$
48.7

 
$
11.3

 
$
6.9


Note 12. Leucadia Transaction

On January 15, 2015, the Company's customers suffered significant losses and generated negative equity balances ("debit balances") owed to it of approximately $275.1 million. This was due to the unprecedented volatility in the EUR/CHF currency pair after the SNB discontinued its currency floor of 1.2 CHF per EUR on that date. When a customer entered a EUR/CHF trade with the Company, the Company executed an identical trade with a FX market maker. During the historic move liquidity became extremely scarce and shallow, which affected execution prices.  This liquidity issue resulted in some customers having losses in excess of their account balance. While customers could not cover their margin call with the Company, the Company still had to cover the same margin call with the FX market maker.  When a customer profits in the trade, the Company gives the profits to the customer, however, when the customer is not profitable on that trade the Company is obligated to pay the FX market maker regardless of whether the Company collects the funds from its customers. These debit balances resulted in a temporary breach of certain regulatory capital requirements.

On January 16, 2015, Holdings and Newco entered into a credit agreement (the “Credit Agreement”) with Leucadia, as administrative agent and lender, and a related financing fee agreement (the “Fee Letter”).  The financing provided to the Company pursuant to these agreements, which is described below, enabled the Company to maintain compliance with regulatory capital requirements and continue operations.  On January 16, 2015, the Corporation, Holdings, Newco and Leucadia also entered into an agreement (the “Letter Agreement”) that set the terms and conditions upon which the Corporation, Holdings and Newco will pay in cash to Leucadia and its assignees a percentage of the proceeds received in connection with certain transactions.  In connection with these financing transactions, Holdings formed Newco and contributed all of the equity interests owned by Holdings in its subsidiaries to Newco. The Credit Agreement and the Letter Agreement were subsequently amended on January 24, 2015. On September 1, 2016, the Company completed a restructuring transaction with Leucadia that, among other changes, amended the Credit Agreement and the Letter Agreement. The principal changes resulting from the restructuring transaction with Leucadia are described below.    


25
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Leucadia Transaction - (continued)


Restructuring Transaction

On September 1, 2016, pursuant to the Restructuring Transaction, the Company and Leucadia agreed to amend the terms of the Credit Agreement and to terminate the Letter Agreement. The Letter Agreement was replaced with an Amended and Restated Limited Liability Company Agreement of FXCM Group, LLC (the “Group Agreement”). The Group Agreement replaces the existing FXCM Newco, LLC agreement and FXCM Newco, LLC was renamed FXCM Group, LLC (“Group”). Pursuant to the Group Agreement, Leucadia acquired a 49.9% membership interest in Group, with Holdings owning the remaining 50.1% membership interest in Group. Group and Holdings also entered into a Management Agreement pursuant to which Holdings manages the assets and day-to-day operations of Group. Additionally, Group adopted the 2016 Incentive Bonus Plan for Founders and Executives (the “Management Incentive Plan”) under which participants are entitled to certain distributions made after the principal and interest under the amended Credit Agreement are repaid. The events described herein are collectively referred to as the "Restructuring Transaction."

Principal Changes to the Credit Agreement

In connection with the Restructuring Transaction, the First Amendment to Amended and Restated Credit Agreement (“Amendment”) became effective on September 1, 2016. The Amendment extends the maturity date of the term loan by one year to January 16, 2018. Additionally, the Amendment permits the Company to defer any three of the remaining interest payments by paying interest in kind. Until the term loan under the amended Credit Agreement is fully repaid, all distributions and sales proceeds will continue to be used solely to repay the principal plus interest.

The Company concluded that the terms of the amended Credit Agreement and the Credit Agreement dated January 24, 2015 are not substantially different. Accordingly, the Amendment is accounted for as a modification on a prospective basis pursuant to ASC 470, Debt ("ASC 470"). The components of interest expense related to the amended Credit Agreement, which are included in Interest on borrowings in the condensed consolidated statements of operations, including contractual interest, deferred interest and previously unamortized discounts, fees and costs, are amortized as an adjustment to interest expense over the remaining term of the amended Credit Agreement using the effective interest method.

Principal Changes to the Letter Agreement

Pursuant to the Restructuring Transaction, the Letter Agreement was terminated effective September 1, 2016 and the parties signed the Group Agreement. The Group Agreement provides that Group will be governed by a six-member board of directors, comprising three directors appointed by Leucadia and three directors appointed by the Company. The Group Agreement specifies the terms according to which the cash distributions and earnings or loss of Group are to be allocated to its members (the “Revised Waterfall”), which is described below. Distributions from Group, other than certain permitted payments, cannot be made under the Group Agreement until the principal and interest due under the amended Credit Agreement are repaid. Pursuant to the Group Agreement, Leucadia and the Company will each have the right to request the sale of Group after January 16, 2018, subject to both Leucadia and the Company accepting the highest reasonable sales price.

Management Agreement

Leucadia has agreed to the Management Agreement with Holdings with an initial term through January 15, 2018, renewable automatically for successive one-year periods, unless terminated by Group or by the manager. In the Management Agreement, a number of rights are granted unilaterally to Holdings as the manager, including the right to create and implement a detailed budget, appoint and terminate the executive officers of Group and make day-to-day decisions in the ordinary course. The rights retained by the board of directors of Group are described below under "Leucadia's membership interest in Group."

Management Incentive Plan
    
In connection with the Restructuring Transaction, the Company adopted the 2016 Incentive Bonus Plan for Founders and Executives (the "Management Incentive Plan") effective September 1, 2016 (“Effective Date”) in order to retain and incentivize senior management to maximize cash flow generation and grow the business. The Management Incentive Plan is a long-term incentive program with a five-year vesting period, with 25% vesting on the second anniversary of the Effective Date (the “First Vesting Date”) and an additional 25% vesting on each of the next three anniversaries of the First Vesting Date.

26
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Leucadia Transaction - (continued)


Distributions under the plan will be made only after the principal and interest under the amended Credit Agreement are repaid and will equal the following:

•
10.0% of all distributions or sales proceeds from Group up to $350 million;

•
12.0% of all distributions or sales proceeds from Group from $350 million to $850 million; and

•
14.0% of all distributions or sales proceeds from Group above $850 million.

Long-term incentive plan participants will receive their share of any distributions or sales proceeds while unvested. In the event that a participant’s employment is terminated other than for cause or due to a material breach of a restrictive covenant, that participant will receive either a non-voting membership interest in Group that entitles the participant to the same share of distributions that would have otherwise been received under the incentive program, or a lump-sum cash payment, at the Company's discretion. In the event that a participant’s employment is terminated for cause or due to a material breach of a restrictive covenant, that participant will not be entitled to distributions following such termination and will forfeit all interests under the Management Incentive Plan. A termination payment will also be paid upon any change of control of Group. For this purpose, a change of control is defined as an event or series of events by which a person or group acquires 50% or more of the voting interests of Group or if, and at the time that, Leucadia’s percentage of ownership of the value of the equity interests of Group becomes less than 16.67%.

The Company determined that the Management Incentive Plan is a share-based payment arrangement that will be accounted for as a liability award under ASC 718. As of the Effective Date, the Company estimated the fair value of the Management Incentive Plan at $53.5 million. The Management Incentive Plan includes a performance condition whereby it only becomes an obligation after the principal and interest under the amended Credit Agreement are fully repaid. Accordingly, the Company will begin recognizing compensation expense for the award over the requisite service period when it becomes probable that the performance condition would be satisfied pursuant to ASC 718. At each reporting date, the Company will estimate the fair value of the Management Incentive Plan and assess the probability of repaying the amended Credit Agreement, and therefore of achieving the performance condition. Once the amended Credit Agreement has been repaid, or it is probable that it would be repaid, compensation expense will be recorded for the estimated fair value of the award, recognized using the accelerated attribution method over the five-year requisite service period.

As of September 30, 2016, the fair value of the Management Incentive Plan was estimated at $52.8 million. As of September 30, 2016, the Company determined that it is not probable that the performance condition would be satisfied and, accordingly, has not recognized compensation expense related to the award for the three and nine months ended September 30, 2016.

Revised Waterfall

The contractual provisions in the Group Agreement specify how certain distributions from Group are to be allocated among Leucadia, the Company and the Company’s senior management members participating in the Management Incentive Plan (the “Revised Waterfall”). The distributions include net proceeds received in connection with certain transactions, including sales of assets, dividends or other capital distributions, the sale of Group (whether by merger, stock purchase, sale of all or substantially all of Group’s assets or otherwise), the issuance of any debt or equity securities, and other specified non-ordinary course events, such as certain tax refunds and litigation proceeds. The Revised Waterfall will result in the following distributions from Group:
    
Distributable Amount
Revised Waterfall
Amounts due under the amended Credit Agreement
100% Leucadia
Next $350 million
45% Leucadia / 45% FXCM / 10.0% FXCM management
Next $500 million
79.2% Leucadia / 8.8% FXCM / 12.0% FXCM management
All aggregate amounts thereafter
51.6% Leucadia / 34.4% FXCM / 14.0% FXCM management


27
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Leucadia Transaction - (continued)


Leucadia’s Membership Interest in Group

As indicated above, in exchange for the Letter Agreement, the Company issued a 49.9% non-controlling membership interest in Group to Leucadia. The remaining 50.1% controlling membership interest in Group is owned by Holdings and Holdings consolidates the financial results of Group, as discussed in Note 1.

Leucadia has designated three directors to the board of directors of Group. As such, Leucadia participates in certain management, operational and investment decisions of Group, including, but not limited to, issuance of additional membership units or additional ownership interests in Group’s subsidiaries, issuance of debt (subject to certain limited exceptions), sales of assets (subject to certain limited exceptions), merger or consolidation with respect to Group or its subsidiaries, review and approval of the annual summary budget, administration of the Management Incentive Plan, and entry into or exit from a material line of business.

In addition to the allocations of cash distributions and the net profit and net loss of Group described above, Leucadia and its assignees are entitled to tax distributions under the Group Agreement. If any such tax distributions are made, the amounts of such distributions reduce the payments to be made to Leucadia and its assignees pursuant to the Revised Waterfall (other than with respect to the repayment of the loan).

The Group Agreement provides that following January 16, 2018, or, if earlier, at any time following a change of control (defined below), Leucadia and the Company will each have the right to cause the sale of Holdings, Group, and/or any of their respective subsidiaries for cash at the highest reasonably available price, subject to both Leucadia and the Company reasonably accepting such sales price. Upon the occurrence of such event, Group will distribute the cash to Leucadia and the Company in accordance with the Revised Waterfall described above.

In the event of a change of control, at the election of Leucadia or its assignees, Holdings and Group will be required to pay Leucadia and its assignees in cash a one-time payment equal to the fair market value of their economic rights under the Group Agreement. For this purpose, change of control is generally defined as an event or series or events by which (i) a person or group acquires 40% or more of the voting interests of the Corporation, (ii) the Corporation and the existing members of Holdings cease to own 90% of the equity interests of Holdings, (iii) the Corporation ceases to be the sole managing member of Holdings or (iv) subject to certain exceptions, a majority of the members of the board of directors of the Corporation, Holdings or Group cease to be directors during a 12-month period.

The Company evaluated the rights that Leucadia has related to its membership interest in Group under the Group Agreement, including board seats, voting rights and participation in key decisions that affect Group, as described above. The Company concluded that the legal form of the membership interest held by Leucadia is equity. The Company then considered the guidance under ASC 815, Derivatives and Hedging ("ASC 815"), and concluded that none of the features of the Group Agreement are required to be bifurcated and accounted for separately as a derivative.

As the economic substance of the instrument significantly changed when Leucadia received non-controlling membership units in Group, the Company concluded that the exchange of the Letter Agreement for the membership interest is an extinguishment of the Letter Agreement. Accordingly, the derivative liability resulting from the Letter Agreement was derecognized as of the date of the Restructuring Transaction. As of the date of the Restructuring Transaction, the estimated fair value of the derivative liability was $235.5 million, which was also the fair value of the non-controlling membership units in Group, resulting in no gain or loss recognized on the exchange. The change in the estimated fair value of the derivative liability between June 30, 2016 and the date of the Restructuring Transaction was a loss of $26.1 million and is recorded in Gain (loss) on derivative liabilities — Letter & Credit Agreements in the condensed consolidated statements of operations for the three months ended September 30, 2016. As of December 31, 2015, the fair value of the derivative liability resulting from the Letter Agreement was estimated at $448.5 million and is included in Derivative liability — Letter Agreement on the condensed consolidated statements of financial condition.

The Company considered the guidance in ASC 480 and determined that the non-controlling interest held by Leucadia falls within the scope of ASC 480 because it is redeemable for cash upon a contingent event that is not solely within the control of the Company and, accordingly, is classified outside of permanent equity on the condensed consolidated statements of financial condition as Redeemable non-controlling interest. The Company evaluates the probability of redemption at each

28
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Leucadia Transaction - (continued)


reporting date. As of September 30, 2016, the Company concluded that the non-controlling interest in Group is not currently redeemable and it is not probable that it will become redeemable as the likelihood that the redemption feature will be triggered is not considered probable. Accordingly, subsequent adjustment of the Redeemable non-controlling interest to its estimated redemption value is not required pursuant to ASC 480. If the non-controlling interest in Group becomes redeemable, or if redemption becomes probable, an adjustment will be made to adjust the Redeemable non-controlling interest to its estimated redemption value.

The allocation of the cash distributions and earnings or loss from Group based on the Revised Waterfall differs from the controlling and non-controlling members' stated ownership percentages. The Company determined that the Revised Waterfall represents a substantive profit sharing arrangement and concluded that the appropriate methodology for calculating the Redeemable non-controlling interest at each reporting date is the HLBV method, as discussed in Note 2. The Company applies the HLBV method using a balance sheet approach. Under the HLBV method, a calculation is performed at each balance sheet date to determine the amount the controlling and non-controlling member would each hypothetically receive assuming Group were liquidated at its recorded amount determined in accordance with U.S. GAAP and the cash distributed according to the Revised Waterfall. The difference between the liquidating distribution amounts calculated at the beginning and end of each period, after adjusting for capital contributions and distributions, is the controlling and non-controlling member's share of the earnings or loss from Group. The non-controlling member's share is reported in Net income (loss) attributable to redeemable non-controlling interest in FXCM Group, LLC in the condensed consolidated statements of operations.

At the date of the Restructuring Transaction, the Redeemable non-controlling interest was initially recorded at its fair value of $235.5 million, and subsequently adjusted for the allocation of the net assets of Group among the controlling and non-controlling members according to the terms of the Revised Waterfall to establish a carrying amount at inception for the non-controlling interest of $93.1 million (see Note 3). The share of the loss and other comprehensive income of Group for the period from inception through September 30, 2016 attributable to the non-controlling member was allocated based on the HLBV method. As of September 30, 2016, the carrying amount of the Redeemable non-controlling interest on the condensed consolidated statements of financial condition was $86.5 million.
     
Amended and Restated Credit Agreement

Other than the changes described above, the principal terms of the Amended and Restated Credit Agreement (“Credit Agreement”), dated January 24, 2015 remain unchanged. The Credit Agreement provides for a $300.0 million term loan made by Leucadia to Holdings and Newco.  The net proceeds of the loan ($279.0 million) were used to replace capital in the Company’s regulated entities to cover negative client balances and pay down outstanding revolving debt. Holdings’ prior revolving credit agreement with Bank of America, N.A. was repaid in full and terminated effective January 20, 2015.

The loan matures on January 16, 2018.  The obligations under the Credit Agreement are guaranteed by certain wholly-owned unregulated domestic subsidiaries of the Company and are secured by substantially all of the assets of Holdings and certain subsidiaries of the Corporation, including a pledge of all of the equity interests in certain of Holdings’ domestic subsidiaries and 65% of the voting equity interests in certain of its foreign subsidiaries.

The loan has an initial interest rate of 10% per annum, increasing by 1.5% per annum each quarter for so long as it is outstanding, but in no event exceeding 20.5% per annum (before giving effect to any applicable default rate). Beginning with the fourth quarter of 2016, the interest rate on the loan is 20.5%, which is fixed until maturity. Under certain circumstances, a default interest rate will apply on all obligations during the event of default at a per annum rate equal to 2% above the applicable interest rate. The Company has the right to defer any three of the remaining interest payments by paying interest in kind. The Company has not deferred any interest payments during the three and nine months ended September 30, 2016.

The Credit Agreement requires the payment of a deferred financing fee in an amount equal to $10.0 million, with an additional fee of up to $30.0 million payable in the event the aggregate principal amount of the term loan outstanding on April 16, 2015 was greater than $250.0 million or the deferred financing fee of $10.0 million (plus interest) had not been paid on or before such date. Prior to April 16, 2015, the Company repaid approximately $56.5 million which reduced the aggregate principal to $243.5 million on April 16, 2015. Additionally, the Company paid the $10.0 million deferred financing fee prior to April 16, 2015. Accordingly, the Company was not obligated to pay the additional $30.0 million fee. As of September 30, 2016, the Company has paid $117.5 million of principal, of which $10.0 million was applied to the deferred financing fee.

29
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Leucadia Transaction - (continued)



The Credit Agreement is subject to various conditions and terms such as requiring mandatory prepayments, including from proceeds of dispositions, condemnation and insurance proceeds, debt issuances, equity issuances, and capital contributions. The Credit Agreement requires monthly payments of the term loan from proceeds received during the immediately preceding calendar month from accounts receivable related to customer debit balances. The loan may be voluntarily prepaid without penalty.    

The Credit Agreement includes a variety of restrictive covenants, including, but not limited to: limitations on the ability to merge, dissolve, liquidate, consolidate or sell, lease or otherwise transfer all or substantially all assets; limitations on the incurrence of liens; limitations on the incurrence of debt by subsidiaries; limitations on the ability of Group to make distributions in respect of its equity interests including distributions to pay interest due on the Company’s convertible notes and limitations on transactions with affiliates, without the prior consent of the lender.  The Credit Agreement also provides for events of default, including, among others: non-payments of principal and interest; breach of representations and warranties; failure to maintain compliance with the other covenants contained in the Credit Agreement; default under other material debt; the existence of bankruptcy or insolvency proceedings; insolvency; and a change of control.

The Company initially allocated the net proceeds of $279.0 million between the Credit Agreement and the Letter Agreement based on their relative fair values. The estimated fair values of the Letter Agreement and the Credit Agreement were determined using an option pricing model based on significant inputs such as volatility and assumptions on public market pricing inputs. The initially recorded amounts for the Letter Agreement and the Credit Agreement were approximately $94.4 million and $184.6 million, respectively, net of an issuance fee of $21.0 million. The effective interest method is used to accrete the initial carrying value of the Credit Agreement liability to the par amount of the debt plus the $10.0 million deferred financing fee using an effective interest rate of 7.1% post-Restructuring Transaction. The fair value of the Letter Agreement’s embedded derivatives that were required to be bifurcated totaled $124.8 million, which is in excess of the amount of proceeds initially allocated to the Letter Agreement, resulting in a charge to earnings of $30.4 million which is included in the condensed consolidated statements of operations for the nine months ended September 30, 2015.    

The Credit Agreement contains mandatory prepayment provisions in the event of certain events described above. The mandatory prepayments may be triggered by events or circumstances that are not considered clearly and closely related to the Credit Agreement, and, as such, represent embedded derivatives in accordance with ASC 815. Beginning with the second quarter of 2016, a decline in the fair value of the Credit Agreement below par resulted in value attributable to the embedded derivatives. The Company assessed the fair value of the embedded derivatives and bifurcated their value from the fair value of the Credit Agreement.

