q310q2011_1.htm




  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, 2011.
     
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: 001-33440
 
INTERACTIVE BROKERS GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
30-0390693
(State or other jurisdiction
 
(I.R.S. Employer
of incorporation or organization)
 
Identification No.)

One Pickwick Plaza
Greenwich, Connecticut 06830
(Address of principal executive office)
 
(203) 618-5800
(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   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer x
Accelerated filer o
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 8, 2011, there were 45,569,085 shares of the issuer’s Class A common stock, par value $0.01 per share, outstanding and 100 shares of the issuer’s Class B common stock, par value $0.01 per share, outstanding.
 
 



 
 
 
 


INTERACTIVE BROKERS GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2011
Table of Contents

 
   
Page
   
No.
     
PART I:
FINANCIAL INFORMATION
 
     
Item 1:
Financial Statements (Unaudited)
3
     
 
Condensed Consolidated Statements of Financial Condition
4
     
 
Condensed Consolidated Statements of Comprehensive Income
5
     
 
Condensed Consolidated Statements of Cash Flows
6
     
 
Condensed Consolidated Statement of Changes in Equity
7
     
 
Notes to Condensed Consolidated Financial Statements
8
     
Item 2:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
30
     
Item 3:
Quantitative and Qualitative Disclosures About Market Risk
51
     
Item 4:
Controls and Procedures
54
     
PART II:
OTHER INFORMATION
 
     
Item 1:
Legal Proceedings
55
     
Item 1A:
Risk Factors
55
     
Item 2:
Unregistered Sales of Equity Securities and Use of Proceeds
55
     
Item 3:
Defaults upon Senior Securities
56
     
Item 5:
Other Information
56
     
Item 6:
Exhibits
56
     
SIGNATURES
57

 
2

 

Financial Statements Introductory Note
 
Interactive Brokers Group, Inc. (“IBG, Inc.” or the “Company”) is a holding company whose primary asset is its ownership of approximately 11.5% of the membership interests of IBG LLC (the “Group”).  See Notes 1 and 4 to the unaudited condensed consolidated financial statements for further discussion of the Company’s capital and ownership structure.

We are an automated global electronic broker and market maker specializing in routing orders and executing and processing trades in securities, futures, foreign exchange instruments, bonds and mutual funds on more than 90 electronic exchanges and trading venues around the world.  In the U.S., our business is conducted from our headquarters in Greenwich, Connecticut and from Chicago, Illinois and Jersey City, New Jersey.  Abroad, we conduct business through offices located in Canada, England, Switzerland, Hong Kong, India, Australia and Japan.  At September 30, 2011 we had 842 employees worldwide.

 
3

 

Interactive Brokers Group, Inc. and Subsidiaries
 
Condensed Consolidated Statements of Financial Condition
 
(Unaudited)
 
        September 30,  
 
 
December 31,
 
(in thousands, except share data)
 
2011
     
2010
 
Assets
               
Cash and cash equivalents
$
       1,555,735
    $
       1,354,219
 
Cash and securities - segregated for regulatory purposes
 
       10,302,842
     
         7,888,093
 
Securities borrowed
 
         3,385,320
     
         3,292,345
 
Securities purchased under agreements to resell
 
            463,427
     
            336,299
 
Trading assets, at fair value:
             
 
Financial instruments owned
 
         7,271,144
     
         5,420,929
 
 
Financial instruments owned and pledged as collateral  
            1,613,715
     
         2,001,488
 
       
         8,884,859
     
         7,422,417
 
Other receivables:
             
 
Customers, less allowance for doubtful accounts of $5,063 and
             
 
 
$17,871 at September 30, 2011 and December 31, 2010  
         6,815,475
     
         6,973,033
 
 
Brokers, dealers and clearing organizations
 
         1,148,961
     
            732,869
 
 
Receivable from affiliate
 
              20,447
     
                1,185
 
 
Interest
 
              22,232
     
              18,502
 
       
         8,007,115
     
         7,725,589
 
Other assets
 
            551,823
     
            479,806
 
Total assets
$
     33,151,121
    $
     28,498,768
 
                   
Liabilities and equity
             
Liabilities:
             
Trading liabilities - financial instruments sold but not yet purchased,
         
 
at fair value
$
8,360,808
     $
       6,125,224
 
Securities loaned
 
         1,572,403
     
         1,659,611
 
Short-term borrowings
 
            151,834
     
            187,380
 
Other payables:
             
 
Customers
 
       17,277,054
     
       15,060,479
 
 
Brokers, dealers and clearing organizations
 
            499,095
     
            248,685
 
 
Payable to affiliate
 
            287,402
     
            284,860
 
 
Accounts payable, accrued expenses and other liabilities
 
            235,537
     
            409,757
 
 
Interest
 
                7,849
     
                7,682
 
       
       18,306,937
     
       16,011,463
 
                   
Senior notes payable
 
            125,873
     
            194,603
 
Senior secured credit facility
 
                        -
     
            100,000
 
       
       28,517,855
     
       24,278,281
 
                   
Commitments, contingencies and guarantees
             
                   
Equity:
             
Stockholders’ equity:
             
 
Common stock, $0.01 par value per share:
             
 
Class A – Authorized - 1,000,000,000, Issued - 52,281,648 and
             
  
  50,298,024, Outstanding – 45,569,085 and 42,231,551 shares               
  
  at September 30, 2011 and December 31, 2010   
                   523
     
                   503
 
 
Class B – Authorized, Issued and Outstanding – 100 shares
             
 
 
at September 30, 2011 and December 31, 2010
 
                        -
     
                        -
 
 
Additional paid-in capital
 
            545,873
     
            535,630
 
 
Retained earnings
 
            131,895
     
              92,504
 
 
Accumulated other comprehensive income, net of income taxes of
             
 
 
$11,529 and $12,284 at September 30, 2011 and December 31, 2010
 
              19,837
     
              21,137
 
 
Treasury stock, at cost, 6,712,563 and 8,066,473 shares
             
 
 
at September 30, 2011 and December 31, 2010
 
           (132,449
   
           (161,947
Total stockholders’ equity
 
            565,679
     
            487,827
 
Non-controlling interests
 
         4,067,587
     
         3,732,660
 
Total equity
 
         4,633,266
     
         4,220,487
 
Total liabilities and equity
$
33,151,121
     $
     28,498,768
 
                   
See accompanying notes to the unaudited condensed consolidated financial statements.
 
                   

 
4

 


Interactive Brokers Group, Inc. and Subsidiaries
 
Condensed Consolidated Statements of Comprehensive Income
 
(Unaudited)
 
                                 
     
Three months ended
     
Nine months ended
 
     
September 30,
     
September 30,
 
(in thousands, except for shares or per share amounts)
   
2011
     
2010
     
2011
     
2010
 
                                 
Revenues:
                               
 
Trading gains
  $
              193,778
    $
         168,675
     $
        514,685
    $
       326,889
 
 
Commissions and execution fees
   
                130,665
     
             90,144
     
           346,296
     
         289,396
 
 
Interest income    
                  73,694
     
             42,350
     
           211,757
     
         119,967
 
 
Other income
   
                  10,726
     
             13,928
     
             43,137
     
           48,425
 
 
 
Total revenues     
                408,863
     
           315,097
     
        1,115,875
     
         784,677
 
                                     
Interest expense
   
                  23,337
     
             15,959
     
             65,521
     
           48,833
 
                                     
 
 
Total net revenues
   
                385,526
     
           299,138
     
        1,050,354
     
         735,844
 
                                     
Non-interest expenses:
                               
 
Execution and clearing
   
                  82,080
     
             61,905
     
           214,391
     
         207,075
 
 
Employee compensation and benefits
   
                  56,157
     
             49,613
     
           161,167
     
         149,649
 
 
Occupancy, depreciation and amortization
   
                    8,984
     
               9,197
     
             27,289
     
           27,549
 
 
Communications
   
                    5,736
     
               5,834
     
             17,849
     
           17,558
 
 
General and administrative
   
                  14,812
     
             10,669
     
             40,785
     
           35,104
 
 
 
Total non-interest expenses
   
                167,769
     
           137,218
     
           461,481
     
         436,935
 
                                     
Income before income taxes
   
                217,757
     
           161,920
     
           588,873
     
         298,909
 
                                     
Income tax expense
   
                  15,270
     
             13,201
     
             46,498
     
           25,735
 
Net income
   
                202,487
     
           148,719
     
           542,375
     
         273,174
 
 
Less net income attributable to non-controlling interests
   
                179,993
     
           137,683
     
           494,069
     
         254,407
 
Net income available for common stockholders
  $
22,494
    $
           11,036
    $
           48,306
     $
         18,767
 
                                     
Earnings per share:
                               
 
Basic
  $
0.50
    $
              0.26
    $
               1.11
    $
            0.45
 
 
Diluted
  $
0.50
    $
               0.26
    $
               1.10
    $
            0.44
 
                                     
Weighted average common shares outstanding:
                               
 
Basic
   
44,832,545
     
42,222,449
     
43,370,291
     
41,750,973
 
 
Diluted
   
45,208,557
     
42,784,799
     
43,832,558
     
42,401,307
 
                                     
                                     
                                     
Comprehensive income:
                               
 
Net income available for common stockholders
  $
22,494
    $
           11,036
    $
           48,306
    $
         18,767
 
 
Other comprehensive income:
                               
   
Cumulative translation adjustment, before income taxes
   
                 (10,127
   
             17,441
     
              (2,055
   
             9,449
 
    Income taxes related to items of other comprehensive income    
                   (3,722
   
               6,410
     
                 (755
)    
             3,473
 
 
Other comprehensive income (loss), net of tax
   
                   (6,405
   
             11,031
     
              (1,300
   
             5,976
 
Comprehensive income available for common stockholders
  $
16,089
    $
       22,067
    $
           47,006
    $
         24,743
 
                                     
                                     
Comprehensive income attributable to non-controlling interests:
                               
 
Net income attributable to non-controlling interests
  $
179,993
     $
         137,683
    $
         494,069
    $
       254,407
 
 
Other comprehensive income (loss) - cumulative translation adjustment
 
 
(75,945
)    
           144,701
     
              (9,184
   
           76,527
 
Comprehensive income attributable to non-controlling interests
  $
104,048
    $
         282,384
     $
         484,885
    $
       330,934
 
                                     
                                     
See accompanying notes to the unaudited condensed consolidated financial statements.
                 

 
5

 


 
 
Interactive Brokers Group, Inc. and Subsidiaries
 
Condensed Consolidated Statements of Cash Flows
 
(Unaudited)
           
Nine months ended September 30,
(in thousands)  
2011
     
2010
 
 
Cash flows from operating activities:
             
   
Net income
$
            542,375
     $
            273,174
 
    Adjustments to reconcile net income to net cash provided by 
 
         
   
operating activities:
             
      Translation losses  
                14,091
     
              169,454
 
     
Deferred income taxes
 
                35,189
     
                  6,409
 
     
Depreciation and amortization
 
                13,629
     
                13,535
 
     
Employee stock plan compensation
 
                30,986
     
                30,184
 
     
Losses on non-trading investments, net
 
                  7,159
     
                  2,756
 
     
Bad debt expense
 
                  4,239
     
                  2,491
 
 
 
Change in operating assets and liabilities:
             
 
 
 
Increase in cash and securities - segregated for regulatory purposes
 
         (2,414,857
)    
            (712,908
)
     
(Increase) decrease in securities borrowed
 
              (92,698
)    
              385,707
 
     
Increase in securities purchased under agreements to resell
 
            (127,099
)    
            (165,902
)
     
(Increase) decrease in trading assets
 
         (1,469,587
)    
                89,774
 
     
Decrease (increase) in receivables from customers
 
              157,297
     
         (2,184,861
)
     
Increase in other receivables
 
            (440,673
)    
              (51,618
     
Decrease in other assets
 
                11,521
     
                  3,668
 
     
Increase (decrease) in trading liabilities
 
           2,233,372
     
            (451,974
     
(Decrease) increase in securities loaned
 
              (86,759
)    
              472,580
 
     
Increase in payable to customers
 
           2,216,034
     
           2,816,952
 
     
Increase in other payables
 
                40,169
     
                73,909
 
       
Net cash provided by operating activities
 
              674,388
     
              773,330
 
 
Cash flows from investing activities:
           