As of September 30, 2016, the Company estimated the fair value of the derivative liability related to the embedded derivatives bifurcated from the Credit Agreement by using the "with" and "without" method. Using this methodology, the Credit Agreement is first valued with the mandatory prepayment provision (the "with" scenario) and subsequently valued without the mandatory prepayment provision (the "without" scenario). The fair value of the derivative liability resulting from the mandatory prepayment provision is estimated as the difference between the fair values of the Credit Agreement in the "with" and "without" scenarios. The fair value of the Credit Agreement in the "with" and "without" scenarios was estimated using a risk-neutral valuation model which models expected cash flows over the life of the debt.

As of September 30, 2016 and December 31, 2015, the fair value of the derivative liability resulting from the Credit Agreement was estimated at $12.6 million and nil, respectively, and is included in Credit Agreement on the condensed consolidated statements of financial condition. The change in the estimated fair value of the derivative liability at each reporting date is recorded in Gain (loss) on derivative liabilities — Letter & Credit Agreements in the condensed consolidated statements of operations.

    

30
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Leucadia Transaction - (continued)


The balance of the amended Credit Agreement as of September 30, 2016 and December 31, 2015, was as follows, with amounts in thousands:
 
As of
 
September 30, 2016
 
December 31, 2015
Debt principal
$
192,543

 
$
192,685

Original issue discount
(12,063
)
 
(35,967
)
Discount — issuance fee
(1,862
)
 
(5,227
)
Deferred financing fee
(1,340
)
 
(3,762
)
Debt issuance costs
(166
)
 
(467
)
Embedded derivative — Mandatory prepayment provision
12,574

 
—

Debt — net carrying value
$
189,686

 
$
147,262

    
Interest expense related to the amended Credit Agreement, included in Interest on borrowings in the condensed consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015, consists of the following, with amounts in thousands:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Contractual interest
$
9,221

 
$
7,301

 
$
25,313

 
$
20,202

Deferred interest
(1,128
)
 
734

 
(2,338
)
 
5,586

Amortization of original issue discount
6,835

 
14,686

 
23,905

 
55,373

Amortization of issuance fee discount
975

 
1,969

 
3,365

 
7,287

Amortization of deferred financing fee
702

 
1,417

 
2,422

 
5,245

Amortization of debt issuance costs
88

 
176

 
301

 
651

Total interest expense — Credit Agreement
$
16,693

 
$
26,283

 
$
52,968

 
$
94,344


The Company records deferred interest for the difference between the current period's contractual rate based on the loan terms and the amortization of the incremental step-up in the contractual rate over the life of the loan.

The Company paid an issuance fee of $21.0 million to Jefferies LLC, an affiliate of Leucadia, at the inception of the loan. The issuance fee was allocated to the Credit Agreement and the Letter Agreement based on the initial fair value of the Credit Agreement and the Letter Agreement. The portion of the issuance fee allocated to the Credit Agreement was $13.9 million and the portion allocated to the Letter Agreement was $7.1 million. The portion allocated to the Credit Agreement is reflected as a discount to the Credit Agreement loan balance on the condensed consolidated statements of financial condition, and is recorded to Interest on borrowings using the effective interest method. Subsequent to the date of the Restructuring Transaction, the discount is amortized over the remaining term of the amended Credit Agreement. Amortization of the issuance fee included in Interest on borrowings was $1.0 million and $3.4 million for the three and nine months ended September 30, 2016, respectively, and $2.0 million and $7.3 million for three and nine months ended September 30, 2015, respectively. The portion allocated to the Letter Agreement is reflected in Gain (loss) on derivative liabilities — Letter & Credit Agreements in the condensed consolidated statements of operations for the nine months ended September 30, 2015.

The Company incurred $1.8 million of issuance costs related to both the Credit Agreement and Letter Agreement. The issuance costs were allocated to the Credit Agreement and Letter Agreement based on the initial fair value of the Credit Agreement and Letter Agreement. The issuance costs allocated to the Credit Agreement and Letter Agreement were $1.2 million and $0.6 million, respectively. Issuance costs allocated to the Credit Agreement were recorded as deferred issuance costs and are amortized using the effective interest method. Subsequent to the date of the Restructuring Transaction, the deferred issuance costs are amortized over the remaining term of the amended Credit Agreement. Amortization of Credit Agreement issuance costs included in Interest on borrowings was $0.1 million and $0.3 million for the three and nine months ended September 30, 2016, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30,

31
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 12. Leucadia Transaction - (continued)


2015, respectively. The portion allocated to the Letter Agreement is reflected in Gain (loss) on derivative liabilities — Letter & Credit Agreements in the condensed consolidated statements of operations for the nine months ended September 30, 2015. As discussed in Note 2, as a result of the Company's adoption of ASU No. 2015-03 in the first quarter of 2016, unamortized debt issuance costs of $0.5 million as of December 31, 2015 were reclassified from Other assets, as previously reported, to the Credit Agreement liability on the condensed consolidated statements of financial condition.

The deferred financing fee of $10.0 million is amortized using the effective interest method. Subsequent to the date of the Restructuring Transaction, the deferred financing fee is amortized over the remaining term of the amended Credit Agreement. Amortization of the deferred financing fee included in Interest on borrowings was $0.7 million and $2.4 million for the three and nine months ended September 30, 2016, respectively, and $1.4 million and $5.2 million for the three and nine months ended September 30, 2015, respectively. The deferred financing fee was paid on April 1, 2015.     

The Company recorded a recovery of bad debt expense of nil and $0.1 million from continuing operations in the condensed consolidated statements of operations for the three and nine months ended September 30, 2016 related to the events of January 15, 2015. There was zero bad debt expense from discontinued operations in the condensed consolidated statements of operations for the three and nine months ended September 30, 2016 related to the events of January 15, 2015. Bad debt expense from continuing operations in the condensed consolidated statements of operations for the three and nine months ended September 30, 2015 includes net expense of nil and $257.3 million, respectively, related to the debit balances. Bad debt expense for the nine months ended September 30, 2015 includes $0.1 million of reversal of recoveries returned to clients, as well as $0.3 million reversal of recovery as payment for an option agreement entered into with a customer as part of a negative equity balance settlement (see Note 17). Bad debt expense from continuing operations for the nine months ended September 30, 2015 reflects net recoveries of $9.3 million. Bad debt expense included in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations for the three and nine months ended September 30, 2015 includes net expense of nil and $8.4 million related to the debit balances, which reflects recoveries during these periods of nil and $0.1 million, respectively.

Note 13. Debt

Revolving Credit Agreement

In December 2011, Holdings entered into a credit agreement ("Revolving Credit Agreement") with a syndicate of financial institutions. In January 2015, in connection with the Leucadia Transaction, Holdings' outstanding balance under the Revolving Credit Agreement of $25.0 million was repaid in full and the Revolving Credit Agreement was terminated effective January 20, 2015.

Interest expense related to borrowings under the Revolving Credit Agreement, including the amortization of debt financing costs, included in Interest on borrowings in the condensed consolidated statements of operations was nil and $1.5 million for the three and nine months ended September 30, 2015, respectively. For the same periods, the weighted average dollar amount of borrowings under the Revolving Credit Agreement was nil and $1.7 million, respectively, and the weighted average interest rates were nil and 2.9%, respectively.

Senior Convertible Notes due 2018

In June 2013, the Corporation issued $172.5 million principal amount of 2.25% Convertible Notes maturing on June 15, 2018 and received net proceeds of $166.5 million, after deducting the initial purchasers' discount and offering expenses. The Convertible Notes pay interest semi-annually on June 15 and December 15 at a rate of 2.25% per year, commencing December 15, 2013. The indenture governing the Convertible Notes does not prohibit the Company from incurring additional senior debt or secured debt, nor does it prohibit any of its subsidiaries from incurring additional liabilities. All references to number of shares, conversion rate and price per share of the Corporation's Class A common stock have been adjusted to reflect the one-for-ten reverse stock split that became effective on October 1, 2015.

The Convertible Notes will be convertible at an initial conversion rate of 5.32992 shares of the Corporation's Class A common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $187.62. In addition, following certain corporate transactions that occur prior to the maturity date, the

32
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 13. Debt - (continued)

Corporation will, in certain circumstances, increase the conversion rate for a holder that elects to convert its Convertible Notes in connection with such corporate transaction. Upon conversion, the Corporation will deliver cash up to the principal amount. With respect to any conversion value in excess of the principal amount, the Corporation will deliver shares of its Class A common stock (unless it elects to deliver cash in lieu of all or a portion of such shares).     

Convertible Note Hedges

In connection with the offering of the Convertible Notes, the Company entered into privately negotiated convertible note hedge transactions with certain counterparties (the “Convertible Note Hedge Transaction”). The Convertible Note Hedge Transactions will cover, subject to customary anti-dilution adjustments, the number of shares of the Corporation's Class A common stock that will initially underlie the Convertible Notes. Concurrently with entering into the Convertible Note Hedge Transaction, the Company also entered into a separate, privately negotiated warrant transaction (the “Warrant Transaction”) with the same counterparties, whereby the Company sold to the counterparties warrants to purchase, subject to customary anti-dilution adjustments, up to the same number of shares of the Corporation's Class A common stock as in the Convertible Note Hedge Transaction. The strike price of the Warrant Transaction will initially be $212.40 per share of the Corporation's Class A common stock. Subject to certain conditions, the Company may settle the warrants in cash or on a net-share basis.

The Convertible Note Hedge Transaction and the Warrant Transaction have the effect of increasing the effective conversion price of the Convertible Notes to $212.40 per share. The cost of the Convertible Note Hedge Transaction and the proceeds from the Warrant Transaction was $29.1 million and $18.6 million, respectively. In accordance with ASC 815, the Company recorded the cost of the Convertible Note Hedge Transaction and the proceeds from the Warrant Transaction to additional paid-in capital in stockholders' equity in the condensed consolidated statements of financial condition and the recorded values will not be adjusted for subsequent changes in their respective fair values.

The Convertible Note Hedge Transaction and the Warrant Transaction are separate transactions, in each case, entered into by the Company with certain counterparties, and are not part of the terms of the Convertible Notes and will not affect any holder's right under the Convertible Notes. Holders of the Convertible Notes will not have any rights with respect to the Convertible Hedge Transaction or the Warrant Transaction.

Under ASC 470, an entity must separately account for the liability and equity components of the convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer's economic interest cost. The effect of ASC 470 on the accounting for the Convertible Notes is that the fair value of the equity component is included in additional paid-in capital in the stockholders' equity section of the Company's condensed consolidated statements of financial condition and the principal amount of the Convertible Notes is reduced by original issue discount to reflect the Convertible Notes fair value at issuance. At issuance, the equity component of the Convertible Notes was valued at $29.1 million and the Convertible Notes were valued at $144.1 million consisting of $172.5 million of principal net of original issuance discount of $29.1 million. The original issue discount will be amortized over the life of the Convertible Notes using the effective interest rate of 6.20%.

The Company incurred $6.0 million of Convertible Notes issuance costs. The debt issuance costs will be amortized to interest expense over the life of the Convertible Notes. As discussed in Note 2, as a result of the Company's adoption of ASU No. 2015-03 in the first quarter of 2016, unamortized debt issuance costs of $2.9 million as of December 31, 2015 were reclassified from Other assets, as previously reported, to the Senior convertible notes liability on the condensed consolidated statements of financial condition.    
    
    

33
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 13. Debt - (continued)

The balances of the liability and equity components as of September 30, 2016 and December 31, 2015, were as follows, with amounts in thousands:
 
As of
 
September 30, 2016
 
December 31, 2015
Liability component — principal
$
172,500

 
$
172,500

Deferred bond discount
(10,872
)
 
(15,315
)
Deferred debt issuance costs
(2,022
)
 
(2,930
)
Liability component — net carrying value
$
159,606

 
$
154,255

Equity component
$
29,101

 
$
29,101

 
Interest expense related to the Convertible Notes, included in Interest on borrowings in the condensed consolidated statements of operations, consists of the following, with amounts in thousands:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Stated coupon rate
$
970

 
$
970

 
$
2,911

 
$
2,911

Amortization of deferred bond discount
1,508

 
1,419

 
4,443

 
4,180

Amortization of debt issuance cost
302

 
302

 
906

 
907

Total interest expense — Convertible Notes
$
2,780

 
$
2,691

 
$
8,260

 
$
7,998


Note 14. Commitments and Contingencies

Cybersecurity Incident

In October 2015, the Company reported that it was the victim of a criminal cybersecurity incident involving unauthorized access to customer information. The Company received an email from a hacker claiming to have unlawful access to customer information. The Company immediately notified the FBI of this threat and cooperated with the FBI. In addition, the Company immediately launched a full investigation, working with a leading cybersecurity firm, and that investigation has been concluded. Based on the investigation, the Company identified a small number of unauthorized wire transfers from customer accounts; however, all funds have been returned to the appropriate accounts and the customers have been contacted. The Company did not find any evidence of an ongoing intrusion into its network or that additional customer information had been stolen from its network as part of the cybersecurity incident.

The Company has incurred expenses subsequent to the cybersecurity incident to investigate and remediate this matter and may continue to incur expenses of this nature in future periods. Although the Company is unable to quantify the ultimate magnitude of such expenses and any other impact to the business from this incident at this time, they may be significant. These expenses will be recognized in the periods in which they are incurred. Through September 30, 2016, the Company incurred $0.7 million of costs related to investigative and other professional services, costs of communications with customers and remediation activities associated with the incident. The costs incurred during the three and nine months ended September 30, 2016 were nil and not material, respectively. The Company maintains insurance coverage for certain expenses of this nature, however, the coverage is subject to deductibles and may not be sufficient to entirely reduce the exposure to losses relating to this matter. During the three and nine months ended September 30, 2016, the Company recorded nil and $0.2 million, respectively, in insurance recoveries for costs incurred related to the cybersecurity incident. The insurance recoveries are recorded in General and administrative expense in the condensed consolidated statements of operations.

Guaranty

In July 2015, the Company entered into a guaranty with Citibank, N.A. (the "Guaranty") following the transition of certain institutional customers from the Company to FastMatch (see Note 10). Under the terms of the Guaranty, the Company agreed to guaranty FastMatch for any liabilities and other amounts that became due and payable by FastMatch for services

34
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 14. Commitments and Contingencies - (continued)


provided by Citibank N.A. as the intermediating counterparty for trading transactions executed on the FastMatch platform. The Guaranty expired on March 1, 2016 and was not renewed. No payments were made by the Company to Citibank N.A. under the terms of the Guaranty.

Note 15. Derivative Financial Instruments

Derivative financial instruments are accounted for in accordance with ASC 815 and are recognized as either assets or liabilities at fair value on the condensed consolidated statements of financial condition. The Company has master netting agreements with its respective counterparties under which derivative financial instruments are presented on a net-by-counterparty basis in accordance with ASC 210 and ASC 815. The Company enters into futures contracts or CFD contracts to economically hedge the open customer contracts and positions on its CFD business. Futures contracts are exchange traded contracts to either purchase or sell a specific asset at a specified future date for a specified price. CFD contracts are non-exchange traded contracts between a buyer and seller to exchange the difference in the value of an underlying asset at the beginning and end of a stated period. The Company's derivative assets and liabilities associated with futures contracts and CFD contracts on its CFD business are recorded within Due from brokers and Due to brokers, respectively, on the condensed consolidated statements of financial condition and gains or losses on these transactions are included in Trading revenue in the condensed consolidated statements of operations.

Through its subsidiaries Lucid and V3, the Company also engages in hedge trading in its electronic market making and institutional foreign exchange spot and futures markets. As discussed in Note 4, Lucid and V3 are reported as discontinued operations for all periods presented. Accordingly, the gains or losses on hedge trading in the Company's electronic market making and institutional foreign exchange spot and futures markets are included in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations.

The Company also enters into options, futures, forward foreign currency contracts and commodity contracts through Lucid and V3. Options grant the purchaser, for the payment of a premium, the right to either purchase from or sell to the writer a specified instrument under agreed terms. A forward contract is a commitment to purchase or sell an asset at a future date at a negotiated rate. The Company's derivative assets and liabilities held for trading purposes in connection with Lucid and V3 are recorded in Current assets held for sale and Current liabilities held for sale, respectively, on the condensed consolidated statements of financial condition. Gains or losses on options, futures and forward contracts held for trading purposes in connection with Lucid and V3 are included in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations.

The Company is exposed to risks relating to its derivatives trading positions from the potential inability of counterparties to perform under the terms of the contracts (credit risk) and from changes in the value of the underlying financial instruments (market risk). The Company is subject to credit risk to the extent that any counterparty with which it conducts business is unable to fulfill its contractual obligations. The Company manages its trading positions by monitoring its positions with and the credit quality of the financial institutions that are party to its derivative trading transactions. Additionally, the Company's netting agreements provide the Company with the right, in the event of a default of the counterparty (such as bankruptcy or a failure to perform), to net a counterparty’s rights and obligations under the agreement and to liquidate and set off collateral against any net amount owed by the counterparty.         
    
    

35
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 15. Derivative Financial Instruments - (continued)

The following tables present the gross and net fair values of the Company's derivative transactions and the related offsetting amount permitted under ASC 210 and ASC 815 as of September 30, 2016 and December 31, 2015. Derivative assets and liabilities are net of counterparty and collateral offsets. Collateral offsets include cash margin amounts posted with brokers. Under ASC 210, gross positive fair values are offset against gross negative fair values by counterparty pursuant to enforceable master netting agreements, with amounts in thousands:
 
 
 
As of September 30, 2016

 
 
Derivative Assets
 
Derivative Liabilities
 
Statement of Financial Condition Location
 
Fair Value
 
Notional
 
Fair Value
 
 Notional
Exchange traded options
Current assets/liabilities held for sale (1)
 
$
4,554

 
$
14,429

 
$
—

 
$
—

CFD contracts
Due from/Due to brokers (2)
 
157

 
18,172

 
32

 
3,761

Futures contracts
Due from/Due to brokers and Current assets/liabilities held for sale (1), (2)
 
446

 
138,223

 
22,289

 
1,743,734

OTC options
Current assets/liabilities held for sale (1)
 
964

 
38,030

 
1,135

 
33,249

Total derivatives, gross
 
 
$
6,121

 
$
208,854

 
$
23,456

 
$
1,780,744

Netting agreements and cash collateral netting
 
 
(4,382
)
 
 
 
(4,382
)
 
 
Total derivatives, net
 
 
$
1,739

 
 
 
$
19,074

 
 
____________________________________
(1) As of September 30, 2016, the aggregate fair values of derivative assets and liabilities, gross attributable to discontinued operations is $5.9 million and $4.5 million, respectively. These amounts are offset by netting agreements and cash collateral netting of $4.3 million and $4.3 million, respectively.
(2) As of September 30, 2016, the aggregate fair values of derivative assets and liabilities, gross attributable to continuing operations is $0.2 million and $18.9 million, respectively. These amounts are offset by immaterial amounts from netting agreements.

 
 
As of December 31, 2015

 
 
Derivative Assets

Derivative Liabilities

Statement of Financial Condition Location
 
Fair Value
 
Notional
 
Fair Value
 
Notional
Exchange traded options
Current assets/liabilities held for sale (3)
 
$
6,503

 
$
15,399

 
$
5,805

 
$
18,282

CFD contracts
Due from/Due to brokers (4)
 
206

 
109,715

 
36

 
99,036

Futures contracts
Due from/Due to brokers and Current assets/liabilities held for sale (3), (4)
 
4,212

 
794,960

 
3,102

 
1,047,239

Total derivatives, gross
 
 
$
10,921

 
$
920,074

 
$
8,943

 
$
1,164,557

Netting agreements and cash collateral netting
 
 
(8,909
)
 

 
(8,909
)
 

Total derivatives, net
 
 
$
2,012

 


 
$
34

 


____________________________________
(3) As of December 31, 2015, the aggregate fair values of derivative assets and liabilities, gross attributable to discontinued operations is $9.7 million and $8.8 million, respectively. These amounts are offset by netting agreements and cash collateral netting of $8.8 million and $8.8 million, respectively.
(4) As of December 31, 2015, the aggregate fair value of derivative assets and liabilities, gross attributable to continuing operations is $1.2 million and $0.1 million, respectively. These amounts are offset by netting agreements and cash collateral netting of $0.1 million and $0.1 million, respectively.