      Purchase of investments, net   
              (96,262
)    
                       (1
 
 
 
Purchase of property and equipment
 
                (9,673
)    
              (14,510
 
 
   
Net cash used in investing activities
 
            (105,935
)    
              (14,511
 
Cash flows from financing activities:
             
 
 
 
Dividends paid to non-controlling interests
 
            (138,548
)    
            (114,210
     
Dividends paid to shareholders
 
                (8,915
)    
                         -
 
     
Redemption of member interests from IBG Holdings LLC
 
                         -
     
              (27,204
 
 
 
Redemption of former member interest
 
                (1,595
)    
                         -
 
     
Issuance of senior notes
 
              340,311
     
              471,596
 
     
Redemptions of senior notes
 
            (409,041
)    
            (457,741
     
Repayments of senior secured credit facility
 
            (100,000
)    
                         -
 
     
Decrease in short-term borrowings, net
 
              (22,575
)    
            (181,652
       
Net cash used in financing activities
 
            (340,363
)    
            (309,211
  Effect of exchange rate changes on cash and cash equivalents 
 
              (26,574
)    
                35,549
 
 
Net increase in cash and cash equivalents
 
              201,516
     
              485,157
 
 
Cash and cash equivalents at beginning of period
 
           1,354,219
     
              806,560
 
 
Cash and cash equivalents at end of period
 $
         1,555,735
     $
         1,291,717
 
                       
Supplemental disclosures of cash flow information:              
 
Cash paid for interest
 $
              65,354
     $
             49,880
 
 
Cash paid for taxes
 $
             68,956
     $
              64,257
 
                       
Non-cash financing activities:              
 
Issuance of common stock in exchange of member interests in IBG LLC
 $
              29,199
     $
                       -
 
 
Redemption of member interests from IBG Holdings LLC
 $
            (29,199
)    $
                       -
 
 
Adjustments to Additional Paid in Capital for changes in proportionate ownership in IBG LLC
 $
            (19,210
)    $
                      -
 
 
Adjustments to Non-Controlling Interests for changes in proportionate ownership in IBG LLC
 $
              19,210
     $
                       -
 
               
 
See accompanying notes to the unaudited condensed consolidated financial statements.

 
6

 


Interactive Brokers Group, Inc. and Subsidiaries
 
Condensed Consolidated Statement of Changes in Equity
 
Nine months ended September 30, 2011
 
(Unaudited)
 
(in thousands, except for share amounts)
 
                                         
    Common Stock                                          
   
 
                    Accumulated                    
        Additional                 Other     Total     Non-        
         Par   Paid-In      Treasury      Retained      Comprehensive       Stockholders'      controlling      Total   
   
Shares
 
Value
 
Capital
    Stock     Earnings    
Income
   
Equity
    Interests    
Equity
 
                                                   
Balance, January 1, 2011
 
   42,231,651
 
 $      503
 
 $      535,630
   
 $      (161,947
 
 $        92,504
   
 $              21,137
   
 $         487,827
   
 $      3,732,660
   
 $      4,220,487
 
                                                   
Net proceeds from issuance of Common Stock in follow-on offering
     1,983,624
 
         20
 
         29,179
                     
            29,199
         
              29,199
 
Common Stock distributed to employees
 
     1,353,910
           
            29,498
               
              29,498
         
              29,498
 
Redemption of non-controlling interests
                                    -    
            (29,199
 
            (29,199
Redemption of former-member interests
         
              (174
                   
                 (174
 
              (1,421
 
              (1,595
Deferred tax benefit retained - follow-on
offering
     
                448
                     
                   448
   
                      
   
                   448
 
Dividends paid to shareholders
                     
(8,915
       
              (8,915
 
 
   
              (8,915
)
Dividends paid by IBG LLC to non-
controlling interests
                         
                        -
   
          (138,548
 
          (138,548
)
Adjustments for changes in proportionate
ownership in IBG LLC
         (19,210
                   
            (19,210
 
              19,210
   
                        -
 
Comprehensive income, net of tax
                     
           48,306
   
                 (1,300
 
              47,006
   
            484,885
   
            531,891
 
Balance, September 30, 2011
 
   45,569,185
 
 $      523
 
 $      545,873
   
 $      (132,449
 
 $      131,895
   
 $              19,837
   
 $         565,679
   
 $      4,067,587
   
 $      4,633,266
 
                                                   
See accompanying notes to the unaudited condensed consolidated financial statements.


 
7

 

Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(dollars in thousands, except shares and per share amounts, unless otherwise noted)

1.   Organization and Nature of Business
 
Interactive Brokers Group, Inc. ("IBG, Inc." or the "Company") is a Delaware holding company whose primary asset is its ownership of approximately 11.5% of the membership interests of IBG LLC, which, in turn, owns operating subsidiaries (collectively, "IBG LLC" or the "Group").  The accompanying unaudited condensed consolidated financial statements of IBG, Inc. reflect the consolidation of IBG, Inc.’s investment in IBG LLC for all periods presented (Note 4).  IBG LLC is an automated global electronic broker and market maker specializing in routing orders and processing trades in securities, futures and foreign exchange instruments.
 
IBG LLC is a Connecticut limited liability company that conducts its business through its operating subsidiaries (collectively called the “Operating Companies”):  Timber Hill LLC (“TH LLC”), Timber Hill Europe AG (“THE”), Timber Hill Securities Hong Kong Limited (“THSHK”), Timber Hill Australia Pty Limited (“THA”), Timber Hill Canada Company (“THC”), Interactive Brokers LLC (“IB LLC”) and subsidiaries, Interactive Brokers Canada Inc. (“IBC”), Interactive Brokers (U.K.) Limited (“IBUK”), Interactive Brokers (India) Private Limited (“IBI”), Interactive Brokers Financial Products S.A. (“IBFP”), Interactive Brokers Hungary KFT (“IBH”), IB Exchange Corp. (“IBEC”), Interactive Brokers Securities Japan, Inc. (“IBSJ”), IB Brasil Participações Ltda (“IBBH”), Interactive Brokers Software Services Estonia OU (“IBEST”) and Interactive Brokers Software Services Russia (“IBRUS”).
 
IBG, Inc. operates in two business segments, electronic brokerage and market making.  IBG, Inc. conducts its electronic brokerage business through its Interactive Brokers subsidiaries, which provide electronic execution and clearing services to customers worldwide. The Company conducts its market making business principally through its Timber Hill subsidiaries on the world’s leading exchanges and market centers, primarily in exchange-traded equities, equity options and equity-index options and futures.
 
Certain of the Operating Companies are members of various securities and commodities exchanges in North America, Europe and the Asia/Pacific region and are subject to regulatory capital and other requirements (Note 13).  Other than IB LLC, IBUK, IBC, IBI and IBSJ, the Operating Companies do not carry securities accounts for customers or perform custodial functions relating to customer securities.

2.   Significant Accounting Policies
 
Basis of Presentation
 
These unaudited condensed consolidated financial statements are presented in U.S. dollars and have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding financial reporting with respect to Form 10-Q and accounting standards generally accepted in the United States of America (“U.S. GAAP”) promulgated in the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC” or the “Codification”).  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in IBG, Inc.’s Annual Report on Form 10-K filed with the SEC on February 28, 2011.
 
Gains and losses from foreign currency transactions are included in trading gains and losses where related to market making activities or in interest income where related to the investment of customer funds as part of electronic brokerage activities in the unaudited condensed consolidated statements of comprehensive income.  Non-U.S. subsidiaries have a functional currency (i.e., the currency in which activities are primarily conducted) that is other than the U.S. dollar.  Such subsidiaries’ assets and liabilities are translated to U.S. dollars at period-end exchange rates, while revenues and expenses are translated at average exchange rates during the year.  Adjustments that result from translating amounts from a subsidiary’s functional currency to the U.S. dollar are reported as a component of other comprehensive income.
 
Principles of Consolidation
 
The unaudited condensed consolidated financial statements include the accounts of IBG, Inc. and its majority and wholly owned subsidiaries.  As sole managing member of IBG LLC, IBG, Inc. exerts control over the Group’s operations.  In accordance with ASC 810, Consolidation, the Company consolidates the Group’s consolidated financial statements and records as non-controlling interest the interests in the Group that IBG, Inc. does not own.  The Company’s policy is to consolidate all entities of which it owns more than 50% unless it does not have control.  All inter-company balances and transactions have been eliminated.  IBG, Inc. would

 
 
8

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
 
also consolidate any Variable Interest Entities (“VIEs”) pursuant to ASC 860, Transfers and Servicing and ASC 810 of which it is the primary beneficiary.  IBG, Inc. currently is not the primary beneficiary of any such entities and therefore no VIEs are included in the unaudited condensed consolidated financial statements.
 
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 and disclosures in the unaudited condensed consolidated financial statements and accompanying notes.  Estimates, by their nature, are based on judgment and available information.  Therefore, actual results could differ materially from those estimates.  Such estimates include the estimated value of investments accounted for under the equity method of accounting, the estimated useful lives of property and equipment, including capitalized internally developed software, the allowance for doubtful accounts, compensation accruals, tax liabilities and estimated contingency reserves.
 
Fair Value
 
At September 30, 2011 and December 31, 2010, substantially all of IBG, Inc.’s assets and liabilities, including financial instruments, were carried at fair value based on published market prices and are marked to market daily, or were assets which are short-term in nature (such as U.S. government treasury bills or spot foreign exchange) and were carried at amounts that approximate fair value.
 
IBG, Inc. applies the fair value hierarchy of ASC 820, Fair Value Measurement, to prioritize the inputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs.  The three levels of the fair value hierarchy are:
 
Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
   
Level 2
Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
   
Level 3
Prices or valuations that require inputs that are both significant to fair value measurement and unobservable

Financial instruments owned and financial instruments sold, but not yet purchased, except forward currency contracts, over-the-counter (“OTC”) currency options and certain corporate and municipal debt securities, which are classified as Level 2 financial instruments, are classified within Level 1 of the fair value hierarchy.  The Company’s financial instruments are valued using quoted market prices as published by exchanges and clearing houses or otherwise broadly distributed in active markets, include U.S. government and sovereign obligations, active listed securities, options, futures, options on futures and corporate and municipal debt securities.  IBG, Inc. does not adjust quoted prices for Level 1 financial instruments, even in the event that the Company may hold a large position whereby a purchase or sale could reasonably impact quoted prices.  Currency forward contracts and OTC currency options are valued using broadly distributed bank and broker prices, and are classified as Level 2 financial instruments as such instruments are not exchange-traded.  Corporate and municipal debt securities, including Federal Deposit Insurance Corporation insured corporate bonds held as securities segregated for regulatory purposes, that are not actively traded are also classified in Level 2.  Investments in common stock and investments in other non-trading securities, which investments are reported in other assets in the accompanying unaudited condensed consolidated statement of financial condition, are generally reported as Level 2 financial instruments, except for unrestricted listed equities, which are Level 1 financial instruments.  Investments in other non-trading securities include corporate, municipal and asset-backed debt securities, which are Level 2 financial instruments whose fair values are determined using broker and vendor prices.
 
Earnings Per Share
 
Earnings per share (“EPS”) are computed in accordance with ASC 260, Earnings per Share.  Shares of Class A and Class B common stock share proportionately in the earnings of IBG, Inc.  Basic earnings per share are calculated utilizing net income available for common stockholders divided by the weighted average number of shares of Class A and Class B common stock outstanding for that period.  Diluted earnings per share are calculated utilizing the Company’s basic net income available for common stockholders divided by diluted weighted average shares outstanding with no adjustments to net income available to common stockholders for potentially dilutive common shares.

 
9

 
 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
Stock-Based Compensation
 
IBG, Inc. follows ASC 718, Compensation – Stock Compensation, to account for its stock-based compensation plans.  ASC 718 requires all share-based payments to employees to be recognized in the financial statements using a fair value-based method.  As a result, IBG, Inc. expenses the fair value of stock granted to employees over the related vesting period.
 