36
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 15. Derivative Financial Instruments - (continued)


Gains (losses) on the Company's derivative instruments are recorded on a trade date basis. The following table presents the gains (losses) on derivative instruments recognized in the condensed consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015, with amounts in thousands:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
Exchange traded options (5)
$
(7,635
)
 
$
6,049

 
$
3,456

 
$
5,320

CFD contracts (6)
185

 
3,216

 
(1,260
)
 
(2,131
)
Futures contracts (7)
(17,681
)
 
5,053

 
(48,537
)
 
43,115

OTC options (5)
—

 
—

 
2

 
1,086

Total
$
(25,131
)
 
$
14,318

 
$
(46,339
)
 
$
47,390

____________________________________
(5) Included in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations for all periods presented.
(6) Included in Trading revenue in the condensed consolidated statements of operations for all periods presented.
(7) The portion included in Income (loss) from continuing operations in the condensed consolidated statements of operations is $(27.7) million and $(53.0) million for the three and nine months ended September 30, 2016, respectively, and $7.5 million and $25.8 million for the three and nine months ended September 30, 2015, respectively.

Note 16. 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. The three levels of fair value hierarchy are defined as follows:

Level 1:  Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.
Level 2:  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 3:  Unobservable inputs for assets or liabilities.

When Level 1 inputs are available, those inputs are selected for determination of fair value. To value financial assets or liabilities that are characterized as Level 2 and 3, the Company uses observable inputs for similar assets and liabilities that are available from pricing services or broker quotes. These observable inputs may be supplemented with other methods, including internal models that result in the most representative prices for assets and liabilities with similar characteristics. Multiple inputs may be used to measure fair value, however, the fair value measurement for each financial asset or liability is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.     


37
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 16. Fair Value Measurements - (continued)


The following tables present the Company's assets and liabilities that are measured at fair value on a recurring basis and the related hierarchy levels, with amounts in thousands:
 
Fair Value Measurements on a Recurring Basis
 
As of September 30, 2016

Level 1
 
Level 2
 
Level 3
 
Counterparty and Cash
Collateral Netting
 
Total
Financial Assets:
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
Exchange traded options
$
4,554

 
$
—

 
$
—

 
$
—

 
$
4,554

CFD contracts
—

 
157

 
—

 
—

 
157

Futures contracts
446

 
—

 
—

 
—

 
446

OTC options
—

 
964

 
—

 
—

 
964

Netting
—

 
—

 
—

 
(4,382
)
 
(4,382
)
Total derivative assets (1)
5,000

 
1,121

 
—

 
(4,382
)
 
1,739

Total assets
$
5,000

 
$
1,121

 
$
—

 
$
(4,382
)
 
$
1,739

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Customer account liabilities
$
—

 
$
725,375

 
$
—

 
$
—

 
$
725,375

Derivative liabilities:
 
 
 
 
 
 
 
 
 
CFD contracts
—

 
32

 
—

 
—

 
32

Futures contracts
22,289

 
—

 
—

 
—

 
22,289

OTC options
—

 
1,135

 
—

 
—

 
1,135

Netting
—

 
—

 
—

 
(4,382
)
 
(4,382
)
Total derivative liabilities (1)
22,289

 
1,167

 
—

 
(4,382
)
 
19,074

Mandatory Prepayment Provision — Credit Agreement
—

 
—

 
12,574

 
—

 
12,574

Total liabilities
$
22,289

 
$
726,542

 
$
12,574

 
$
(4,382
)
 
$
757,023


As of September 30, 2016, the Company's total notional absolute value of open FX and CFD customer assets and liabilities by currency pair or product was $2.6 billion and $3.3 billion, respectively. The Company's total net notional value for open FX and CFD positions was $3.5 billion.


38
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 16. Fair Value Measurements - (continued)


 
Fair Value Measurements on a Recurring Basis
 
As of December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Counterparty and Cash
Collateral Netting
 
Total
Financial Assets:

 

 

 

 

Derivative assets:

 

 

 

 

Exchange traded options
$
6,503

 
$
—

 
$
—

 
$
—

 
$
6,503

CFD contracts
—

 
206

 
—

 
—

 
206

Futures contracts
4,212

 
—

 
—

 
—

 
4,212

Netting
—

 
—

 
—

 
(8,909
)
 
(8,909
)
Total derivative assets (1)
10,715

 
206

 
—

 
(8,909
)
 
2,012

Total assets
$
10,715

 
$
206

 
$
—

 
$
(8,909
)
 
$
2,012



 

 

 

 

Financial Liabilities:

 

 

 

 

Customer account liabilities
$
—

 
$
685,043

 
$
—

 
$
—

 
$
685,043

Derivative liabilities:

 

 

 

 

Exchange traded options
5,805

 
—

 
—

 
—

 
5,805

CFD contracts
—

 
36

 
—

 
—

 
36

Futures contracts
3,102

 
—

 
—

 
—

 
3,102

Netting
—

 
—

 
—

 
(8,909
)
 
(8,909
)
Total derivative liabilities (1)
8,907

 
36

 
—

 
(8,909
)
 
34

Securities sold, not yet purchased (2)
3,624

 
—

 
—

 
—

 
3,624

Letter Agreement
—

 
—

 
448,458

 
—

 
448,458

Total liabilities
$
12,531

 
$
685,079

 
$
448,458

 
$
(8,909
)
 
$
1,137,159


As of December 31, 2015, the Company's total notional absolute value of open FX and CFD customer assets and liabilities by currency pair or product was $2.5 billion and $2.5 billion, respectively. The Company's total net notional value for open FX and CFD positions was $2.2 billion.
____________________________________
(1) Attributable to continuing and discontinued operations. See Note 15 for details of the classification of amounts on the condensed consolidated statements of financial condition.
(2) Attributable to discontinued operations. Amounts classified as held for sale on the condensed consolidated statements of financial condition (see Note 4).

Derivative Assets and Liabilities

Exchange traded options and open futures contracts are measured at fair value based on exchange prices. CFD contracts and over-the-counter ("OTC") options are measured at fair value based on market price quotations (where observable) obtained from independent brokers.

Customer Account Liabilities

Customer account liabilities represent amounts due to customers related to cash and margin transactions, including cash deposits and gains and losses on settled FX, CFDs and spread betting trades as well as unrealized gains and losses on open FX commitments, CFDs and spread betting. Customer account liabilities, included in the condensed consolidated statements of financial condition, are measured at fair value based on the market prices of the underlying products.

Securities Sold, Not Yet Purchased

Securities sold, not yet purchased, represent the Company’s obligations to deliver the specified security at the contracted price at a future point in time, and thereby create a liability to repurchase the securities in the market at the

39
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 16. Fair Value Measurements - (continued)


prevailing prices. The liability for such securities sold short, included on the condensed consolidated statements of financial condition, is marked to market based on the current fair value of the underlying security at the reporting date which is determined based on exchange prices. Changes in fair value of securities sold, not yet purchased are recorded in Income (loss) from discontinued operations, net of tax in the condensed consolidated statements of operations. These transactions may involve market risk in excess of the amount currently reflected in the condensed consolidated statements of financial condition.

Letter Agreement

The embedded derivatives bifurcated from the Letter Agreement are accounted for separately as a derivative liability. The fair value of the derivative liability resulting from the Letter Agreement is determined by the use of valuation techniques that incorporate a combination of Level 1 and Level 3 inputs. The Level 1 input is comprised of the common stock price of the Corporation. The significant Level 3 inputs are considered more relevant in the analysis and are given a higher weighting in the overall fair value determination.

On September 1, 2016, in conjunction with the Restructuring Transaction, the Letter Agreement was terminated and its material terms are now reflected in the Group Agreement (see Note 12).  The Company determined the fair value of the derivative liability resulting from the Letter Agreement as of August 31, 2016 (just prior to the termination of the Letter Agreement) by using an enterprise valuation based on the traded (or closing) common stock price of the Corporation of $9.33. This valuation approach incorporated an option pricing model for the allocation of enterprise value between the derivative liabilities resulting from the Letter and Credit Agreements, the Management Incentive Plan, common stock and convertible debt.

The following table summarizes the significant Level 3 inputs used in the fair value determination of the Letter Agreement as of August 31, 2016 and December 31, 2015, respectively:

 
 
 
 
As of
Valuation Technique
 
Significant Unobservable Inputs
 
August 31, 2016
 
December 31, 2015
 
 
 
 
 
 
 
Option-Pricing Method
 
Term (years)
 
1.8

 
2.5

 
 
Volatility
 
131.1
%
 
79.1
%
 
 
Risk-free rate
 
0.8
%
 
1.2
%
 
 
Dividend yield
 
—
%
 
—
%
 
 
Reliance placed on public indication of value
 
100.0
%
 
100.0
%

Prior to the date of the Restructuring Transaction, the derivative liability resulting from the Letter Agreement, included on the condensed consolidated statements of financial condition, was marked to market at each reporting date and changes in the fair value were recorded through earnings in the condensed consolidated statements of operations as gains or losses resulting from the Letter Agreement.

Mandatory Prepayment Provision — Credit Agreement

The Credit Agreement contains mandatory prepayment provisions that may be triggered by events or circumstances that are not considered clearly and closely related to the Credit Agreement, such as asset sales, and, as such, represent embedded derivatives in accordance with ASC 815. The embedded derivatives are bifurcated from the Credit Agreement and accounted for separately as a derivative liability. The fair value of the derivative liability resulting from the mandatory prepayment provisions of the Credit Agreement is estimated using the "with" and "without" method. Using this methodology, the Credit Agreement is first valued with the mandatory prepayment provision (the "with" scenario) and subsequently valued without the mandatory prepayment provision (the "without" scenario). The fair value of the derivative liability resulting from the mandatory prepayment provision is estimated as the difference between the fair values of the Credit Agreement in the "with" and "without" scenarios. The fair value of the Credit Agreement in the "with" and "without" scenarios was estimated using a risk-neutral valuation model. Specifically, to estimate the fair value of the Credit Agreement, the expected cash flows

40
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 16. Fair Value Measurements - (continued)


were modeled over the life of the debt, including the extension of the maturity date by one year as part of the Restructuring Transaction.

The valuation of the derivative liability resulting from the mandatory prepayment provision primarily utilizes Level 3 inputs. The significant Level 3 inputs include the expected recovery rate in the case of a default and the expected timing for the remaining businesses to be sold. A recovery rate of 53.4% was used in the valuation as of September 30, 2016, which was estimated using market observed long-term average recovery rates for debt instruments of similar seniority. The timing for the remaining businesses to be sold was estimated by management and ranged from the fourth quarter of 2016 to the first half of 2017.

The derivative liability resulting from the mandatory prepayment provision, included in the Credit Agreement on the condensed consolidated statements of financial condition, is marked to market at each reporting date and changes in the fair value are recorded through earnings in the condensed consolidated statements of operations as gains or losses resulting from the Credit Agreement. The valuation techniques used are sensitive to the key assumptions noted above. For example, a 5.0% increase (decrease) in the recovery rate would result in a decrease of approximately $0.5 million (increase of approximately $0.5 million) in this valuation, assuming no other change in any other factors considered. Separately, a $25.0 million acceleration (deceleration) in principal repayments would result in an increase of approximately $1.7 million (decrease of approximately $1.2 million) in this valuation, assuming no other change in any other factors considered.

The following tables present the carrying value, fair value and fair value hierarchy category of certain financial instruments that are not measured at fair value in the condensed consolidated statements of financial condition, with amounts in thousands:


As of September 30, 2016
 
Fair Value Measurements using:

Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial Assets:

 

 

 

 

Due from brokers — unsettled spot FX (4)
$
1,040

 
$
1,040

 
$
—

 
$
1,040

 
$
—

Due from brokers — excess cash collateral (5)
11,773

 
11,773

 
—

 
11,773

 
—

Equity method investments (4)
6,514

 
12,659

 
—

 
—

 
12,659

Cost method investment
1,103

 
1,103

 
—

 
—

 
1,103

Exchange memberships (5)
9,434

 
9,835

 
—

 
9,835

 
—

Total assets
$
29,864

 
$
36,410

 
$
—

 
$
22,648

 
$
13,762



 

 

 

 

Financial Liabilities:

 

 

 

 

Due to brokers — unsettled spot FX (4)
$
1,364

 
$
1,364

 
$
—

 
$
1,364

 
$
—

Senior convertible notes
159,606

 
72,881

 
—

 
72,881

 
—

Credit Agreement
189,686

 
173,990

 
—

 
—

 
173,990

Total liabilities
$
350,656

 
$
248,235

 
$
—

 
$
74,245

 
$
173,990


41
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 16. Fair Value Measurements - (continued)


 
As of December 31, 2015
 
Fair Value Measurements using:
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial Assets:

 

 

 

 

Due from brokers — unsettled spot FX (4)
$
2,939

 
$
2,939

 
$
—

 
$
2,939

 
$
—

Due from brokers — unsettled common stock (5)
3,054

 
3,054

 
—

 
3,054

 
—

Due from brokers — excess cash collateral (5)
18,010

 
18,010

 
—

 
18,010

 
—

Equity method investments (4)
8,273

 
19,043

 
—

 
—

 
19,043

Notes receivable
7,881

 
7,881

 
—

 
—

 
7,881

Exchange memberships (5)
9,434

 
8,655

 
—

 
8,655

 
—

Total assets
$
49,591

 
$
59,582

 
$
—

 
$
32,658

 
$
26,924

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:

 

 

 

 

Due to brokers — unsettled spot FX (4)
$
1,039

 
$
1,039

 
$
—

 
$
1,039

 
$
—

Senior convertible notes
157,185

 
121,187

 
—

 
121,187

 
—

Credit Agreement
147,729

 
192,685

 
—

 
—

 
192,685

Total liabilities
$
305,953

 
$
314,911

 
$
—

 
$
122,226

 
$
192,685

____________________________________
(4) Attributable to continuing and discontinued operations. See Note 4 for amounts classified as held for sale on the condensed consolidated statements of financial condition.
(5) Attributable to discontinued operations and included in assets held for sale on the condensed consolidated statements of financial condition (see Note 4).

Due from/to Brokers — Unsettled Spot FX

Unsettled spot FX, included in Due from/Due to brokers and assets and liabilities held for sale on the condensed consolidated statements of financial condition, is carried at contracted amounts which approximate fair value based on market price quotations (where observable) obtained from independent brokers.

Due from Brokers — Unsettled Common Stock

The receivable for exchange membership shares sold short, included in assets held for sale on the condensed consolidated statements of financial condition, is carried at the contracted amount which approximates fair value based on quoted prices.

Due from Brokers — Excess Cash Collateral

Excess cash collateral, included in assets held for sale on the condensed consolidated statements of financial condition, is carried at contractual amounts which approximate fair value.

Equity Method Investments

Equity method investments are carried at cost. The fair value of these investments is based on comparable market multiples and other valuation methods.

Cost Method Investment

The cost method investment, included in Other assets on the condensed consolidated statements of financial condition, is carried at cost. The fair value of this investment is based on an independent valuation under a market-based approach.
 

42
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 16. Fair Value Measurements - (continued)


Notes Receivable

Notes receivable are carried at contracted amounts which approximate fair value.

Exchange Memberships

Exchange memberships, which include ownership interests and shares owned, are carried at cost. The fair value is based on quoted prices or recent sales.

Senior Convertible Notes

Senior convertible notes are carried at contractual amounts. The fair value of the Senior convertible notes is based on similar recently executed transactions and market price quotations (where observable) obtained from independent brokers.

Credit Agreement

Credit Agreement is carried at the contracted amount less original issue discount. The fair value of the Credit Agreement is based on a valuation model that considers the probability of default, Leucadia's secured interest, and the observable trading value of the Senior convertible notes.     
    
The following tables reconcile the opening and ending balances of the recurring fair value measurements categorized as Level 3, which are included in the condensed consolidated statements of financial condition, and identifies the total gains and losses the Company recognized during the three and nine months ended September 30, 2016 and 2015, with amounts in thousands:
 
Three Months Ended September 30, 2016
 
Balance as of
June 30, 2016
 
Net Unrealized (Gain) Loss
 
Addition/(Reversal)
 
Balance as of
September 30, 2016
Letter Agreement
$
209,458

 
$
26,051

 
$
(235,509
)
 
$
—

Mandatory Prepayment Provision — Credit Agreement
11,640

 
934

 
—

 
12,574

Total Level 3 liabilities
$
221,098

 
$
26,985

 
$
(235,509
)
 
$
12,574


 
Nine Months Ended September 30, 2016
 
Balance as of
December 31, 2015
 
Net Unrealized (Gain) Loss
 
Addition/(Reversal)
 
Balance as of
September 30, 2016
Letter Agreement
$
448,458

 
$
(212,949
)
 
$
(235,509
)
 
$
—

Mandatory Prepayment Provision — Credit Agreement
—

 
12,574

 
—

 
12,574

Total Level 3 liabilities
$
448,458

 
$
(200,375
)
 
$
(235,509
)
 
$
12,574


 
Three Months Ended September 30, 2015
 
Balance as of
June 30, 2015
 
Net Unrealized (Gain) Loss
 
Addition/(Reversal)
 
Balance as of
September 30, 2015
Letter Agreement
$
486,097

 
$
(137,566
)
 
$
—

 
$
348,531

Total Level 3 liabilities
$
486,097

 
$
(137,566
)
 
$
—

 
$
348,531



43
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 16. Fair Value Measurements - (continued)


 
Nine Months Ended September 30, 2015
 
Balance as of
December 31, 2014
 
Net Unrealized (Gain) Loss
 
Addition/(Reversal)
 
Balance as of
September 30, 2015
Letter Agreement
$
—

 
$
254,095

 
$
94,436

 
$
348,531

Total Level 3 liabilities
$
—

 
$
254,095

 
$
94,436

 
$
348,531


The net unrealized gains and losses summarized in the tables above are related to the changes in the fair value of the Letter Agreement and the embedded derivative related to the mandatory prepayment provision of the Credit Agreement for the three and nine months ended September 30, 2016 and 2015 and are included in Gain (loss) on derivative liability — Letter & Credit Agreements in the condensed consolidated statements of operations.

There were no transfers into or out of Level 1, 2 or 3 of the fair value hierarchy during the three and nine months ended September 30, 2016 and 2015.

Note 17. Stockholders' Equity

Amendment to Stockholder Rights Plan

On January 26, 2016, the Company entered into an Amended and Restated Rights Agreement (the “Amended Rights Agreement”) which amended the Company’s original Rights Agreement (the “Original Rights Agreement”) dated January 29, 2015. In connection with the adoption of the Original Rights Agreement, the Corporation's Board of Directors declared a dividend distribution of one right on each outstanding share of the Corporation's Class A common stock. The Original Rights Agreement was amended to protect the interests of the Company and its stockholders by helping to preserve the value of the Company’s net operating loss carryforwards and tax credits.