Cash and Cash Equivalents
 
IBG, Inc. defines cash equivalents as short-term, highly liquid securities and cash deposits with original maturities of three months or less, other than those used for trading purposes.
 
Cash and Securities — Segregated for Regulatory Purposes
 
As a result of customer activities, certain Operating Companies are obligated by rules mandated by their primary regulators to segregate or set aside cash or qualified securities to satisfy such regulations, which regulations have been promulgated to protect customer assets.  In addition, substantially all of the Operating Companies are members of various clearing organizations at which cash or securities are deposited as required to conduct day-to-day clearance activities.  Securities segregated for regulatory purposes consisted of Federal Deposit Insurance Corporation insured corporate bonds, which are recorded as Level 2 financial assets, in the amount of $439,998 and $440,773 at September 30, 2011 and December 31, 2010, U.S. Treasury Bills of $747,726 and $146,976 at September 30, 2011 and December 31, 2010, which are recorded as Level 1 financial assets and securities purchased under agreements to resell in the amount of $3,454,976 and $2,391,813 as of September 30, 2011 and December 31, 2010, respectively, which amounts approximate fair value.
 
Securities Borrowed and Securities Loaned
 
Securities borrowed and securities loaned are recorded at the amount of cash collateral advanced or received.  Securities borrowed transactions require IBG, Inc. to provide counterparties with collateral, which may be in the form of cash, letters of credit, or other securities.  With respect to securities loaned, IBG, Inc. receives collateral, which may be in the form of cash or other securities in an amount generally in excess of the fair value of the securities loaned.
 
IBG, Inc. monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as permitted contractually.  Receivables and payables with the same counterparty are not offset in the unaudited condensed consolidated statements of financial condition.  For these transactions, the fees received or paid by IBG, Inc. are recorded as interest income or interest expense in the unaudited condensed consolidated statements of comprehensive income.
 
Securities Purchased under Agreements to Resell
 
Securities purchased under agreements to resell are treated as collateralized financing transactions and are recorded at contract value, plus accrued interest, which approximates fair value. The Company’s policy is to obtain possession of collateral with a fair value equal to or in excess of the principal amount loaned under resale agreements.  To ensure that the fair value of the underlying collateral remains sufficient, this collateral is valued daily with additional collateral obtained or excess collateral returned, as permitted under contractual provisions.
 
Financial Instruments Owned and Sold But Not Yet Purchased
 
Stocks, government, corporate and municipal bonds, futures and options transactions are reported in the unaudited condensed consolidated financial statements on a trade date basis.  All financial instruments owned and financial instruments sold but not yet purchased are recorded at fair value based upon quoted market prices.  All firm-owned financial instruments pledged to counterparties where the counterparty has the right, by contract or custom, to sell or repledge the financial instruments are classified as financial instruments owned and pledged as collateral in the unaudited condensed consolidated statements of financial condition.
 
IBG, Inc. also enters into currency forward contracts.  These transactions, which are also reported on a trade date basis, are agreements to exchange a fixed amount of one currency for a specified amount of a second currency at completion of the currency forward contract term.  Unrealized mark-to-market gains and losses on currency forward contracts are reported as components of financial instruments owned or financial instruments sold but not yet purchased in the unaudited condensed consolidated statements of financial condition.  Net earnings or losses are reported as components of interest income in the unaudited condensed consolidated statements of comprehensive income.
 
 
10

 
 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
Customer Receivables and Payables
 
Customer securities transactions are recorded on a settlement date basis and customer commodities transactions are recorded on a trade date basis.  Receivables from and payables to customers include amounts due on cash and margin transactions, including futures contracts transacted on behalf of customers.  Securities owned by customers, including those that collateralize margin loans or other similar transactions, are not reported in the unaudited condensed consolidated statements of financial condition.  Amounts receivable from customers that are determined by management to be uncollectible are written off to general and administrative expense.
 
Receivables from and Payables to Brokers, Dealers and Clearing Organizations
 
Receivables from brokers, dealers and clearing organizations include amounts receivable for securities not delivered by IBG, Inc. to the purchaser by the settlement date (“fails to deliver”) and margin deposits.  Payables to brokers, dealers and clearing organizations include amounts payable for securities not received by IBG, Inc. from a seller by the settlement date (“fails to receive”).  Receivables and payables to brokers, dealers and clearing organizations also include amounts related to futures contracts executed on behalf of customers as well as net payables and receivables from unsettled trades.
 
Investments
 
IBG, Inc. makes certain strategic investments and accounts for these investments under the cost method of accounting or under the equity method of accounting as required under ASC 323, Investments – Equity Method and Joint Ventures.  Investments are accounted for under the equity method of accounting, when IBG, Inc. has significant influence over the investee.  Investments accounted for under the equity method, including where the investee is a limited partnership or limited liability company, are recorded at the fair value amount of IBG, Inc.’s investment and adjusted each period for IBG, Inc.’s share of the investee’s income or loss.  IBG, Inc.’s share of the income or losses from equity investments is reported as a component of other income in the unaudited condensed consolidated statements of comprehensive income and the recorded amounts of IBG, Inc.’s equity investments, which are included in other assets in the unaudited condensed consolidated statements of financial condition, increase or decrease accordingly.  Distributions received from equity investees are recorded as reductions to the respective investment balance.

A judgmental aspect of accounting for investments is evaluating whether an other-than-temporary decline in the value of an investment has occurred.  The evaluation of an other-than-temporary impairment is dependent on specific quantitative and qualitative factors and circumstances surrounding an investment, including recurring operating losses, credit defaults and subsequent rounds of financing.  None of IBG, Inc.’s equity investments have readily determinable market values.  All equity investments are reviewed for changes in circumstances or occurrence of events that suggest IBG, Inc.’s investment may not be recoverable.  If an unrealized loss on any investment is considered to be other-than-temporary, the loss is recognized in the period the determination is made.  IBG, Inc. also holds exchange memberships and investments in equity securities of certain exchanges as required to qualify as a clearing member, and strategic investments in corporate stock that do not qualify for equity method accounting.  Such investments 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, and are included in other assets in the unaudited condensed consolidated statements of financial condition.  Dividends are recognized as a component of other income as such dividends are received.
 