Under the terms of the Amended Rights Agreement, each right initially entitles stockholders to buy one one-thousandth (1/1000) of a share of the Series A Junior Participating Preferred Stock of the Corporation, at an initial exercise price of $44.12, in the event the rights become exercisable. As amended, the rights generally become exercisable if a person or group becomes the beneficial owner of 4.9% or more of (a) the outstanding Class A common stock of the Corporation or (b) the fair market value of all capital stock of the Corporation. Prior to this amendment, the beneficial ownership percentage threshold to trigger the rights plan was 10.0% of all voting securities, a trigger that, after this amendment, remains in place in addition to the aforementioned 4.9% trigger.

The Amended Rights Agreement extends the expiration date of the rights from January 29, 2018 to January 26, 2019, unless the rights are earlier redeemed or exchanged in accordance with the Amended Rights Agreement or the Amended Rights Agreement is earlier terminated by the Company’s Board of Directors.

As of September 30, 2016, the Company is not aware of the occurrence of any events that would trigger the exercise of the rights under the Amended Rights Agreement.

This amendment is not a taxable event, will not affect the reported financial condition or results of operations, including earnings per share, of the Corporation and will not change the manner in which the Corporation’s Class A common stock is currently traded.

Reverse Stock Split

A one-for-ten reverse split of the Corporation's issued and outstanding Class A common stock (the "Reverse Stock Split") became effective at the opening of trading on the NYSE on October 1, 2015 (the "Effective Date"). As of the Effective Date, every ten shares of issued and outstanding Class A common stock were combined into one newly issued share of Class A common stock. All references to number of Class A common shares, number of Holdings Units, price per share and weighted average shares of Class A common stock have been adjusted to reflect the Reverse Stock Split on a retroactive basis for all prior periods presented, unless otherwise noted.


44
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 17. Stockholders' Equity - (continued)


Option Agreement

On April 15, 2015, the Company entered into an Option Agreement (the “Option Agreement”) pursuant to which the Company issued an option to purchase 56,934 shares of the Corporation’s Class A common stock (the “Option”) with an exercise price of $22.50 (after giving effect to the one-for-ten reverse stock split). The Option was exercisable immediately, expires two years from the date of issuance, and includes standard anti-dilution protections. The Option Agreement was entered into as part of a negative equity balance settlement with a customer. The fair value of the Option on the date of issuance was estimated at $0.3 million and was determined using the Black-Scholes-Merton option pricing model.

Nasdaq

On September 13, 2016, the Company provided written notice to the New York Stock Exchange ("NYSE") of its intention to voluntarily delist its common stock, $0.01 par value per share, on the NYSE and to list its common stock on the NASDAQ Global Market of The NASDAQ Stock Market LLC ("NASDAQ"). At market close on September 23, 2016, the listing and trading of the Company's common stock on NYSE ceased. At market open on September 26, 2016, the trading of the common stock on NASDAQ commenced. The Company's common stock continues to trade under the symbol "FXCM."

Note 18. Income Taxes

Holdings operates in the U.S. as a limited liability company that is treated as a partnership for U.S. federal, state and local income tax purposes. Since January 2015, all of Holdings' operations are held by Group, a limited liability company that is also treated as a partnership between Holdings and Leucadia for U.S. federal, state and local income tax purposes. As a result, neither Holdings' nor Group's income from its U.S. operations is subject to U.S. federal income tax because the income is attributable to its members. Accordingly, the Company’s U.S. tax provision is solely based on the portion of income attributable to the Corporation from the lower tier limited liability companies and excludes the income attributable to other members of Holdings and Group whose income is included in Net income (loss) attributable to non-controlling interest in FXCM Holdings, LLC in the condensed consolidated statements of operations.

In addition to U.S. federal and state income taxes, the Company is subject to Unincorporated Business Tax which is attributable to Group's operations apportioned to New York City. The Company’s foreign subsidiaries are also subject to taxes in the jurisdictions in which they operate.

The Company’s effective tax rate was 0.2% for the three months ended September 30, 2016 compared to 0.3% for the three months ended September 30, 2015. The Company's effective tax rate was 0.0% for the nine months ended September 30, 2016 compared to (35.9)% for the nine months ended September 30, 2015. The tax rate for the three months ended September 30, 2016 is predominately the result of recording a valuation allowance on the deferred tax benefit associated with the book loss for the period. The tax rate for both the nine months ended September 30, 2016 and the three months ended September 30, 2015 is predominately the result of reversing valuation allowance to offset the tax provision associated with the book income for the period. Since January 2015, the Corporation determined that, given the losses incurred from the events of January 15, 2015 and due to the Leucadia Transaction, it was not more likely than not that it would benefit from the tax deduction attributable to the tax basis step-up from the conversion of the non-controlling membership units of Holdings, nor would it benefit from the tax benefit of the losses incurred. The negative tax rate for the nine months ended September 30, 2015 reflects the recording of a tax provision on the book loss for the period. The tax provision for the nine months ended September 30, 2015 reflects the recording of valuation allowance on the deferred tax assets of the Company as of January 2015.

During the nine months ended September 30, 2016, there were no material changes to the uncertain tax positions.

The Company is no longer subject to tax examinations by taxing authorities for tax years prior to 2011. During the third quarter of 2015, the Company was notified that its 2013 federal tax return was subject to examination by the Internal Revenue Service ("IRS"). During the third quarter of 2016, Holdings was notified by the IRS that its 2013 tax return was also subject to examination. Certain of the Company’s UK subsidiaries are also currently subject to examination.

45
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


Note 19. Litigation

In the ordinary course of business, we and certain of our officers, directors and employees may from time to time be involved in litigation and claims incidental to the conduct of our businesses, including intellectual property claims. In addition, our business is also subject to extensive regulation, which may result in administrative claims, investigations and regulatory proceedings against us. We have been named in various arbitration and civil litigation cases brought by customers seeking damages for trading losses. Management has investigated these matters and believes that such cases are without merit and is defending them vigorously. However, the arbitrations and litigations are presently in various stages of the judicial process and no judgment can be made regarding the ultimate outcome of the arbitrators’ and/or court’s decisions.

In January 2014, the equity receiver for a former client of US, Revelation Forex Fund (“Revelation”), its principal, Kevin G. White, and related entities RFF GP, LLC and KGM Capital Management, LLC, filed suit against US, and certain unrelated defendants, in Texas state court.  The suit alleges that US is liable for damages in excess of $3.8 million, plus exemplary damages, interest, and attorneys’ fees in connection with a Ponzi scheme run by Mr. White through his companies. In June 2015, that same equity receiver filed a complaint against US seeking $2.0 million, plus interest, and attorneys’ fees, based on allegations that the amount in controversy represents the net fraudulent transfers from Revelation to US under New York law.  In September 2015, the parties agreed to arbitration before the National Futures Association ("NFA") on these claims. In June 2016, the parties agreed to settle all related matters for $2.3 million. The settlement is reflected in General and administrative expense in the condensed consolidated statements of operations for the nine months ended September 30, 2016.

In April 2014, the Securities and Futures Commission initiated an investigation relating to HK’s past trade execution practices concerning the handling of price improvements in our trading system prior to August 2010. On October 19, 2016, the parties entered into a final settlement whereby HK voluntarily agreed to make full restitution to affected clients in the amount of $1.5 million and pay a fine of $0.5 million. The Company has accrued $2.0 million in connection with this matter.

On January 15, 2015, as a result of the unprecedented volatility in the EUR/CHF currency pair after the SNB discontinued its currency floor of 1.2 CHF per EUR, US suffered a temporary breach of certain regulatory capital requirements.  On August 18, 2016, the Commodity Futures Trading Commission ("CFTC") filed a complaint, U.S. Commodity Futures Trading Commission v. Forex Capital Markets, LLC, in the U.S. District Court for the Southern District of New York that alleges that FXCM was undercapitalized following SNB, failed to notify the CFTC of its undercapitalization, and guaranteed customer losses. The court has set November 18, 2016 as the date by which US must file its motion to dismiss. The NFA is conducting a similar investigation into US’s adjusted net capital and minimum financial requirement computations following SNB. US is cooperating with the NFA.

In connection with an earlier settlement between FSL and the Financial Conduct Authority regarding trade execution practices for the period 2006 to 2010, in February 2015, FSL paid an additional $0.7 million in restitution to affected clients.    

On May 8, 2015, the International Union of Operating Engineers Local No. 478 Pension Fund filed a complaint against the Company, its Chief Executive Officer and its Chief Financial Officer in the United States District Court for the Southern District of New York, individually and on behalf of all purchasers of the Company's common stock between June 11, 2013 and January 20, 2015. The complaint alleges that the defendants violated certain provisions of the federal securities laws and seeks compensatory damages as well as reasonable costs and expenses. An amended and consolidated complaint was filed on January 11, 2016. The Company filed a motion to dismiss the consolidated complaint on February 25, 2016 which was granted by the Court on August 18, 2016. On October 7, 2016, the District Court entered an order of final judgment closing the case. On November 3, 2016, plaintiffs filed a notice of appeal from the order granting the motion to dismiss.

In September 2015, US settled a complaint brought by the CFTC alleging that US failed to supervise an account determined to have been involved in wrongdoing and inadvertently omitted certain documents from its responses to document request. Under the terms of the settlement, US agreed, without admitting or denying any of the allegations, to pay a fine of $0.7 million to the CFTC and disgorge commissions and fees of $0.1 million.

On December 15, 2015, Brett Kandell, individually and on behalf of nominal defendant, FXCM Inc., filed a shareholder derivative complaint against the members of FXCM’s board of directors (the "Board") in the Court of Chancery for the State of Delaware.  The case is captioned Brett Kandell v. Dror Niv et al., C.A. No. 11812-VCG. On March 4, 2016,

46
FXCM Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 19. Litigation - (continued)


plaintiff filed an amended shareholder derivative complaint, which alleges claims for breach of fiduciary duty, contribution and indemnification, waste of corporate assets, abuse of control and unjust enrichment and seeks compensatory damages, rescission of certain agreements as well as reasonable costs and expenses. A second amended shareholder derivative complaint was filed on May 31, 2016 and the Board filed a motion to dismiss on July 15, 2016. Subsequently, plaintiff filed a third amended shareholder derivative complaint on September 1, 2016 and the Board filed a motion to dismiss on October 17, 2016.

The CFTC and the NFA are currently examining the relationship with US and one of its liquidity providers. The NFA is also conducting an investigation into US’s compliance with NFA daily trade data reporting requirements and NFA price adjustment requirements. US is cooperating and continues to comply with information requests from the CFTC and NFA.

For the outstanding matters referenced above, including ordinary course of business litigation and claims referenced in the first paragraph hereto, for which a loss is more than remote but less than likely, whether in excess of an accrued liability or where there is no accrued liability, we have estimated a range of possible loss. Management believes the estimate of the aggregate range of possible loss in excess of accrued liabilities for such matters is between nil and $2.1 million as of September 30, 2016.

In view of the inherent difficulty of predicting the outcome of litigation and claims, we cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss related to each pending matter may be. Furthermore, the above-referenced matters represented in the estimated aggregate range of possible loss will change from time to time and actual results may vary significantly from the current estimate. An adverse outcome in one or more of these matters could be material to our results of operations or cash flows for any particular reporting period.

Note 20. Subsequent Events

The Company has evaluated its subsequent events through the filing date of this Form 10-Q.

Sale of DailyFX

On September 30, 2016, the Company entered into an asset purchase agreement pursuant to which it agreed to sell the DailyFX business to IG Group for cash of $40.0 million, payable in two installments (the "DailyFX Transaction"). The DailyFX Transaction closed on October 28, 2016 (the "Closing Date"). The first installment of $36.0 million was paid to the Company on the Closing Date and the proceeds were used to pay down the term loan. The second installment of $4.0 million will be paid to the Company on the completion of certain migration requirements, which is expected within 60 to 90 days after the Closing Date. The Company expects to recognize a gain of approximately $38.0 million during the fourth quarter of 2016 related to the DailyFX Transaction.

At-the-Market Common Stock Offering

On October 3, 2016, the Company entered into an Equity Distribution Agreement (the "Equity Distribution Agreement") with Jefferies, LLC, as sales agent (the "Sales Agent"). Under the terms of the Equity Distribution Agreement, the Company may, from time to time, issue and sell shares of its Class A common stock, par value $0.01 per share, having an aggregate offering price of up to $15.0 million, through the Sales Agent. The common stock will be sold pursuant to the Company's shelf registration statement on Form S-3 which was declared effective by the Securities and Exchange Commission on August 2, 2016.

47

FXCM Inc.

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements of FXCM Inc., and the related notes included elsewhere in this Quarterly Report and our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission on March 11, 2016 (“Annual Report”), including the audited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations" contained therein. The historical consolidated financial data discussed below reflects the historical results and financial position of FXCM Inc. In addition, this discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including those described under “Forward-Looking Statements” and “Risk Factors.” Actual results may differ materially from those contained in any forward looking statements.

Unless the context suggests otherwise, references to “FXCM,” the “Company,” “we,” “us,” and “our” refer to FXCM Inc. and its consolidated subsidiaries. References to "Lucid" collectively refer to Lucid Markets Trading Limited and its subsidiary, Lucid Markets LLP. References to "Faros" refer to Faros Trading LLC and references to "V3" refer to V3 Markets, LLC.


OVERVIEW

Executive Summary

Since the events of January 15 and 16, 2015 (discussed below), we have focused on reestablishing the strong competitive position we had prior to that date.  Our efforts thus far have yielded significant results:

•
We successfully restored our operations. Revenue per million is up 22% for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, reflecting a higher proportion of revenue from dealing desk execution and higher CFD revenue per million.
•
We significantly reduced the loan balance with Leucadia. Through September 30, 2016, we have made Leucadia loan repayments of $117.5 million, leaving $192.5 million of principal outstanding. In addition, prior to April 16, 2015, we reduced the aggregate principal to $243.5 million and as a result were not obligated to pay an additional $30.0 million financing fee.
•
We recently sold DailyFX, our news and research website, to IG Group, a global leader in online trading, for a purchase price of $40.0 million. The transaction closed on October 28, 2016. Proceeds of $36.0 million were received at closing, which were used to pay down the term loan. The remaining proceeds, to be received after the completion of certain migration requirements, will be similarly applied to the term loan, net of any closing costs. (See Note 20 "Subsequent Events" to the condensed consolidated financial statements for more information).
•
During 2015, we completed the sales of FXCM Japan Securities Co., Ltd. ("FXCMJ"), the operations of Faros Trading LLC ("Faros"), FXCM Asia Limited ("HK") and the equity trading business of FXCM Securities Limited ("FSL") for a combined purchase price of $102.3 million.
•
On September 1, 2016 we completed the restructuring of the financing arrangements with Leucadia (the "Restructuring Transaction"). As further described below under Events of January 15 and 16, 2015, we entered into agreements to amend the terms of the Amended and Restated Credit Agreement (the "Credit Agreement") and replaced the Amended and Restated Letter Agreement (the "Letter Agreement") with a new Limited Liability Company Agreement. The Restructuring Transaction deepens the partnership with Leucadia and provides Leucadia with a membership interest in our operating entity, FXCM Group, LLC.
•
We took certain steps to limit risk during and immediately after the historic Brexit vote in June 2016, including gradually raising margins and limiting exposure. These steps helped to ensure that our trading platform operated normally throughout the Brexit-related market volatility.

•
On September 26, 2016, we transferred our stock exchange listing to the NASDAQ Global Market, which provides better alignment with our business.


48

•
On October 3, 2016 we entered into an Equity Distribution Agreement to issue and sell up to $15.0 million of our FXCM Inc. Class A common stock, to be used to reduce our outstanding indebtedness and for other general corporate purposes. (See Note 20 "Subsequent Events" to the condensed consolidated financial statements for more information).

Our near-term focus:

•
Target significant reduction in the Leucadia debt through non-core asset sales and cash generated through operations. We have identified our investments in FastMatch, Inc. ("FastMatch"), Lucid Markets Trading Limited ("Lucid") and V3 Markets, LLC ("V3") as non-core and are in active sales processes for all of these assets.

•
Accelerate the growth of our core business through a number of FX and CFD initiatives.

On the latter objective, we have implemented the following:

•
Launched single share CFDs, an important market for a number of our customers. We soft launched a single share CFD offering with certain customers and recently expanded the offering to certain customers on our proprietary Trading Station platform. We are continuing a broader roll-out over the remainder of the year.
•
Further expand the dealing desk model for small retail FX customers who are less interested in an agency FX offering, which has had a favorable effect on our revenue per million.
•
We recently implemented a number of new features and tools to enhance our customers’ trading experience:
◦
Introduced historical Forex Spreads Data allowing clients to back test trading strategies
◦
Launched a new Forex Market Depth Indicator on the Trading Station platform providing insights to levels of liquidity and depth for frequently traded currency pairs
◦
Added features to the Trading Station platform for margin monitoring, simulations and search functionality
◦
Added enhancements to our Application Program Interface ("API") technology services for algorithmic and institutional traders    

Industry Environment

Economic Environment — Our revenue and profitability are influenced by volatility which is directly impacted by economic conditions. FX volatility in the three months ended September 30, 2016 increased compared to the three months ended September 30, 2015. The daily JPMorgan Global FX Volatility was 10.2 for the third quarter of 2016, compared to 9.9 in the third quarter of 2015. In general, in periods of elevated volatility customer trading volumes tend to increase. However, significant swings in market volatility can also result in increased customer trading losses, higher turnover and reduced trading volume. It is difficult to predict volatility and its effects on the FX market.
                                                             
Competitive Environment — The retail FX trading market is 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 U.S., the U.K. (where regulatory passport rights have been exercised to operate in a number of European Economic Area jurisdictions) and Australia. We are evaluating the impact of the Brexit vote and how it has structured the servicing of our European operations.

Events of January 15 and 16, 2015

On January 16, 2015, we reached a financing agreement with Leucadia National Corporation ("Leucadia") that permitted our regulated subsidiaries to meet their regulatory capital requirements and continue normal operations after significant losses were incurred due to unprecedented volatility in the EUR/CHF currency pair after the Swiss National Bank ("SNB") discontinued its currency floor of 1.2 CHF per Euro. Specifically, as a result of customer debit balances following the historic movement of the Swiss Franc on January 15, 2015, regulators required our regulated entities to supplement their

49

respective net capital on an expedited basis (see Note 12 "Leucadia Transaction" to the condensed consolidated financial statements for more information).

At the time of the SNB announcement over 3,000 of our clients held slightly over $1 billion in open positions on EUR/CHF. Those same clients held approximately $80.0 million of collateral in their accounts. The SNB action wiped out the account equity of those clients and generated debit balances owed to us of approximately $275.1 million. The caveat of our no dealing desk (“NDD”) execution system is that traders are off-set one-for-one with a liquidity provider. When a client entered a EUR/CHF trade with us, we had an identical trade with our liquidity providers. During the historic move, liquidity became extremely scarce and shallow, which affected execution prices. This liquidity issue resulted in some clients having a negative balance. While clients could not cover their margin call with us, we still had to cover the same margin call with our liquidity providers. When a client profits in the trade, we give the profits to the customer, however, when the client's loss exceeds its margin, we are required to pay the liquidity provider regardless of whether we collect the loss from the customer.

As a regulated entity, we are required to notify our regulators in a timely manner when any event occurs that adversely impacts clients. When we notified the regulators, they required our regulated entities to supplement their respective net capital on an expedited basis. We explored multiple debt and equity financing alternatives in an effort to meet the regulators' deadline. The deal with Leucadia was the only financing that we were able to arrange in the very short timeframe we were given by the regulators, and represented the best opportunity for us to continue doing business.