Property and Equipment
 
Property and equipment, which is a component of other assets, consist of purchased technology hardware and software, internally developed software, leasehold improvements and office furniture and equipment.  Property and equipment are recorded at historical cost, less accumulated depreciation and amortization.  Additions and improvements that extend the lives of assets are capitalized, while expenditures for repairs and maintenance are expensed as incurred.  Depreciation and amortization are computed using the straight-line method.  Equipment is depreciated over the estimated useful lives of the assets, while leasehold improvements are amortized over the lesser of the estimated economic useful life of the asset or the term of the lease.  Computer equipment is depreciated over three to five years and office furniture and equipment are depreciated over five to seven years.  Qualifying costs for internally developed software are capitalized and amortized over the expected useful life of the developed software, not to exceed three years.
 
Comprehensive Income and Foreign Currency Translation
 
Comprehensive income consists of two components: net income and other comprehensive income.  Other comprehensive income refers to revenues, expenses, gains and losses that are included in stockholders’ equity but are excluded from net income.  IBG, Inc.’s other comprehensive income is comprised of foreign currency translation adjustments.
 
 
11

 
 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
 
IBG, Inc.’s international Operating Companies have a functional currency (i.e., the currency in which activities are primarily conducted) that is other than the U.S. dollar.  Such subsidiaries’ assets and liabilities are translated into U.S. dollars at period-end exchange rates, and revenues and expenses are translated at average exchange rates prevailing during the period.  Translation gains and losses from market making and electronic brokerage activities, respectively, are included in trading gains and in other income in the accompanying unaudited condensed consolidated statements of comprehensive income.  Adjustments that result from translating amounts from a subsidiary’s functional currency are reported as a component of accumulated other comprehensive income.
 
Revenue Recognition
 
Trading Gains
Trading gains and losses are recorded on trade date and are reported on a net basis.  Trading gains are comprised of changes in the fair value of trading assets and liabilities (i.e., unrealized gains and losses) and realized gains and losses.  Dividends are integral to the valuation of stocks and interest is integral to the valuation of fixed income instruments.  Accordingly, both dividends and interest income and expense attributable to specific trading assets and liabilities are reported on a net basis as a component of trading gains in the accompanying unaudited condensed consolidated statements of comprehensive income.
 
Commissions and Execution Fees
Commissions charged for executing and clearing customer transactions are accrued on a trade date basis and are reported as commissions and execution fees in the unaudited condensed consolidated statements of comprehensive income, and the related expenses are reported as execution and clearing expenses, also on a trade date basis.

Interest Income and Expense
The Company earns interest income and incurs interest expense primarily in connection with its Electronic Brokerage customer business and its securities lending activities.  Such interest is recorded on the accrual basis.

Income Taxes
 
IBG, Inc. accounts for income taxes in accordance with ASC 740, Income Taxes, which requires the recognition of tax benefits or expenses on the temporary differences between the financial reporting and tax bases of assets and liabilities, including the accounting for uncertainty of income tax positions and valuation allowances for deferred tax assets reported in financial statements, prescribing a “more likely than not” threshold and measurement attribute for recognition in the financial statements of an asset or liability resulting from a tax position taken or expected to be taken in an income tax return.
 
The Company’s provision for income taxes is comprised of two principal components: (1) the Group’s consolidated income tax expense, and (2) the Company’s U.S. Federal and state income taxes on its proportionate share of the Group’s income that is subject to tax.
 
The Group has historically operated in the United States as a limited liability company that was treated as a partnership for U.S. federal income tax purposes.  Accordingly, the Group’s income, which is allocated proportionately to the Group’s members, the Company and IBG Holdings LLC, is not subject to U.S. federal income taxes at the Group level.  Taxes related to income earned by partnerships represent obligations of the individual partners.  Therefore, income taxes attributable to the Group and included in income tax expense in the Company’s unaudited condensed consolidated statements of comprehensive income are primarily incurred in non-U.S. subsidiaries.  Outside the United States, the Group principally operates through subsidiary corporations and is subject to local income taxes.  In addition, state and local income taxes include taxes assessed on the Group by jurisdictions that do not recognize the Group’s limited liability company status.  Foreign income taxes paid by the Group on dividends received are also reported as income taxes.
 
IBG, Inc. recognizes interest related to income tax matters as interest income or expense and penalties related to income tax matters as income tax expense.
 
Recently Issued Accounting Pronouncements
 
Subsequent to the adoption of the ASC, the FASB will issue Accounting Standards Updates (“ASU’s”) as the means to add to or delete from, or otherwise amend the ASC.  In 2011, prior to the issuance of the Company’s unaudited condensed consolidated financial statements, ASU’s 2011-01 through ASU 2011-09 were issued.  Following is a summary of recently issued ASU’s that may affect the Company’s condensed consolidated financial statements:

 
12

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)


   
Affects
 
Status
ASU 2010-13
Compensation - Stock Compensation (Topic 718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades
Fiscal years, and interim periods within those fiscal years, beginning after December 15, 2010.  Early application is permitted.
         
ASU 2011-01
Receivables (Topic 310) - Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20
Effective on issuance.
         
ASU 2011-02
Receivables (Topic 310) - A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring
First interim or annual period beginning after June 15, 2011, to be applied retrospectively to the beginning of the annual period of adoption.  Early adoption is permitted.
         
ASU 2011-03
Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements
Fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011.  Early application is not permitted.
         
ASU 2011-04
Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS
To be applied prospectively for interim and annual periods beginning after December 15, 2011.  Early adoption is not permitted for public entities.
         
ASU 2011-05
Comprehensive Income (Topic 220) - Presentation of Comprehensive Income
To be applied retrospectively, with reporting to commence in fiscal years beginning after December 15, 2011.  Early adoption is permitted.
         
ASU 2011-08
Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment
Effective for fiscal years beginning after December 15, 2011.  Early adoption is permitted.
 