On January 16, 2015, we entered into a credit agreement (the "Credit Agreement") with Leucadia, as administrative agent and lender. In connection with the Leucadia Credit Agreement, we also entered into an agreement (the "Letter Agreement") with Leucadia that set the terms and conditions upon which we will pay in cash to Leucadia and its assignees a percentage of the proceeds received in connection with certain transactions. In connection with these financing transactions, Holdings formed FXCM Newco, LLC ("Newco") and contributed all of the equity interests owned by Holdings in its subsidiaries to Newco. The Credit Agreement and Letter Agreement were subsequently amended on January 24, 2015. The amendments finalized certain terms of the Credit Agreement and Letter Agreement and the terms of the amended agreements were not substantially different from the initial agreements.

Restructuring of the Leucadia Financing

On September 1, 2016 we completed the restructuring of the financing arrangements with Leucadia, which was originally announced in March 2016. Key elements of the restructuring include:

Credit Agreement

•
The maturity date of the Credit Agreement was extended one year to January 16, 2018 to allow us more time to optimize asset sales.
•
We have the ability to defer any three of the remaining interest payments, permitting us flexibility to invest and grow our core business.

Letter Agreement

•
The Letter Agreement was terminated and the material terms are now reflected in the Amended and Restated Limited Liability Company Agreement of FXCM Group, LLC (the "Group Agreement").

Group Agreement

•
The Group Agreement replaces the existing FXCM Newco, LLC agreement and FXCM Newco, LLC has been renamed FXCM Group, LLC (“Group”).
•
Leucadia acquired a 49.9% non-controlling interest in Group.
•
The Group Agreement provides that Group will be governed by a six-member board, with three directors each appointed by FXCM and Leucadia.
•
We and Leucadia share the right to request a sale process after January 16, 2018, subject to both of us reasonably accepting the highest reasonable sales price.


50

Management Agreement

•
Group and Holdings entered into a Management Agreement (the “Management Agreement”) pursuant to which Holdings will manage the assets and day-to-day operations of Group and its subsidiaries.

Management Incentive Plan

•
Group adopted the 2016 Incentive Bonus Plan for Founders and Executives (the “Management Incentive Plan”), in order to retain and incentive senior management to maximize cash flow generation and grow the business.
•
The Management Incentive Plan is a long-term plan with five-year vesting.
•
Distributions under the plan are only made after the principal and interest under the Credit Agreement have been repaid.
•
Distributions will range from 10% to 14% of distributions made by Group.
•
If a participant terminates employment, they will receive either a non-voting membership in Group entitling them to the same share of distributions that they would have received, or a lump-sum cash payment, at our discretion.

For additional information, see Note 12 to the condensed consolidated financial statements.

Cybersecurity Incident

In October 2015, we reported that we were the victim of a criminal cybersecurity incident involving unauthorized access to customer information. We immediately launched a full investigation, working with a leading cybersecurity firm, and that investigation has been concluded. Based on the investigation, we identified a small number of unauthorized wire transfers from customer accounts; however, all funds have been returned to the appropriate accounts and the customers have been contacted. We did not find any evidence of an ongoing intrusion into our network or that additional customer information had been stolen from our network as part of the cybersecurity incident. We also cooperated with an investigation by federal law enforcement.
    
We have incurred expenses subsequent to the cybersecurity incident to investigate and remediate this matter and may continue to incur expenses of this nature in future periods. Although we are unable to quantify the ultimate magnitude of such expenses and any other impact to the business from this incident at this time, they may be significant. These expenses will be recognized in the periods in which they are incurred. Through September 30, 2016, we incurred $0.7 million of costs related to investigative and other professional services, costs of communications with customers and remediation activities associated with the incident. We maintain insurance coverage for certain expenses of this nature, however, the coverage is subject to deductibles and may not be sufficient to entirely reduce the exposure to losses relating to this matter. In the three and nine months ended September 30, 2016, we recorded nil and $0.2 million, respectively, in insurance recoveries to reimburse for expenses incurred related to the cybersecurity incident. See Note 14 “Commitments and Contingencies” to the condensed consolidated financial statements for more information.

Primary Sources of Revenues

Trading Revenue — Trading revenue is our largest source of revenue and is primarily driven by: (i) the number of active FX accounts and the type of accounts - commission, spread or dealing desk; (ii) the volume these accounts trade, which is driven by the amount of customer equity and the overall volatility of the FX market; (iii) the amount of the commission or spread we receive, which varies by currency pair; (iv) the difference between the interest we receive from FX market makers and the interest paid to customers on open positions; (v) net gains/losses derived from our dealing desk; and (vi) revenues earned from CFD trading and fees earned through white label relationships. 

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.

Primary Expenses

Compensation and Benefits — Compensation and benefits expense includes employee salaries, bonuses, stock compensation awards, benefits and employer taxes. Changes in this expense are driven by fluctuations in the number of employees, changes in the composition of our workforce, 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. The expense associated with our bonus plans can also have a significant impact on this expense category and may vary from period to period. In the first quarter of 2015, we

51

implemented a bonus plan aimed at retaining key employees following the significant decline in our stock price after the events of January 15, 2015. As a result, we expect our variable compensation in 2016 to be higher than historical periods.

At the time of our initial public offering (“IPO”) and thereafter, we have periodically granted awards of stock options to purchase shares of FXCM Inc.'s Class A common stock pursuant to the Amended and Restated Long-Term Incentive Plan (the “LTIP”) to certain employees and independent directors. We recorded stock-based compensation expense related to stock options of $0.3 million and $1.0 million for the three and nine months ended September 30, 2016, respectively, and $0.4 million and $1.6 million for the three and nine months ended September 30, 2015, respectively. The LTIP also provides for other stock-based awards (“Other Equity Awards”) that may be granted by our Executive Compensation Committee. In December 2014, we granted restricted stock units ("RSUs") to employees. We recorded stock-based compensation expense related to RSUs of $0.2 million and $0.5 million for the three and nine months ended September 30, 2016, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2015, respectively. We did not incur any expense for Other Equity Awards for the three and nine months ended September 30, 2016 and 2015.

Referring Broker Fees — Referring broker fees consist primarily of compensation paid to our 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 expense as Referring broker fees.

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.

Trading Costs, Prime Brokerage and Clearing Fees — Trading costs, prime brokerage and clearing fees primarily represent fees paid to third party clearing banks and prime brokers for clearing foreign exchange spot futures currency and contract transactions, transaction fees paid to exchanges, equity options brokerage activity fees, and fees paid to third party providers for use of their platform for our market making business. Clearing fees primarily fluctuate based on changes in volume, rate of clearing fees charged by clearing banks and rate of fees paid to exchanges.

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. Regulatory fees also includes fines and restitution imposed by regulators from time to time;
•
Occupancy and building operations expense — consisting primarily of costs related to leased property including rent, maintenance, real estate taxes, utilities and other related costs; and

•
Other — consisting primarily of a provision for forgiveness of a notes receivable and other miscellaneous client debit balances

Bad Debt Expense — As a result of the events of January 15, 2015, we experienced losses from client debit balances. The charge for these losses, net of recoveries, is included in Bad debt expense. We do not expect any further recoveries.

Depreciation and Amortization — Depreciation and amortization expense results primarily from the depreciation of long-lived assets purchased and internally-developed software that has been capitalized.


52

Amortization of intangibles includes amortization of intangible assets obtained through our various acquisitions. In addition, amortization of intangibles includes impairment charges resulting from impairment assessments.

Goodwill Impairment Loss — Goodwill impairment loss represents the charge from the reduction of goodwill resulting from impairment assessments.

Gain (loss) on Derivative Liabilities — Letter & Credit Agreements — We allocated the net proceeds from the Leucadia financing in 2015 of $279.0 million between the Credit Agreement and the Letter Agreement based on their relative fair values. The estimated fair values of the Letter Agreement and the Credit Agreement were determined using an option pricing model based on significant inputs such as volatility and assumptions on public market pricing inputs. We considered applicable accounting guidance and concluded that several features of the Letter and Credit Agreements require bifurcation as embedded derivatives and should be accounted for as derivative liabilities. The fair value of the Letter Agreement’s embedded derivatives that were required to be bifurcated totaled $124.8 million at the inception of the loan, which was in excess of the amount of proceeds initially allocated to the Letter Agreement, resulting in a charge to earnings of $30.4 million for the three months ended March 31, 2015. On September 1, 2016, the Letter Agreement was terminated and the material terms are now reflected in the Group LLC Agreement. The derivative liability related to the Letter Agreement was derecognized and Leucadia's 49.9% non-controlling interest was recorded as a redeemable non-controlling interest in Group at $93.1 million, which represented the amount that Leucadia would receive assuming Group were liquidated at its recorded amount determined in accordance with U.S. GAAP and the cash distributed according to the Revised Waterfall at that date. The change in the fair value of the Letter Agreement ($26.1 million loss and $213.0 million gain for the three and nine months ended September 30, 2016, respectively) was recorded in Gain (loss) on derivative liabilities — Letter & Credit Agreements in the condensed consolidated statements of operations. See Note 3 and Note 12 to the condensed consolidated financial statements for further information.

The Credit Agreement contains mandatory prepayment provisions that may be triggered by events or circumstances that are not considered clearly and closely related to the Credit Agreement, such as asset sales, and, as such, represent embedded derivatives. The embedded derivatives are bifurcated from the Credit Agreement and accounted for separately as a derivative liability. As of September 30, 2016, the fair value of the derivative liability resulting from the mandatory prepayment provisions of the Credit Agreement was estimated at $12.6 million, and is included in Credit Agreement on the condensed consolidated statements of financial position. The change in the fair value of the derivative liability associated with the mandatory prepayment provisions (losses of $0.9 million and $12.6 million for the three and nine months ended September 30, 2016, respectively) is recorded in Gain (loss) on derivative liabilities — Letter & Credit Agreement in the condensed consolidated statements of operations. See Note 12 to the condensed consolidated financial statements for further information.
 
Interest on Borrowings — Interest on borrowings consists of interest expense, deferred interest and amortization of financing and issuance costs related to the Leucadia Credit Agreement, the Convertible Notes and borrowings under the Revolving Credit Agreement. On January 20, 2015, the Revolving Credit Agreement was terminated (see Note 13 "Debt" to the condensed consolidated financial statements).
    
Income Taxes — Holdings operates in the U.S. as a limited liability company that is treated as a partnership for U.S. federal, state and local income tax purposes. Since January 2015, all of Holdings' operations are held by Group (formerly Newco), a limited liability company that is also treated as a partnership between Holdings and Leucadia for U.S. federal, state and local income tax purposes. As a result, neither Holdings' nor Group's income from its U.S. operations is subject to U.S. federal income tax because the income is attributable to its members. Accordingly, our U.S. tax provision is solely based on the portion of income attributable to the Corporation from the lower tier limited liability companies and excludes the income attributable to other members of Holdings whose income is included in Net income (loss) attributable to non-controlling interest in FXCM Holdings, LLC in the condensed consolidated statements of operations.

In addition to U.S. federal and state income taxes, we are subject to New York City Unincorporated Business Tax which is attributable to Group's operations apportioned to New York City. Our foreign subsidiaries are also subject to local taxes.

Other

Income (loss) from discontinued operations, net of tax — As a result of the events of January 15 and 16, 2015 discussed in the Overview section, we made the decision to dispose of our interests in certain retail and institutional trading businesses in order to accelerate the pay down of the Leucadia Credit Agreement. The retail businesses are HK, FXCMJ and the equity trading business of FSL. The institutional businesses are Faros, Lucid, V3 and our equity interest in FastMatch. We evaluated the criteria for reporting the results of operations for these entities as discontinued operations and determined that the dispositions qualify for treatment as discontinued operations. As such, the results of operations for these entities are reported in Income (loss) from discontinued operations, net of tax, in the condensed consolidated statements of operations.

53


Tax expense for discontinued operations is primarily driven by the recognition of tax benefit associated with the generation of net operating loss and the write down of the deferred tax liability associated with the goodwill of Lucid Markets LLP ("Lucid LLP"), offset by the establishment of a valuation allowance on the net deferred tax assets of Lucid LLP.  Lucid LLP is a limited liability partnership treated as a partnership for income tax purposes.  As a result, Lucid LLP's income is not subject to U.K. corporate income tax because the income is attributable to its members. Therefore, Lucid's tax provision is solely based on the portion of its income attributable to its managing member, Lucid Markets Trading Limited, which is a U.K. corporation subject to U.K. corporate income tax, and excludes the income attributable to other members of Lucid LLP.

Net income (loss) attributable to non-controlling interest in FXCM Holdings, LLC — FXCM Inc. is a holding company, and its sole material asset is a controlling membership interest in Holdings. As the sole managing member of Holdings, FXCM Inc. operates and controls all of the business and affairs of Holdings and, through Holdings and its subsidiaries, conducts our business. FXCM Inc. consolidates the financial results of Holdings and its subsidiaries, and the ownership interest of the other members of Holdings is reflected as a non-controlling interest in our condensed consolidated financial statements.

Net income (loss) attributable to redeemable non-controlling interest in FXCM Group, LLC  — In conjunction with the restructuring of the Leucadia financing arrangement, the Letter Agreement was terminated and the material terms are now reflected in the Group LLC Agreement. Leucadia's 49.9% ownership interest in Group is reflected as a redeemable non-controlling interest in our condensed consolidated financial statements.

Net income (loss) attributable to other non-controlling interests and allocation of net income to Lucid members for services provided — We consolidate the financial results of Lucid in which we have a 50.1% controlling interest. The 49.9% ownership interest of the non-controlling Lucid members is reflected as follows:

•
The portion of the 49.9% of earnings allocated among the non-controlling members of Lucid based on services provided to Lucid is reported as a component of compensation and benefits expense within Income (loss) from discontinued operations, net of tax in our condensed consolidated statements of operations.

•
The portion of the 49.9% of earnings allocated among the non-controlling members not allocated based on services provided is reported as a component of Net income (loss) attributable to other non-controlling interests in our condensed consolidated statements of operations.

We also consolidate the financial results of other entities in which we have a controlling interest. The ownership interests of the non-controlling members is reported in net income (loss) attributable to other non-controlling interests in the condensed consolidated statements of operations.

Segment Information

Accounting Standards Codification Topic 280, Segment 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 guidance defines reportable segments as operating segments that meet certain quantitative thresholds. As a result of the events of January 15, 2015 described above, and the decision to sell certain retail and institutional businesses, the composition of what we previously reported as our Institutional segment has changed significantly, such that the remaining institutional business reported in continuing operations will no longer meet the quantitative criteria for separate reporting. In addition, the remaining institutional business now shares common management strategies, customer support and trading platforms with our retail business. Accordingly, we have concluded that we now operate as a single operating segment.

Common Stock Repurchase Program

Our Board of Directors previously approved the repurchase of $80.0 million of FXCM Inc.'s Class A common stock (the “Stock Repurchase Program”). In November 2014, our Board of Directors approved a $50.0 million incremental increase in the Stock Repurchase Program for an aggregate of $130.0 million. Since inception of the Stock Repurchase Program in May 2011 through September 30, 2016, we have repurchased 5.1 million pre-reverse split shares for $64.2 million under these authorizations. In November 2016, our Board of Directors canceled the Stock Repurchase Program.

Pursuant to an agreement between FXCM Inc. and Holdings, when FXCM Inc. repurchases shares of its Class A common stock, Holdings enters into an equivalent Holdings Units transaction with FXCM Inc. Therefore, as of September 30,

54

2016, Holdings has repurchased 5.1 million of pre-reverse split Holdings Units from FXCM Inc. related to FXCM Inc. Class A common stock repurchases noted above.

At-the-Market Common Stock Offering

On October 3, 2016 we entered into an Equity Distribution Agreement to issue and sell up to $15.0 million of our Class A common stock. The stock will be offered under our effective shelf registration statement (including prospectus) filed with the Securities and Exchange Commission.


55

RESULTS OF OPERATIONS

The following table sets forth our condensed consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
  
(Amounts in thousands)
Revenues
  

 
  

 
 
 
 
Trading revenue
$
57,845

 
$
56,247

 
$
196,550

 
$
184,672

Interest income
791

 
494

 
1,900

 
1,232

Brokerage interest expense
(228
)
 
(212
)
 
(655
)
 
(589
)
Net interest revenue
563

 
282

 
1,245

 
643

Other income
2,984

 
3,053

 
5,668

 
149,969

Total net revenues
61,392

 
59,582

 
203,463

 
335,284

Operating Expenses
  

 
  

 
 
 
 
Compensation and benefits
24,222

 
23,948

 
73,399

 
72,444

Referring broker fees
9,535

 
13,032

 
29,114

 
43,702

Advertising and marketing
5,069

 
4,116

 
15,353

 
10,416

Communication and technology
6,878

 
7,312

 
20,999

 
26,072

Trading costs, prime brokerage and clearing fees
871

 
847

 
2,608

 
2,947

General and administrative
14,646

 
12,861

 
53,626

 
39,234

Bad debt expense
—

 
—

 
(141
)
 
257,303

Depreciation and amortization
6,956

 
7,316

 
21,149

 
21,136

Goodwill impairment loss
—

 
—

 
—

 
9,513

Total operating expenses
68,177

 
69,432

 
216,107

 
482,767

Operating loss
(6,785
)
 
(9,850
)
 
(12,644
)
 
(147,483
)
Other Income (Expense)
 
 
 
 
 
 
 
(Loss) gain on derivative liabilities — Letter & Credit Agreements
(26,985
)
 
137,566

 
200,375

 
(254,730
)
Loss on equity method investments, net
140

 
111

 
478

 
299

Interest on borrowings
19,473

 
28,974

 
61,228

 
103,824

(Loss) income from continuing operations before income taxes
(53,383
)
 
98,631

 
126,025

 
(506,336
)
Income tax (benefit) provision
(85
)
 
295

 
58

 
181,616

(Loss) income from continuing operations
(53,298
)
 
98,336

 
125,967

 
(687,952
)
(Loss) income from discontinued operations, net of tax
(22,049
)
 
18,018

 
(53,635
)
 
(74,915
)
Net (loss) income
(75,347
)
 
116,354

 
72,332

 
(762,867
)
Net (loss) income attributable to non-controlling interest in FXCM Holdings, LLC
(18,493
)
 
39,038

 
33,411

 
(274,650
)
Net loss attributable to redeemable non-controlling interest in FXCM Group, LLC
(6,877
)
 
—

 
(6,877
)
 
—

Net (loss) income attributable to other non-controlling interests
(10,843
)
 
3,667

 
(25,204
)
 
(39,238
)
Net (loss) income attributable to FXCM Inc.
$
(39,134
)
 
$
73,649

 
$
71,002

 
$
(448,979
)


56

Other Selected Customer Trading Metrics for Continuing Operations

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
  
2016
 
2015
 
2016
 
2015
Customer equity (in millions)
$
725

 
$
713

 
$
725

 
$
713

Tradeable accounts
155,067

 
160,350

 
155,067

 
160,350

Active accounts
177,818

 
180,121

 
177,818

 
180,121

Daily average trades — retail customers
544,096

 
563,100

 
582,861

 
539,043

Daily average trades per active account
3.1

 
3.1

 
3.3

 
3.0

Total retail trading volume(1) (billions)
$
875

 
$
972

 
$
2,648

 
$
2,906

Retail trading revenue per million traded(1)
$
65

 
$
56

 
$
72

 
$
59

Average retail customer trading volume per day(1) (billions)
$
13.3

 
$
14.7

 
$
13.6

 
$
15.0

Trading days
66

 
66

 
195

 
194

(1) 
Volume that customers traded in period translated into U.S. dollars.

Three months ended September 30, 2016

Highlights — Continuing Operations

Total retail trading volumes decreased by $97 billion, or 10%, to $875 billion for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. The decrease in volume compared to the prior year period is primarily due to the lower volatility in the EUR/USD pair, which is one of our most popular major pairs traded, after the Brexit vote in June 2016. Retail trading revenue per million traded increased 16% to $65 per million, reflecting a higher proportion of revenue from dealing desk execution and higher revenue per million for CFDs. The number of total active retail customer accounts at September 30, 2016 was 177,818, a decrease of 1% from September 30, 2015, primarily related to the lower trading volume.

Revenues from Continuing Operations

Trading revenue increased by $1.6 million, or 3%, to $57.8 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. The increase was primarily due to an increase in CFD revenues of $4.6 million. With the enhancements to our CFD technology implemented over the past year, we have been able to significantly increase the CFD revenue per million. The increase in CFD revenues was partially offset by lower revenue from retail FX trading, which decreased $1.8 million, primarily due to lower spread and commission income related to the lower trading volumes, partially offset by higher revenues from dealing desk execution. Revenue from dealing desk execution was approximately 23% of trading revenue for the three months ended September 30, 2016.

Revenues derived from the trading of institutional customers decreased $1.2 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015.

Net interest revenue of $0.6 million for the three months ended September 30, 2016 was $0.3 million higher than net interest revenue for the three months ended September 30, 2015 due to higher interest on cash held.

Other income of $3.0 million for the three months ended September 30, 2016 primarily consists of $0.7 million of service fees related to post-sale services provided to the buyers of FXCMJ, HK and the equity trading business of FSL and $2.3 million of dormancy and ancillary fees. Other income of $3.1 million for the three months ended September 30, 2015 primarily consists of $0.8 million of service fees related to post-sale services provided to the buyers of FXCMJ and HK and $2.2 million of dormancy and ancillary fees.

Operating Expenses from Continuing Operations

Total compensation and employee benefits expense increased by $0.3 million, or 1%, to $24.2 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. The increase was largely due to higher salary and benefit expense of $0.7 million and a charge of $0.5 million in connection with the renegotiation of an

57

employee contract recorded in the three months ended September 30, 2016, partially offset by lower variable compensation expense of $0.8 million, primarily related to compensation plans implemented during the first quarter of 2015 to retain employees following the significant decline in our stock price after the events of January 15, 2015. In the three months ended September 30, 2015 we recognized additional expense under the plans due to the achievement of certain targets. Stock-based compensation expense was also lower by $0.1 million largely due to the full vesting of stock grants.

Referring broker fees decreased $3.5 million, or 27%, to $9.5 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. The decrease in referring broker fees is related to a decline in indirect trading volume and reduced reliance on introducing brokers as we focus on organic growth.

Advertising and marketing expense increased $1.0 million, or 23%, to $5.1 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. For most of 2015, advertising and marketing spend was curtailed as a result of the events of January 15, 2015. We increased spending to promote our dealing desk execution model and new CFD technology.

Communication and technology expense decreased $0.4 million, or 6%, to $6.9 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. The decrease is primarily attributable to $0.7 million lower third party platform fees, partially offset $0.2 million higher software licensing and maintenance costs.

Trading costs, prime brokerage and clearing fees increased 3% to $0.9 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015.

General and administrative expense increased $1.8 million, or 14%, to $14.6 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. The increase of $1.8 million is primarily due to $1.9 million of higher professional fees, primarily costs related to the Leucadia restructuring, and $0.4 million of higher local taxes, partially offset by $0.7 million of lower bank fees.

Bad debt expense related to the events of January 15, 2015 was nil for both the three months ended September 30, 2016 and September 30, 2015. The Company has forgiven approximately 97% of the clients who incurred debit balances as a result of the SNB announcement on January 15, 2015 and returned certain recoveries, which is reflected in Bad debt expense in the condensed consolidated statements of operations. Approximately 3% of clients remain who were previously notified that they will be required to pay their debit balances, which comprises approximately 10% of the total debit balances owed as a result of the events on January 15, 2015. In light of the numerous uncertainties associated with collection options, we cannot provide any assurance that we will be successful in recovering any portion of the remaining clients' debit balances. We have fully reserved for the remaining unforgiven debit balances.
  
Depreciation and amortization expense decreased $0.4 million, or 5%, to $7.0 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. The $0.4 million decrease is due to a decrease in amortization expense of $0.1 million related to fully amortized intangibles acquired from customer account acquisitions, and $0.3 million of lower depreciation expense related to fully depreciated assets.

Non-operating expenses

Gain (Loss) on Derivative Liabilities — Letter & Credit Agreements

On September 1, 2016, the Letter Agreement was terminated and the material terms are now reflected in the Group LLC Agreement. The value of the derivative liability related to the Letter Agreement as of August 31, 2016 was reversed and the value of Leucadia's 49.9% non-controlling interest was recorded as a redeemable non-controlling interest in Group with fair value of $235.5 million. The change in the derivative liability related to the Letter Agreement was a loss of $26.1 million for the three months ended September 30, 2016, recorded in Gain (Loss) on Derivative Liabilities — Letter & Credit Agreements. The change in the derivative liability related to the Credit Agreement was a loss of $0.9 million for the three months ended September 30, 2016, recorded in Gain (Loss) on Derivative Liabilities — Letter & Credit Agreements.

58

Interest on Borrowings

The following table sets forth total interest expense recognized for the period indicated:

 
Three Months Ended September 30,
 
2016
 
2015
 
 
 
 
 
(In thousands)
Contractual interest expense
 
 
 
Leucadia Credit Agreement
$
9,221

 
$
7,301

Convertible Notes
970

 
970

Deferred interest expense
 
 
 
Leucadia Credit Agreement
(1,128
)
 
734

Amortization of Debt Discount
 
 
 
Leucadia Credit Agreement original issue discount
6,835

 
14,686

Leucadia Credit Agreement issuance fee discount
975

 
1,969

Convertible Notes
1,508

 
1,419

Amortization of Debt Issuance Costs
 
 
 
Leucadia Credit Agreement deferred financing fee
702

 
1,417

Leucadia Credit Agreement debt acquisition costs
88

 
176

Convertible Notes
302

 
302

Total interest expense
$
19,473

 
$
28,974


The decrease in Total interest expense of $9.5 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 is primarily due to lower amortization of original issue discount, lower deferred interest and a lower principal balance on the Leucadia Credit Agreement. In addition to contractual interest expense, we record deferred interest for the difference between the current period’s contractual rate based on the loan terms and the amortization of the incremental step-up in the contractual rate over the life of the loan. The Leucadia borrowing proceeds were allocated between the Credit Agreement and the Letter Agreement. The portion allocated to the Credit Agreement is reflected as an original issue discount to the Credit Agreement loan balance and amortized to interest expense using the effective interest method. Amortization is accelerated when payments on the Credit Agreement are made. Effective with the Restructuring Transaction on September 1, 2016, the term of the Credit Agreement was extended by one year to January 2018. The amortization of the remaining debt discounts and issuance costs will be recognized over the extended remaining term. See Note 12. “Leucadia Transaction” in the Notes to Consolidated Financial Statements for more information.

The debt discount on the Convertible Notes is amortized to interest expense over the life of the Convertible Notes using the effective interest method.    

Income Taxes

Three Months Ended September 30,

2016
 
2015
 
 
 
 
  
(In thousands, except percentages)
(Loss) income from continuing operations before income taxes
$
(53,383
)
 
$
98,631

Income tax (benefit) provision
$
(85
)
 
$
295

Effective tax rate
0.2
%
 
0.3
%

Our top-tier subsidiary, Holdings, is a limited liability company that is treated as a partnership for U.S. federal and state income tax purposes. In January 2015, all of Holdings' operations were contributed to Group, a limited liability company that is also treated as a partnership between Holdings and Leucadia for U.S. federal, state and local income tax purposes. As a result, neither Holdings' nor Group's income is subject to U.S. federal nor most state income tax because the income is attributable to its members. Therefore, our U.S. tax provision is solely based on the portion of Holdings' income attributable to FXCM Inc. and excludes the income attributable to other members of Holdings whose income is included in Net income (loss) attributable to non-controlling interest in FXCM Holdings, LLC.

59


The effective tax rates reflect the proportion of income recognized by FXCM Inc. taxed at the U.S. marginal corporate income tax rate of 34% and the proportion of income recognized by each of our international subsidiaries subject to tax at their respective local jurisdiction tax rates unless subject to U.S. tax by election or as a U.S. controlled foreign corporation.

Our income tax provision decreased $0.4 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. The tax provision for the three months ended September 30, 2016 is predominately the result of recording a valuation allowance on the deferred tax benefit associated with the book loss. The provision for the three months ended September 30, 2015 principally reflected reversing valuation allowance associated with the tax liability that resulted from the book income for the quarter.

(Loss) Income from Discontinued Operations, Net of Tax

Loss from discontinued operations, net of tax was $22.0 million for the three months ended September 30, 2016 compared to income of $18.0 million for the three months ended September 30, 2015. The loss for the three months ended September 30, 2016 is primarily due to recording a loss on classification as held for sale of $25.1 million on the remaining entities held for sale due to the determination that the fair value less costs to sell the assets did not exceed the carrying value of the assets. The remaining increase is primarily net profit from the remaining discontinued operations of $3.0 million. The income from discontinued operations for the three months ended September 30, 2015 of $18.0 million is primarily due to (a) a net gain of $12.4 million related to the sale of HK in September 2015; (b) a gain recorded on held for sale assets of $1.0 million due to an increase in the fair value less costs to sell; and (c) net profit from the remaining discontinued operations of $4.6 million.

Nine months ended September 30, 2016

Highlights — Continuing Operations

Total retail trading volumes decreased $258.0 billion, or 9%, to $2,648 billion for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The decrease in volume compared to the prior year period is primarily due to the lower volatility in the EUR/USD pair, which is one of our most popular major pairs traded, after the Brexit vote in June 2016. Retail trading revenue per million traded increased 22% to $72 per million, reflecting a higher proportion of revenue from dealing desk execution and higher revenue per million for CFDs. The number of total active retail customer accounts at September 30, 2016 was 177,818, a decrease of 1% from September 30, 2015, primarily related to the lower trading volume.

Revenues from Continuing Operations

Trading revenue increased by $11.9 million, or 6% to $196.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The increase was primarily due to an increase in CFD revenues of $21.5 million. CFD revenue for the nine months ended September 30, 2015 was negatively impacted by challenging market conditions brought about by the Greek debt crisis in the month of June 2015. With the enhancements to our CFD technology implemented over the past year, we have been able to significantly increase the CFD revenue per million. Revenue from retail FX trading decreased $1.2 million, primarily due to lower revenue from spread and commissions related to the lower trading volumes, partially offset by higher revenue from dealing desk execution. Revenue from dealing desk execution was approximately 25% of trading revenue for the nine months ended September 30, 2016.

Revenues derived from the trading of institutional customers decreased $8.4 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, of which $6.3 million was due to institutional customers trading via the FastMatch platform becoming direct customers of FastMatch as of July 1, 2015, and the remainder primarily due to lower revenues from FXCM Pro.

Net interest revenue of $1.2 million for the nine months ended September 30, 2016 was $0.6 million higher than net interest revenue for the nine months ended September 30, 2015 due to higher interest on cash held.

Other income of $5.7 million for the nine months ended September 30, 2016 primarily consists of $3.0 million of service fees related to post-sale services provided to the buyers of FXCMJ, HK and the equity trading business of FSL, $2.6 million of dormancy fees and ancillary fees and $0.1 million of service fees from FastMatch. Other income of $150.0 million for the nine months ended September 30, 2015 primarily consists of $145.2 million attributable to the reversal of our tax receivable agreement liability. During the first quarter of 2015, we reduced the contingent liability under the tax receivable

60

agreement to zero based on the determination that it was more likely than not that the Corporation would not benefit from the tax deduction attributable to the tax basis step-up of which 85% of the benefit would be owed to members of Holdings under the tax receivable agreement. The determination to reduce the tax receivable agreement liability to zero was a direct result of the tax-deductible losses incurred on January 15, 2015 and our future projected taxable income before taking into account the amortization of basis associated with the tax receivable agreement. The remaining $4.8 million of other income primarily consists of $1.6 million of service fees related to post-sale services provided to the buyers of FXCMJ and HK, $0.2 million of service fees from FastMatch and $3.0 million of dormancy and ancillary fees.

Operating Expenses from Continuing Operations

Total compensation and employee benefits expense increased $1.0 million, or 1%, to $73.4 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The increase was largely due to higher variable compensation expense of $0.8 million, primarily related to compensation plans implemented during the first quarter of 2015 to retain employees following the significant decline in our stock price after the events of January 15, 2015, a charge of $0.5 million in connection with the renegotiation of an employee contract recorded in the three months ended September 30, 2016 and a charge of $0.4 million to write off employee advances, partially offset by lower salary and benefit expense of $0.1 million. Stock-based compensation expense was lower by $0.6 million, largely due to the full vesting of stock grants.

Referring broker fees decreased $14.6 million, or 33%, to $29.1 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The decrease in referring broker fees is related to a decline in indirect trading volume and reduced reliance on introducing brokers as we focus on organic growth.

Advertising and marketing expense increased $4.9 million, or 47%, to $15.4 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. Advertising and marketing spend was curtailed as a result of the events of January 15, 2015. We increased spending to promote our dealing desk execution model and new CFD technology.

Communication and technology expense decreased $5.1 million, or 19%, to $21.0 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The decrease is primarily attributable to $4.3 million of lower platform costs for FastMatch due to institutional customers trading via the FastMatch platform becoming direct customers of FastMatch effective July 1, 2015, $1.5 million lower third party platform fees and $0.4 million lower communication costs, partially offset by $1.2 million higher software licensing and maintenance costs.

Trading costs, prime brokerage and clearing fees decreased $0.3 million, or 12%, to $2.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The net decrease is primarily attributable to lower prime broker fees related to FastMatch and FXCM Pro.

General and administrative expense increased $14.4 million, or 37%, to $53.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The increase of $14.4 million is primarily attributable to (i) a provision of $8.2 million for notes receivable that were forgiven (see Note 5 to the condensed consolidated financial statements for further information); (ii) the settlement of a litigation claim for $2.3 million (see Note 19 to the condensed consolidated financial statements for further information); (iii) $3.5 million of higher professional fees, including costs related to the Leucadia restructuring; (iv) $0.5 million to forgive customer debit balances; (v) $0.7 million higher local taxes and (vi) $0.4 million of higher occupancy costs, partially offset by $1.0 million of insurance recoveries for costs incurred related to the events of January 15, 2015 and the cybersecurity incident and $0.4 million of lower bank processing fees.

Bad debt expense was a recovery of $0.1 million for the nine months ended September 30, 2016 related to the events of January 15, 2015. Bad debt expense was $257.3 million for the nine months ended September 30, 2015 resulting from the events on January 15, 2015. Specifically, we experienced losses from customer debit balances of approximately $275.1 million on January 15, 2015, and as of September 30, 2015, we recovered approximately $9.4 million, for a net loss after recoveries of $265.7 million. Of this total, $257.3 million is recorded in Bad debt expense and $8.4 million is recorded in Income (loss) from discontinued operations, net of tax.
    
Depreciation and amortization expense was $21.1 million for both the nine months ended September 30, 2016 and 2015. Amortization expense related to intangibles acquired from customer account acquisitions increased $0.8 million. Depreciation expense decreased $0.8 million which includes $1.2 million related to fully depreciated assets, offset by an increase in depreciation of $0.4 million for capitalized software.


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Goodwill impairment loss was $9.5 million for the nine months ended September 30, 2015. During the first quarter of 2015, we performed an interim impairment evaluation of goodwill due to the events of January 15, 2015. This evaluation resulted in the recording of goodwill impairment losses of $9.5 million primarily due to a reduction in the implied fair value of certain institutional businesses subsequent to January 15, 2015.

Non-operating expenses

Gain (Loss) on Derivative Liabilities — Letter & Credit Agreements
    
On September 1, 2016, the Letter Agreement was terminated and the material terms are now reflected in the Group LLC Agreement. The value of the derivative liability related to the Letter Agreement as of August 31, 2016 was reversed and the value of Leucadia's 49.9% non-controlling interest was recorded as a redeemable non-controlling interest in Group with a fair value of $235.5 million. The change in the derivative liability related to the Letter Agreement was a gain of $213.0 million for the nine months ended September 30, 2016, recorded in Gain (Loss) on Derivative Liabilities — Letter & Credit Agreements, due to a decrease in the fair value of the derivative liability. The decrease in the estimated fair value of the derivative liability reflects a decline in the fair value of the Letter Agreement due to the decline in our stock price and an increase in the volatility assumption used in the valuation. The change in the derivative liability related to the Credit Agreement was a loss of $12.6 million for the nine months ended September 30, 2016, recorded in Gain (Loss) on Derivative Liabilities — Letter & Credit Agreements.

Interest on Borrowings

The following table sets forth total interest expense recognized for the period indicated:

 
Nine Months Ended September 30,
 
2016
 
2015
 
 
 
 
 
(In thousands)
Contractual interest expense
 
 
 
Leucadia Credit Agreement
$
25,313

 
$
20,202

Revolving Credit Agreement
—

 
38

Convertible Notes
2,911

 
2,911

Deferred interest expense
 
 
 
Leucadia Credit Agreement
(2,338
)
 
5,586

Amortization of Debt Discount
 
 
 
Leucadia Credit Agreement original issue discount
23,905

 
55,373

Leucadia Credit Agreement issuance fee discount
3,365

 
7,287

Convertible Notes
4,443

 
4,180

Amortization of Debt Issuance Costs
 
 
 
Leucadia Credit Agreement deferred financing fee
2,422

 
5,245

Leucadia Credit Agreement debt acquisition costs
301

 
651

Revolving Credit Agreement
—

 
1,444

Convertible Notes
906

 
907

Total interest expense
$
61,228

 
$
103,824


The decrease in Total interest expense of $42.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 is primarily due to lower amortization of original issue discount, lower deferred interest and a lower principal balance on the Leucadia Credit Agreement. In addition to contractual interest expense, we record deferred interest for the difference between the current period’s contractual rate based on the loan terms and the amortization of the incremental step-up in the contractual rate over the life of the loan. The Leucadia borrowing proceeds were allocated between the Credit Agreement and the Letter Agreement. The portion allocated to the Credit Agreement is reflected as an original issue discount to the Credit Agreement loan balance and amortized to interest expense using the effective interest method. Amortization is accelerated when payments on the Credit Agreement are made. Effective with the Restructuring Transaction on September 1, 2016, the term of the Credit Agreement was extended by one year to January 2018. The

62

amortization of the remaining debt discounts and issuance costs will be recognized over the extended remaining term. See Note 12 “Leucadia Transaction” in the Notes to Consolidated Financial Statements for more information.

The debt discount on the Convertible Notes is amortized to interest expense over the life of the Convertible Notes using the effective interest method.

The decrease in amortization of debt issuance costs is primarily related to the termination of the Revolving Credit Agreement effective January 20, 2015 at which time the outstanding balance was repaid in full, which accelerated the amortization of the remaining debt issuance costs, and lower amortization of deferred financing fees related to the Leucadia Credit Agreement.

Income Taxes
 
Nine Months Ended September 30,
 
2016
 
2015
 
 
 
 
  
(In thousands, except percentages)
Income (loss) from continuing operations before income taxes
$
126,025

 
$
(506,336
)
Income tax provision
$
58

 
$
181,616

Effective tax rate
—
%
 
(35.9
)%

Our top-tier subsidiary, Holdings, is a limited liability company that is treated as a partnership for U.S. federal and state income tax purposes. In January 2015, all of Holdings' operations were contributed to Group, a limited liability company that is also treated as a partnership between Holdings and Leucadia for U.S. federal, state and local income tax purposes. As a result, neither Holdings' nor Group's income is subject to U.S. federal nor most state income tax because the income is attributable to its members. Therefore, our U.S. tax provision is solely based on the portion of Holdings' income attributable to FXCM Inc. and excludes the income attributable to other members of Holdings whose income is included in Net income (loss) attributable to non-controlling interest in FXCM Holdings, LLC.