 
Adoption of those ASU’s that became effective during 2011, prior to the issuance of the Company’s unaudited condensed consolidated financial statements, did not have a material effect on those financial statements.  Other than ASU 2011-05, which the Company adopted early, as permitted, for the quarter ended June 30, 2011, management is assessing the potential impact on the Company’s financial statements of adopting ASU’s that will become effective in the future.
 
ASC/IFRS Convergence

         In February 2010, the SEC issued “Commission Statement in Support of Convergence and Global Accounting Standards”, a formal statement updating the status of its November 2008 “Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers” (“IFRS Roadmap”).  The statement supported convergence of accounting standards and the development of a single set of global accounting standards.  As directed in this statement, the SEC staff issued “Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers” (the “Work Plan”) in May 2010, and issued a follow-up Staff Paper, subtitled “Exploring a Possible Method of Incorporation” in May 2011.  The Work Plan outlines the steps to be taken to provide the SEC with information to be able to conclude whether IFRS should be adopted for U.S. registrants and the Staff Paper discusses alternative approaches
 
 
13

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
 
(“Convergence” and “Endorsement”) to adoption that could be applied.  Within the Staff Paper, the SEC Staff has issued a Request for Comment on these alternatives.  The Comment period ended July 31, 2011 and the SEC Staff have not issued further reporting to date.  Neither the February statement, the Work Plan nor the Staff Paper define a certain date for adoption of IFRS. A decision on whether the SEC will mandate adoption of IFRS, in full or in part, may be made in 2011.  If a decision to adopt IFRS is made at that point in time, initial adoption for U.S. registrants would be approximately December 31, 2015 or 2016, with a transition date of either January 1, 2013 or 2014 for the initial three year retrospective comparative reporting period.  Management continues to assess the potential impact of adopting IFRS on the Company’s unaudited condensed consolidated financial statements.

3.   Trading Activities and Related Risks
 
IBG, Inc.’s trading activities include providing securities market making and brokerage services.  Trading activities expose IBG, Inc. to market and credit risks.  These risks are managed in accordance with established risk management policies and procedures.  To accomplish this, management has established a risk management process that includes:
 
 
·
a regular review of the risk management process by executive management as part of its oversight role;
 
 
·
defined risk management policies and procedures supported by a rigorous analytic framework; and
 
 
·
articulated risk tolerance levels as defined by executive management that are regularly reviewed to ensure that IBG, Inc.’s risk-taking is consistent with its business strategy, capital structure, and current and anticipated market conditions.

Market Risk
 
IBG, Inc. is exposed to various market risks.  Exposures to market risks arise from equity price risk, foreign currency exchange rate fluctuations and changes in interest rates.  IBG, Inc. seeks to mitigate market risk associated with trading inventories by employing hedging strategies that correlate rate, price and spread movements of trading inventories and related financing and hedging activities.  IBG, Inc. uses a combination of cash instruments and exchange traded derivatives to hedge its market exposures.  The following discussion describes the types of market risk faced:
 
Equity Price Risk
Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the value of equity securities and other instruments that derive their value from a particular stock, a defined basket of stocks, or a stock index.  IBG, Inc. is subject to equity price risk primarily in securities owned and securities sold but not yet purchased.  IBG, Inc. attempts to limit such risks by continuously reevaluating prices and by diversifying its portfolio across many different options, futures and underlying securities and avoiding concentrations of positions based on the same underlying security.
 
Currency Risk
Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact the value of financial instruments.  Exchange rate contracts may include cross-currency swaps and currency futures contracts.  Currency swaps are agreements to exchange future payments in one currency for payments in another currency.  These agreements are used to effectively convert assets or liabilities denominated in different currencies.  Currency futures are contracts for delayed delivery of currency at a specified future date.  IBG, Inc. uses currency swaps to manage the levels of its non-U.S. dollar currency balances and currency cash and futures to hedge its global exposure.
 
Interest Rate Risk
Interest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments.  IBG, Inc. is exposed to interest rate risk on cash and margin balances, positions carried in equity securities, options and futures and on its debt obligations.  These risks are managed through investment policies and by entering into interest rate futures contracts.
 
Credit Risk
 
IBG, Inc. is exposed to risk of loss if an individual, counterparty or issuer fails to perform its obligations under contractual terms (“default risk”).  Both cash instruments and derivatives expose IBG, Inc. to default risk.  IBG, Inc. has established policies and procedures for mitigating credit risk on principal transactions, including reviewing and establishing limits for credit exposure, maintaining collateral, and continually assessing the creditworthiness of counterparties.
 
The Company’s credit risk is limited in that substantially all of the contracts entered into are settled directly at securities and
 
 
14

 
 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
 
commodities clearing houses and a small portion is settled through member firms and banks with substantial financial and operational resources.  IBG, Inc. seeks to control the risks associated with its customer margin activities by requiring customers to maintain collateral in compliance with regulatory and internal guidelines.
 
In the normal course of business, IBG, Inc. executes, settles, and finances various customer securities transactions.  Execution of these transactions includes the purchase and sale of securities by IBG, Inc. that exposes IBG, Inc. to default risk arising from the potential that customers or counterparties may fail to satisfy their obligations.  In these situations, IBG, Inc. may be required to purchase or sell financial instruments at unfavorable market prices to satisfy obligations to customers or counterparties.  Liabilities to other brokers and dealers related to unsettled transactions (i.e., securities fails to receive) are recorded at the amount for which the securities were purchased, and are paid upon receipt of the securities from other brokers or dealers.  In the case of aged securities fails to receive, IBG, Inc. may purchase the underlying security in the market and seek reimbursement for any losses from the counterparty.
 
For cash management purposes, IBG, Inc. enters into short-term securities purchased under agreements to resell and securities sold under agreements to repurchase transactions (“repos”) in addition to securities borrowing and lending arrangements, all of which may result in credit exposure in the event the counterparty to a transaction is unable to fulfill its contractual obligations.  In accordance with industry practice, repos are collateralized by securities with a market value in excess of the obligation under the contract. Similarly, securities borrowed and loaned agreements are collateralized by deposits of cash or securities.  IBG, Inc. attempts to minimize credit risk associated with these activities by monitoring collateral values on a daily basis and requiring additional collateral to be deposited with or returned to IBG, Inc. as permitted under contractual provisions.
 