The effective tax rates reflect the proportion of income recognized by FXCM Inc. taxed at the U.S. marginal corporate income tax rate of 34% and the proportion of income recognized by each of our international subsidiaries subject to tax at their respective local jurisdiction tax rates unless subject to U.S. tax by election or as a U.S. controlled foreign corporation.

Our income tax provision decreased $181.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. During the quarter ended March 31, 2015, the Corporation determined that, given the losses incurred from the events of January 15, 2015 and due to the Leucadia Transaction, it was not more likely than not that it would benefit from the tax deduction attributable to the tax basis step-up from the conversion of the non-controlling membership units of Holdings and therefore a valuation allowance was established on substantially all of the Company's deferred tax assets. The tax provision for the nine months ended September 30, 2016 is predominately the result of reversing valuation allowance to offset the provision associated with the book income for the period.

Loss from Discontinued Operations, Net of Tax

Loss from discontinued operations, net of tax was $53.6 million for the nine months ended September 30, 2016 compared to a loss of $74.9 million for the nine months ended September 30, 2015. The loss for the nine months ended September 30, 2016 is primarily due to recording a loss on classification as held for sale of $57.1 million on the remaining entities held for sale due to the determination that the fair value less costs to sell the assets did not exceed the carrying value of the assets and a reserve for $0.5 million for potential regulatory penalties related to pre-August 2010 trade execution practices of HK, partially offset by a gain of $0.7 million for the disposition of an equity method investment and operating profit from the remaining held for sale entities of $3.3 million. The loss of $74.9 million for the nine months ended September 30, 2015 was primarily due to (i) goodwill impairment losses of $54.9 million primarily due to a decline in the implied fair value of certain institutional businesses subsequent to the events of January 15, 2015; (ii) net loss on classification as held for sale of $27.8 million due to the determination that the fair value less costs to sell of the assets did not exceed the carrying value of the assets; (iii) bad debt expense of $8.4 million related to losses from customer debit balances as a result of the events of January 15, 2015 and (iv) an intangible asset impairment charge of $5.4 million included in depreciation and amortization, primarily due to a decline in the implied fair value of certain institutional businesses subsequent to the events of January 15, 2015. These amounts were offset by a net gain of $2.0 million related to the sale of FXCMJ in April 2015 and a net gain of $12.4 million related to the sale of HK in September 2015, and net operating profit from the remaining held for sale entities of $7.2 million.

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LIQUIDITY AND CAPITAL RESOURCES

We anticipate that funds generated from our operations and proceeds from the disposition of non-core assets will be sufficient to fund our operating liquidity, capital needs and debt obligations for the next twelve months.

As of September 30, 2016, we had cash and cash equivalents of $233.5 million, including $13.3 million within assets held for sale. We hold our cash and cash equivalents in 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 our 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.     
    
The table below presents the minimum capital requirement, the capital, as defined by the respective regulatory authority, and the excess capital for our regulated entities as of September 30, 2016:

As of September 30, 2016
  
Regulatory
Jurisdiction
 
Minimum Regulatory
Capital Requirements
 
Capital Levels
Maintained
 
Excess Net
Capital
 
 
 
 
 
 
 
 
  
(In millions)
Forex Capital Markets LLC
USA
 
$
33.1

 
$
49.5

 
$
16.4

Forex Capital Markets Limited
U.K.
 
$
21.9

 
$
79.0

 
$
57.1

FXCM Australia Pty. Ltd.
Australia
 
$
0.8

 
$
12.8

 
$
12.0

Lucid Markets LLP
U.K.
 
$
4.5

 
$
9.9

 
$
5.4


We filed a shelf registration statement on Form S-3 with the SEC which became effective on August 2, 2016. The shelf registration statement provides us with the ability to offer, from time to time and subject to market conditions, debt securities, preferred stock, common stock, depositary shares, purchase contracts warrants or units for proceeds in the aggregate amount of up to $125.0 million. The shelf registration statement is intended to give us greater flexibility to efficiently raise capital and put us in a position to take advantage of favorable market conditions as they arise. Any issuances under the shelf registration will be subject to the terms and conditions of the Leucadia financing.

On October 3, 2016 we commenced a $15.0 million "at-the-market" offering program for our FXCM Inc. Class A common stock. The common stock will be offered under our effective shelf registration (including prospectus). Proceeds will be used to reduce our outstanding indebtedness and for other general corporate purposes.
    

64

Cash Flow and Capital Expenditures — Continuing and Discontinued Operations

Nine Months Ended September 30, 2016 and 2015

The following table sets forth a summary of our cash flow from both continuing and discontinued operations for the nine months ended September 30, 2016 and 2015:
 
Nine Months Ended September 30,
 
2016
 
2015
 
 
 
 
  
(In thousands)
Cash provided by (used in) operating activities
$
33,617

 
$
(301,117
)
Cash (used in) provided by investing activities
(16,021
)
 
40,583

Cash (used in) provided by financing activities
(245
)
 
133,140

Effect of foreign currency exchange rate changes on cash and cash equivalents
1,481

 
(1,629
)
Net increase (decrease) in cash and cash equivalents
18,832

 
(129,023
)
Cash and cash equivalents – end of period
$
233,472

 
$
209,791


Included in net cash flows are the following non-cash and other items which are reported in discontinued operations in the unaudited condensed consolidated financial statements:
 
Nine Months Ended September 30,
 
2016
 
2015
 
 
 
 
  
(In thousands)
Depreciation and amortization
$
—

 
$
12,359

Equity-based compensation
$
—

 
$
1,494

Deferred tax expense
$
—

 
$
5,321

Goodwill impairment losses
$
—

 
$
54,865

Loss on classification as held for sale assets
$
57,092

 
$
27,820

Gain on business dispositions
$
—

 
$
14,427

Transaction costs associated with business dispositions
$
—

 
$
(6,693
)
Gain (loss) on equity method investments, net
$
242

 
$
(821
)
Purchases of office, communication and computer equipment, net
$
(149
)
 
$
(240
)
Proceeds from sale of office, communication and computer equipment
$
—

 
$
499

Gain on disposition of equity method investment
$
679

 
$
—

Proceeds from business dispositions, net of cash
$
—

 
$
52,155


Operating Activities
    
Details of cash provided by (used in) operating activities are as follows, with amounts in thousands:
 
Nine Months Ended September 30,
  
2016
 
2015
Net income (loss) and other adjustments
$
11,484

 
$
(106,110
)
Non-cash equity-based compensation
1,504

 
3,644

Non-cash — change in tax receivable agreement liability
44

 
(145,224
)
Net interest payments
(27,254
)
 
(22,222
)
Cash (paid) received for taxes
(194
)
 
135

All other, net, including net current assets and liabilities
48,033

 
(31,340
)
Net cash provided by (used in) operating activities
$
33,617

 
$
(301,117
)

Cash provided by operating activities of $33.6 million for the nine months ended September 30, 2016 is primarily attributable to an increase in net income, adjusted for certain non-cash items, an increase in net due to broker balances of $30.8 million resulting from the net change in open trading positions, including $19.1 million related to CFDs and $9.0 million related to discontinued operations, and an increase in accounts payable and accrued expenses of $12.5 million primarily due to

65

accruals related to variable compensation. Cash used in operating activities of $301.1 million for the nine months ended September 30, 2015 was primarily attributable to the net losses we experienced from customer debit balances of $265.7 million resulting from the events of January 15, 2015 and an increase in interest payments of $19.5 million primarily related to the Leucadia Transaction.

Investing Activities

Details of cash (used in) provided by investing activities are as follows, with amounts in thousands:
 
Nine Months Ended September 30,
 
2016
 
2015
Purchases of office, communication and computer equipment, net
$
(14,521
)
 
$
(13,571
)
Proceeds from sale of office, communication and computer equipment
—

 
499

Purchase of intangible assets
(1,500
)
 
—

Proceeds from notes receivable
—

 
1,500

Proceeds from business dispositions, net of cash
—

 
52,155

Net cash (used in) provided by investing activities
$
(16,021
)
 
$
40,583


Cash used in investing activities of $16.0 million during the nine months ended September 30, 2016 consisted of $14.5 million of capital expenditures, primarily for capitalized software, and payments of $1.5 million under the terms of the asset purchase agreement for FX trading accounts acquired in the second quarter of 2015.

Cash provided by investing activities of $40.6 million during the nine months ended September 30, 2015 consisted primarily of $52.2 million of net proceeds from the sales of FXCMJ and HK and proceeds of $1.5 million from the collection of notes receivable, offset by $13.6 million of capital expenditures, primarily for capitalized software.

Financing Activities

Details of cash (used in) provided by financing activities are as follows, with amounts in thousands:
 
Nine Months Ended September 30,
  
2016
 
2015
Distributions to non-controlling members
$
(104
)
 
$
(12,166
)
Payments on borrowing under the Revolving credit agreement
—

 
(25,000
)
Proceeds from the Leucadia Transaction
—

 
279,000

Principal payments on borrowings under the Credit Agreement
(141
)
 
(107,139
)
Debt acquisition costs — Credit Agreement
—

 
(1,876
)
Proceeds from issuance of stock options
—

 
321

Net cash (used in) provided by financing activities
$
(245
)
 
$
133,140

    
Cash used in financing activities of $0.2 million during the nine months ended September 30, 2016 consisted of $0.1 million of distributions to other non-controlling interests and $0.1 million of principal payments on borrowings under the Credit Agreement.

Cash provided by financing activities of $133.1 million during the nine months ended September 30, 2015 consisted primarily of net proceeds received from the Leucadia Transaction of $279.0 million, offset by principal payments of $107.1 million on borrowings under the Credit Agreement and a payment of $25.0 million on outstanding borrowings under the Revolving credit agreement in connection with its termination in January 2015. In addition, distributions of $12.2 million were made during the nine months ended September 30, 2015, which primarily included distributions of $11.7 million to other non-controlling interests.
    
Leucadia Transaction
 
On January 16, 2015, Holdings and FXCM Newco, LLC (“Newco”), a newly-formed wholly-owned subsidiary of Holdings, entered into a credit agreement (the “Credit Agreement”) with Leucadia National Corporation ("Leucadia"), as

66

administrative agent and lender, and a related financing fee agreement (the “Fee Letter”).  The financing enabled us to maintain compliance with regulatory capital requirements and continue operations. On January 16, 2015, in connection with the Leucadia Credit Agreement and the Fee Letter, the Corporation, Holdings, Newco and Leucadia also entered into an agreement (the “Letter Agreement”) that set the terms and conditions upon which the Corporation, Holdings and Newco will pay in cash to Leucadia and its assignees a percentage of the proceeds received in connection with certain transactions.  In connection with these financing transactions, Holdings formed Newco and contributed all of the equity interests owned by Holdings in its subsidiaries to Newco. The Credit Agreement and the Letter Agreement were subsequently amended on January 24, 2015. The amendments finalized certain terms of the Credit Agreement and Letter Agreement and the terms of the amended agreements were not substantially different from the initial agreements.

Restructuring of the Leucadia Financing

On September 1, 2016 we completed the restructuring of the financing arrangements with Leucadia that was originally announced in March 2016. Key elements of the restructuring include:

Credit Agreement

•
The maturity date of the Credit Agreement was extended one year to January 16, 2018 to allow us more time to optimize asset sales.
•
We have the ability to defer any three of the remaining interest payments, permitting us flexibility to invest and grow our core business.

Letter Agreement

•
The Letter Agreement was terminated and the material terms are now reflected in the Amended and restated Limited Liability Company Agreement of Group, LLC (the “Group Agreement”).

Group Agreement

•
The Group Agreement replaces the existing FXCM Newco, LLC agreement and FXCM Newco, LLC has been renamed Group, LLC (“Group”).
•
Leucadia acquired a 49.9% non-controlling interest in Group.
•
The Group Agreement provides that Group will be governed by a six-member board, with three directors each appointed by FXCM and Leucadia.
•
We and Leucadia share the right to request a sale process after January 16, 2018, subject to both of us reasonably accepting the highest reasonable sales price.

Management Agreement

•
Group and Holdings entered into a Management Agreement (the “Management Agreement”) pursuant to which Holdings will manage the assets and day to day operations of Group and its subsidiaries.

Management Incentive Plan

•
Group adopted the 2016 Incentive Bonus Plan for Founders and Executives (the “Management Incentive Plan”), in order to retain and incentive senior management to maximize cash flow generation and grow the business.
•
The Management Incentive Plan is a long-term plan with five-year vesting.
•
Distributions under the plan are only made after Leucadia’s principal and interest under the Credit Agreement have been repaid.
•
Distributions will range from 10% to 14% of distributions made by Group.
•
If a participant terminates employment, they will receive either a non-voting membership in Group entitling them to the same share of distributions that they would have received, or a lump-sum cash payment, at our discretion.


67

Leucadia will be entitled to receive additional distributions of proceeds that, when added to their 49.9% membership interest, will result in the following distribution percentages:

Aggregate amount of proceeds
Original Waterfall
Revised Waterfall
Amounts due under the Credit Agreement
100% Leucadia
100% Leucadia
Next $350 million
50% Leucadia / 50% FXCM
45% Leucadia / 45% FXCM / 10.0% FXCM management
Next $500 million
90% Leucadia / 10% FXCM
79.2% Leucadia / 8.8% FXCM / 12.0% FXCM management
All aggregate amounts thereafter
60% Leucadia / 40% FXCM
51.6% Leucadia / 34.4% FXCM / 14.0% FXCM management

For additional information, see Note 12 to the condensed consolidated financial statements.


Contractual Obligations and Commercial Commitments

The following table reflects a summary of our contractual obligations and other commercial commitments as of September 30, 2016:

 
Payments Due by Period
  
Total
 
Less Than
1 Year
 
1 – 3
Years
 
4 – 5
Years
 
More Than
5 Years
 
 
 
 
 
 
 
 
 
 
  
(In thousands)
Lease obligations
$
35,578

 
$
1,788

 
$
13,861

 
$
6,781

 
$
13,148

Leucadia Credit Agreement (1)
243,694

 
9,949

 
233,745

 
—

 
—

Convertible Notes
180,263

 
1,941

 
178,322

 
—

 
—

Deferred payment for customer accounts acquisition
3,485

 
503

 
2,982

 
—

 
—

Tax Receivable Agreement (2)
144,797

 
—

 
—

 
—

 
144,797

Total
$
607,817

 
$
14,181

 
$
428,910

 
$
6,781

 
$
157,945

____________________________________
(1) Interest is based on the stated step-up coupon rate
(2) Assumes sufficient taxable income is generated such that the Corporation fully realizes the tax benefits of the amortization specified in the Tax Receivable Agreement


68


NON-GAAP FINANCIAL MEASURES
    
In addition to financial results reported in accordance with U.S. GAAP, we have provided Adjusted EBITDA, a Non-GAAP financial measure. We believe this Non-GAAP measure, when presented in conjunction with the comparable U.S. GAAP measure, is useful to investors in better understanding our current financial performance as seen through the eyes of management and facilitates comparisons of our historical operating trends across several periods. We believe that investors use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of companies in our industry that present similar measures, although the methods used by other companies in calculating Adjusted EBITDA may differ from our method, even if similar terms are used to identify such measure.

Adjusted EBITDA provides us with an understanding of the results from the primary operations of our business by excluding the effects of certain gains, losses or other charges that do not reflect the normal earnings of our core operations or that may not be indicative of our future outlook and prospects. Internally, Adjusted EBITDA is used by management for various purposes, including to evaluate our operating performance and operational strategies, as a basis for strategic planning and forecasting, and for compensation purposes.

Adjusted EBITDA does not represent and should not be considered as a substitute for net income or net income attributable to FXCM Inc., each as determined in accordance with U.S. GAAP. Adjusted EBITDA reflects the following adjustments to net income: 

1.
Compensation Expense/Lucid Minority Interest. Our reported U.S. GAAP results reflect the portion of the 49.9% of Lucid earnings allocated among the non-controlling members of Lucid based on services provided as a component of compensation expense under Allocation of income to Lucid members for services provided within discontinued operations. Adjustments have been made to eliminate this allocation of Lucid's earnings attributable to non-controlling members. We believe that this adjustment provides a more meaningful view of the Company's operating expenses and the Company's economic arrangement with Lucid's non-controlling members. This adjustment has no impact on net income from continuing operations as reported by the Company.
2.
Regulatory and Legal Costs.  Adjustments have been made to eliminate certain costs or recoveries (including client reimbursements, regulatory fines and settlements from lawsuits) associated with ongoing discussions and settling certain regulatory and legal matters. Given the nature of these expenses, they are not viewed by management as expenses incurred in the ordinary course of business and we believe it is useful to show the effects of eliminating these expenses.
3.
SNB Costs.  Adjustments have been made to eliminate certain costs/income (including the net losses associated with client debit balances, gains/losses on the derivative liabilities related to the Letter and Credit Agreements, costs related to the implementation of a Stockholder Rights Plan costs related to the Leucadia Restructuring Transaction, professional costs, adjustments to the Company's tax receivable agreement contingent liability and insurance recoveries) associated with the January 15, 2015 SNB event. Given the nature of these expenses, they are not viewed by management as expenses incurred in the ordinary course of business and we believe it is useful to show the effects of eliminating these expenses.
4.
Cybersecurity Incident. Adjustments have been made to eliminate certain costs/income related to investigative and other professional services, costs of communications with customers, remediation activities associated with the incident and insurance recoveries. Given the nature of these expenses, we believe it is useful to show the effects of eliminating these expenses.
5.
Discontinued Operations. Adjustments have been made to eliminate the impact of goodwill impairments, gains or losses on classification as held for sale assets, gains or losses from completed asset sales and a gain related to the disposition of an equity method investment. Given the nature of these items, they are not viewed by management as activity in the ordinary course of business and we believe it is useful to show the effect of eliminating these items.
6.
Provision for debt forgiveness. An adjustment has been made to eliminate the provision recorded against a notes receivable from the non-controlling members of Lucid that will not be required to be repaid and has been forgiven. Given the atypical nature of this expense, we believe it is useful to show the effect of eliminating this expense.

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Reconciliation of U.S. GAAP Net Income (Loss) to Adjusted EBITDA
 
Three Months Ended September 30,
 
2016
 
2015
 
Continuing Operations
Discontinued Operations
Combined
 
Continuing Operations
Discontinued Operations
Combined
Net (loss) income
$
(53,298
)
$
(22,049
)
$
(75,347
)
 
$
98,336

$
18,018

$
116,354

Adjustments:
 
 
 
 
 
 
 
Allocation of net income to Lucid members for services provided(1)
—

1,218

1,218

 
—

2,249

2,249

General and administrative(2)
2,078

—

2,078

 
1,306

—

1,306

Depreciation and amortization
6,956

—

6,956

 
7,316

—

7,316

Loss (gain) on classification as held for sale
—

25,095

25,095

 
—

(979
)
(979
)
Loss (gain) on derivative liabilities — Letter & Credit Agreements
26,985

—

26,985

 
(137,566
)
—

(137,566
)
Interest on borrowings
19,473

—

19,473

 
28,974

—

28,974

Income tax (benefit) provision
(85
)
—

(85
)
 
295

(306
)
(11
)
Gain on completed dispositions
—

—

—

 
—

(12,449
)
(12,449
)
Total adjustments
55,407

26,313

81,720

 
(99,675
)
(11,485
)
(111,160
)
Adjusted EBITDA
$
2,109

$
4,264

$
6,373

 
$
(1,339
)
$
6,533

$
5,194

________________________________________________________ 
(1) Represents the elimination of the 49.9% of Lucid's earnings allocated among the non-controlling interests recorded as compensation for U.S. GAAP purposes included in discontinued operations.
(2) Represents $2.1 million of professional fees, including fees related to the Leucadia Restructuring and other SNB-related costs included in continuing operations for the three months ended September 30, 2016. For the three months ended September 30, 2015, represents $1.1 million of regulatory and legal costs related to the SNB event, and $0.2 million of costs related to the cybersecurity incident.


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Reconciliation of U.S. GAAP Net Income (Loss) to Adjusted EBITDA
 
Nine Months Ended September 30,
 
2016
 
2015
 
Continuing Operations
Discontinued Operations
Combined
 
Continuing Operations
Discontinued Operations
Combined
Net income (loss)
$
125,967

$
(53,635
)
$
72,332

 
$
(687,952
)
$
(74,915
)
$
(762,867
)
Adjustments:
 
 
 
 
 
 
 
Net revenues(1)
44

—

44

 
(145,224
)
—

(145,224
)
Allocation of net income to Lucid members for services provided(2)
—

3,779

3,779

 
—

6,916

6,916

General and administrative(3)
12,577

513

13,090

 
4,341

—

4,341

Bad debt (recovery) expense(4)
(141
)
—

(141
)
 
257,303

8,408

265,711

Depreciation and amortization
21,149

—

21,149

 
21,136

12,359

33,495

Goodwill impairment and loss on classification as held for sale
—

57,092

57,092

 
9,513

82,685

92,198

(Gain) loss on derivative liabilities — Letter & Credit Agreements
(200,375
)
—

(200,375
)
 
254,730

—

254,730

Gain on equity method transaction(5)
—

(679
)
(679
)
 
—

—

—

Interest on borrowings
61,228

—

61,228

 
103,824

—

103,824

Income tax provision
58

—

58

 
181,616

5,321

186,937

Gain on completed dispositions
—

—

—

 
—

(14,427
)
(14,427
)
Total adjustments
(105,460
)
60,705

(44,755
)
 
687,239

101,262

788,501

Adjusted EBITDA
$
20,507

$
7,070

$
27,577

 
$
(713
)
$
26,347

$
25,634

________________________________________________________ 
(1) Represents a $0.1 million charge in the three months ended March 31, 2016 for tax receivable agreement payments and the elimination of a $145.2 million noncash benefit in the three months ended March 31, 2015 attributable to the reduction of our tax receivable agreement contingent liability to zero.
(2) Represents the elimination of the 49.9% of Lucid’s earnings allocated among the non-controlling interests recorded as compensation for U.S. GAAP purposes included in discontinued operations.
(3) Represents the provision for debt forgiveness of $8.2 million against the notes receivable from the non-controlling members of Lucid, $5.4 million of professional fees, including fees related to the Leucadia Restructuring Transaction and the Stockholder Rights Plan, partially offset by $1.0 million of insurance recoveries to reimburse for costs incurred related to the January 15, 2015 SNB event and the cybersecurity incident, which is included in continuing operations in the nine months ended September 30, 2016, and expense of $0.5 million included in discontinued operations in the nine months ended September 30, 2016 related to pre-August 2010 trade execution practices and other regulatory fees and fines. For the nine months ended September 30, 2015, represents $4.1 million of professional fees, including fees resulting from the SNB event and the Stockholder Rights Plan, and $0.2 million of costs related to the cybersecurity incident.
(4) Represents the net bad debt (recovery) expense related to client debit balances associated with the January 15, 2015 SNB event.
(5) Represents the gain on the disposition of an equity method investment related to V3 in the three months ended March 31, 2016.



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Recent Accounting Pronouncements

See discussion of recent accounting pronouncements in Note 2 "Significant Accounting Policies and Estimates" to our Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.


Item 3. Quantitative and Qualitative Disclosures 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 statements of financial condition and statements of operations from local currencies primarily to U.S. dollars. We currently have limited exposure to currency risk from customer open positions as we utilize an agency model, simultaneously entering offsetting trades with both our customers and FX market makers. However, we do incur currency mismatch risk arising from customer accounts denominated in one currency being secured by cash deposits in a different currency. As exchange rates change, we could suffer a loss.

As of September 30, 2016, (27.0)% of our net assets (assets less liabilities) were in British pounds, 2.6% in Japanese Yen, (2.1)% in Australian dollars, (19.9)% in Hong Kong Dollars, 2.3% in Euros and 5.8% in all other currencies than the U.S. dollar. For illustrative purposes, if each of these currencies were to adversely change by 10% with no intervening hedging activity by ourselves, this would result in a pre-tax loss (gain) of $0.7 million in the case of British pounds, $(0.1) million for Japanese Yen, $0.1 million for Australian dollars, $0.5 million for Hong Kong Dollars and $(0.1) million for Euros.

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 generally 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 for continuing operations at September 30, 2016, we estimate that a 50 basis point change in interest rates would increase our annual pre-tax income from continuing operations by approximately $4.7 million.

The Convertible Notes pay a fixed rate of interest and are not subject to fluctuations in interest rates. If we were to refinance the debt, the interest rates in effect at that time may be different than the existing fixed rate. The Leucadia Credit Agreement has an initial interest rate of 10% per annum, increasing quarterly by 1.5% for so long as it is outstanding, but in no event exceeding 20.5% per annum (before giving effect to any applicable default rate) and is not subject to fluctuations in interest rates. Beginning with the fourth quarter of 2016, the interest rate on the Leucadia Credit Agreement is 20.5%, which is fixed until maturity.

Credit risk

Credit risk is the risk that a borrower or counterparty will fail to meet its obligations. We are exposed to credit risk from our 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 customer’s positions are revalued on a real-time basis to calculate the customer’s usable margin. Usable 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 customer’s positions are automatically closed once his or her usable margin falls to zero. 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. As a result of the foregoing measures, prior to the events of January 15, 2015, our customers rarely had significant negative equity balances, and exposure to credit risk from customers was therefore minimal. For example, in the nine months ended September 30, 2016, we incurred $0.6 million in losses from customer accounts that had gone negative.

On January 15, 2015, however, the SNB’s decision to discontinue its currency floor of 1.2 CHF per EUR led to unprecedented volatility in the EUR/CHF currency pair. As a result, our customers suffered significant losses and generated debit balances owed to us of approximately $275.1 million. Following those events, we have taken a number of actions to

72

reduce credit risk from our customers. We have increased margin requirements and discontinued currency pairs from our platform that we believe carry significant risk due to overactive manipulation by their respective governments either by a floor, ceiling, peg or band. We expect that these actions will reduce the risk that another event of increased volatility could lead to significant negative equity balances. However, while we believe these actions mitigate our exposure, we are still exposed to the risk of losses from negative equity balances. For example, at September 30, 2016, assuming a 10% reduction in the GBP, the EUR and the JPY and no market liquidity (i.e., counterparties halt trading GBP, EUR, and JPY), we estimate clients holding long GBP, EUR and JPY positions would incur debit balances of approximately $22.8 million, $3.4 million and $4.1 million, respectively.

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 of September 30, 2016, our exposure to our three largest institutional counterparties, all major global banking institutions, was 33.9% of total assets and the single largest within the group was 14.4% 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. In our retail business, we operate predominantly on an agency execution model and are not exposed to the market risk of a position moving up or down in value with the exception of certain trades of our CFD customers. As of September 30, 2016, our net unhedged exposure to CFD customer positions was 13.9% of total assets. A hypothetical 10% fully correlated adverse change in the value of our unhedged CFD positions as of September 30, 2016 would result in a $16.6 million adverse impact to our pre-tax earnings from continuing operations.

We offer our smaller retail clients with less than $20,000 in deposits the option to trade with a dealing desk, or principal model. In our agency execution model, when a customer executes a trade with us, we act as a credit intermediary, simultaneously entering into trades with the customer and the FX market maker. In the principal model, we may maintain our trading position and not offset the trade with another party. As a result, we may incur trading losses using principal model execution from changes in the prices of currencies where we are not hedged. We have established risk limits, policies and procedures to monitor risk on a continuous basis. As of September 30, 2016, our net unhedged exposure to FX customer positions was 6.8% of total assets. A hypothetical 10% fully correlated adverse change in the value of our unhedged FX positions as of September 30, 2016 would result in a $8.2 million adverse impact to our pre-tax earnings from continuing operations.

We hold a 50.1% interest in Lucid, an electronic market maker and trader in the institutional foreign exchange spot and futures market. Lucid has risk limits by currency, trading strategy and overall exposure which are monitored continuously. In addition, Lucid seeks to close all open positions by the end of each foreign exchange trading day in New York. The average intra-day gross notional position in the three months ended September 30, 2016 was $14.3 million and the maximum intra-day gross position was $58.1 million. A hypothetical 10% fully correlated decrease in value at the maximum intra-day position would result in a $5.8 million adverse impact to consolidated pre-tax earnings. Lucid has recently started a trading strategy in the over-the-counter options market on FX. Similar to its spot and futures markets trading, Lucid has position and risk limits that are monitored continuously.

We hold a 50.1% interest in V3, an entity created with the non-controlling members of Lucid. V3 expands Lucid's business model into a broader array of financial instruments and provides more robust connectivity to various financial exchanges. V3's market making and trading activities expose us to market risk. Market risks include price risk, volatility risk, liquidity risk and interest rate risk. Further risks may result from unexpected market reactions to economic data. V3 monitors these risks through risk limits, continuously monitoring positions and hedging strategies. V3’s practices are designed to limit risk exposure assumed to approximately $1.5 million.

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

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substantial pool of liquidity. As of September 30, 2016, cash and cash equivalents held for continuing operations, excluding cash and cash equivalents held for customers, were 18.4% 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 promptly address issues that arise. 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 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 "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2015 and in this Quarterly Report.    

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 September 30, 2016, we had $60.3 million in regulatory capital requirements in the aggregate at our regulated subsidiaries and $151.2 million of capital on a consolidated basis.



74


Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2016. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2016, the design and operation of our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

75

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of business, we and certain of our officers, directors and employees may from time to time be involved in litigation and claims incidental to the conduct of our businesses, including intellectual property claims. In addition, our business is also subject to extensive regulation, which may result in administrative claims, investigations and regulatory proceedings against us. We have been named in various arbitration and civil litigation cases brought by customers seeking damages for trading losses. Management has investigated these matters and believes that such cases are without merit and is defending them vigorously. However, the arbitrations and litigations are presently in various stages of the judicial process and no judgment can be made regarding the ultimate outcome of the arbitrators’ and/or court’s decisions.

In January 2014, the equity receiver for a former client of US, Revelation Forex Fund (“Revelation”), its principal, Kevin G. White, and related entities RFF GP, LLC and KGM Capital Management, LLC, filed suit against US, and certain unrelated defendants, in Texas state court.  The suit alleges that US is liable for damages in excess of $3.8 million, plus exemplary damages, interest, and attorneys’ fees in connection with a Ponzi scheme run by Mr. White through his companies. In June 2015, that same equity receiver filed a complaint against US seeking $2.0 million, plus interest, and attorneys’ fees, based on allegations that the amount in controversy represents the net fraudulent transfers from Revelation to US under New York law.  In September 2015, the parties agreed to arbitration before the National Futures Association ("NFA") on these claims. In June 2016, the parties agreed to settle all related matters for $2.3 million.

In April 2014, the Securities and Futures Commission initiated an investigation relating to HK’s past trade execution practices concerning the handling of price improvements in our trading system prior to August 2010. On October 19, 2016, the parties entered into a final settlement whereby HK voluntarily agreed to make full restitution to affected clients in the amount of $1.5 million and pay a fine of $0.5 million. The Company has accrued $2.0 million in connection with this matter.

On January 15, 2015, as a result of the unprecedented volatility in the EUR/CHF currency pair after the SNB discontinued its currency floor of 1.2 CHF per EUR, US suffered a temporary breach of certain regulatory capital requirements.  On August 18, 2016, the Commodity Futures Trading Commission ("CFTC") filed a complaint, U.S. Commodity Futures Trading Commission v. Forex Capital Markets, LLC, in the U.S. District Court for the Southern District of New York that alleges that FXCM was undercapitalized following SNB, failed to notify the CFTC of its undercapitalization, and guaranteed customer losses. The court has set November 18, 2016 as the date by which US must file its motion to dismiss. The NFA is conducting a similar investigation into US’s adjusted net capital and minimum financial requirement computations following SNB. US is cooperating with the NFA.

In connection with an earlier settlement between FSL and the Financial Conduct Authority regarding trade execution practices for the period 2006 to 2010, in February 2015, FSL paid an additional $0.7 million in restitution to affected clients.

On May 8, 2015, the International Union of Operating Engineers Local No. 478 Pension Fund filed a complaint against the Company, its Chief Executive Officer and its Chief Financial Officer in the United States District Court for the Southern District of New York, individually and on behalf of all purchasers of the Company's common stock between June 11, 2013 and January 20, 2015. The complaint alleges that the defendants violated certain provisions of the federal securities laws and seeks compensatory damages as well as reasonable costs and expenses. An amended and consolidated complaint was filed on January 11, 2016. The Company filed a motion to dismiss the consolidated complaint on February 25, 2016 which was granted by the Court on August 18, 2016. On October 7, 2016, the District Court entered an order of final judgment closing the case. On November 3, 2016, plaintiffs filed a notice of appeal from the order granting the motion to dismiss.

In September 2015, US settled a complaint brought by the CFTC alleging that US failed to supervise an account determined to have been involved in wrongdoing and inadvertently omitted certain documents from its responses to document request. Under the terms of the settlement, US agreed, without admitting or denying any of the allegations, to pay a fine of $0.7 million to the CFTC and disgorge commissions and fees of $0.1 million.

On December 15, 2015, Brett Kandell, individually and on behalf of nominal defendant, FXCM Inc., filed a shareholder derivative complaint against the members of FXCM’s board of directors (the "Board") in the Court of Chancery for the State of Delaware.  The case is captioned Brett Kandell v. Dror Niv et al., C.A. No. 11812-VCG. On March 4, 2016, plaintiff filed an amended shareholder derivative complaint, which alleges claims for breach of fiduciary duty, contribution and indemnification, waste of corporate assets, abuse of control and unjust enrichment and seeks compensatory damages, rescission of certain agreements as well as reasonable costs and expenses. A second amended shareholder derivative complaint was filed

76

on May 31, 2016 and the Board filed a motion to dismiss on July 15, 2016. Subsequently, plaintiff filed a third amended shareholder derivative complaint on September 1, 2016 and the Board filed a motion to dismiss on October 17, 2016.
    
The CFTC and the NFA are currently examining the relationship with US and one of its liquidity providers. The NFA is also conducting an investigation into US’s compliance with NFA daily trade data reporting requirements and NFA price adjustment requirements. US is cooperating and continues to comply with information requests from the CFTC and NFA.

For the outstanding matters referenced above, including ordinary course of business litigation and claims referenced in the first paragraph hereto, for which a loss is more than remote but less than likely, whether in excess of an accrued liability or where there is no accrued liability, we have estimated a range of possible loss. Management believes the estimate of the aggregate range of possible loss in excess of accrued liabilities for such matters is between nil and $2.1 million as of September 30, 2016.

In view of the inherent difficulty of predicting the outcome of litigation and claims, we cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss related to each pending matter may be. Furthermore, the above-referenced matters represented in the estimated aggregate range of possible loss will change from time to time and actual results may vary significantly from the current estimate. An adverse outcome in one or more of these matters could be material to our results of operations or cash flows for any particular reporting period.

Item 1A. Risk Factors

Other than described below, there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015, which we filed with the SEC on March 11, 2016. The risks described below and those disclosed in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties, not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. 

We face risks related to the passage of the recent "Brexit" referendum in the United Kingdom which could harm our business and operations.

Upon the United Kingdom’s (the “U.K.”) adoption of the policy passed in its recent vote to leave the European Union (“E.U.”), (the “Brexit”), we would likely face new regulatory and legal costs and challenges. The key mechanism for the cross-border provision of financial services within the E.U. is the passport under the E.U. single market directive. Our U.K. operations may no longer be able to take advantage of passporting financial services from the U.K. to other E.U. member states. In addition, the equivalence of the U.K.’s regulatory regime in terms of governance could also become uncertain. This may affect the way in which our operating companies in the U.K. manage their businesses.

Depending on the terms of Brexit, the U.K. could also lose access to the single E.U. market and to the global trade deals negotiated by the E.U. on behalf of its members. Such a decline in trade could affect the attractiveness of the U.K. as a global investment center and, as a result, could have a detrimental impact on U.K. growth. The uncertainty prior to the actual implementation of Brexit could also have a negative impact on the U.K. economy. Although we have an international customer base, we could be adversely affected by reduced growth and greater volatility in the U.K. economy.

Changes to U.K. and E.U. migration policy could likewise occur as a result of Brexit. London’s role as a global center for business may decline, particularly if financial services entities shift their headquarters to the E.U. impacting our ability to recruit and retain talent. Any of the foregoing factors could have a material adverse effect on our business, results of operations or financial condition.

We are subject to a wide variety of domestic and foreign tax laws and regulations that are constantly changing.
 
We are subject to a wide variety of domestic and foreign tax laws and regulations that are constantly changing. We are affected by new laws and regulations, and changes to existing laws and regulations, including interpretations by courts and regulators. With the finalization of specific actions contained within the Organization for Economic Cooperation and Development's (the “OECD”) Base Erosion and Profit study (the “Actions”), many OECD countries have acknowledged their intent to implement the Actions and update their local tax regulations. The extent (if any) to which countries in which we operate adopt and implement the Actions could affect our effective tax rate and our future results from non-U.S. operations.
 

77

Compliance with the laws and regulations described above or with other applicable foreign, federal, state, and local laws and regulations currently in effect or that may be adopted in the future could materially adversely affect our competitive position, operating results, financial condition and liquidity.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchase of Equity Securities by the Issuer

There were no shares of Class A common stock repurchased during the quarter ended September 30, 2016.

Our Board of Directors has previously approved the repurchase of $130.0 million of FXCM Inc.'s Class A common stock (the “Stock Repurchase Program”). As of September 30, 2016, we have repurchased 5.1 million pre-reverse split shares for $64.2 million under these authorizations. In November 2016, our Board of Directors canceled the Stock Repurchase Program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
Exhibit Number
 
Description of Exhibit
3.1
 
Certificate of Amendment to Amended and Restated Certificate of Incorporation (previously filed as Exhibit 3.1 to the Current Report on Form 8-K filed by FXCM Inc. on September 29, 2015 and incorporated herein by reference).
10.1*
 
Asset Purchase Agreement, dated as of September 30, 2016, between Forex Capital Markets LLC and FX Publications, Inc.
31.1*   
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*   
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**  
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**  
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS** 
 
XBRL Instance Document
101.SCH**
 
XBRL Taxonomy Extension Schema Document
101.CAL**
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE**
 
XBRL Taxonomy Extension Presentation Linkbase Document
____________________________________
*
Filed herewith.

78

**
Furnished herewith.

79

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
FXCM INC.
 
 
 
 
Date:
November 8, 2016
By:
/s/ Dror (Drew) Niv
 
 
 
Dror (Drew) Niv
Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
Date:
November 8, 2016
By:
/s/ Robert Lande
 
 
 
Robert Lande
Chief Financial Officer
(Principal Financial Officer)

80

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