Concentrations of Credit Risk
 
IBG, Inc.’s exposure to credit risk associated with its trading and other activities is measured on an individual counterparty basis, as well as by groups of counterparties that share similar attributes.  Concentrations of credit risk can be affected by changes in political, industry, or economic factors.  To reduce the potential for risk concentration, credit limits are established and exposure is monitored in light of changing counterparty and market conditions.  As of September 30, 2011, the Company did not have any material concentrations of credit risk.
 
Off-Balance Sheet Risks
 
IBG, Inc. may be exposed to a risk of loss not reflected in the unaudited condensed consolidated financial statements for futures products, which represent obligations of IBG, Inc. to settle at contracted prices, which may require repurchase or sale in the market at prevailing prices.  Accordingly, these transactions result in off-balance sheet risk as IBG, Inc.’s cost to liquidate such futures contracts may exceed the amounts reported in IBG, Inc.’s unaudited condensed consolidated statements of financial condition.

4.   Equity and Earnings Per Share
 
In connection with its IPO in May 2007, IBG, Inc. purchased 10.0% of the membership interests in IBG LLC from IBG Holdings LLC, became the sole managing member of IBG LLC and began to consolidate IBG LLC’s financial results into its financial statements.  IBG Holdings LLC wholly owns all Class B common stock, which common stock has voting rights in proportion to its ownership interests in IBG LLC, approximately 88.5% as of September 30, 2011.  The unaudited condensed consolidated financial statements reflect the results of operations and financial position of IBG, Inc., including consolidation of its investment in IBG LLC, and IBG Holdings LLC’s ownership interests in IBG LLC are reported as non-controlling interests.

Recapitalization and Post-IPO Capital Structure
 
Immediately prior to and immediately following the consummation of the IPO, IBG, Inc., IBG Holdings LLC, IBG LLC and the members of IBG LLC consummated a series of transactions collectively referred to herein as the “Recapitalization.” In connection with the Recapitalization, IBG, Inc., IBG Holdings LLC and the historical members of IBG LLC entered into an exchange agreement, dated as of May 3, 2007 (the “Exchange Agreement”), pursuant to which the historical members of IBG LLC received membership interests in IBG Holdings LLC in exchange for their membership interests in IBG LLC.  Additionally, IBG, Inc. became the sole managing member of IBG LLC.
 
In connection with the consummation of the IPO, IBG Holdings LLC used the net proceeds to redeem 10.0% of members’ interests in IBG Holdings LLC in proportion to their interests.  Immediately following the Recapitalization and IPO, IBG Holdings LLC owned approximately 90% of IBG LLC and 100% of IBG, Inc.’s Class B common stock, which has voting power in IBG, Inc. proportionate to the extent of IBG Holdings LLC’s ownership of IBG LLC.
 
The Exchange Agreement also provides for future redemptions of member interests and for the purchase of member interests
 
 
 
15

 
 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
 
in IBG LLC by IBG, Inc. from IBG Holdings LLC, which could result in IBG, Inc. acquiring the remaining member interests in IBG LLC that it does not own.  On an annual basis, holders of IBG Holdings LLC member interests are able to request redemption of such member interests over a minimum eight (8) year period following the IPO; 12.5% annually for seven (7) years and 2.5% in the eighth year.
 
Redemptions may be funded through two (2) methods.  Material redemptions would be funded from the proceeds of sales of additional shares of Class A common stock (“Common Stock”) to the public, although there have been no such additional sales of Common Stock through September 30, 2011.  Three hundred sixty (360) million shares of authorized Common Stock were reserved for such future sales.

In lieu of a sale of Common Stock to the public, the Exchange Agreement provides that IBG LLC, using its available liquidity, may facilitate the redemption by IBG Holdings LLC ("IBGH") of interests held by its members or the Company may elect to acquire interests to be redeemed by IBGH through the issuance of shares of Common Stock.

Redemptions from 2008 through 2010 were cash redemptions.  On August 4, 2011, the Company filed a “shelf” Registration Statement on Form S-3 with the SEC for the issuance of additional shares in connection with IBGH requesting redemption of a portion of its member interests in IBG LLC.  On August 4, 2011, a Prospectus Supplement (File Number 333-176053) was filed by the Company with the SEC to issue 1,983,624 shares of Common Stock in exchange for an equivalent number of shares of member interests in IBG LLC.  The Company expects that future redemptions will be funded through the issuance of Common Stock.

Subsequent to the IPO and with the consent of IBG Holdings LLC and IBG, Inc. (on its own behalf and acting as the sole managing member of IBG LLC), IBG LLC agreed to redeem membership interests from IBG Holdings LLC as follows:


     
 Price per Equivalent
 
Fair Value
 
Class A Share
       
2008
 $               72,015
 
 $               29.99
2009
                  14,738
 
                                     14.85
2010
                  27,204
 
                                     16.80
2011
                  29,199
 
                                     14.72

As a consequence of these transactions, and distribution of shares to employees (Note 10), IBG, Inc.’s interest in IBG LLC has increased to approximately 11.5%, with IBG Holdings LLC owning the remaining 88.5% as of September 30, 2011.  The redemptions also resulted in an increase in the IBG Holdings LLC interest held by Thomas Peterffy and his affiliates from approximately 84.6% at the IPO to approximately 86.3% at September 30, 2011.
 
Since consummation of the IPO and Recapitalization, IBG, Inc.’s equity capital structure has been comprised of Class A and Class B common stock.  All shares of common stock have a par value of $0.01 per share and have identical rights to earnings and dividends and in liquidation.  As described previously in this Note 4, Class B common stock has voting power in IBG, Inc. proportionate to the extent of IBG Holdings LLC’s ownership of IBG LLC.  At September 30, 2011 and December 31, 2010, 1,000,000,000 shares of Class A common stock were authorized, of which 52,281,648 and 50,298,024 shares have been issued; and 45,569,085 and 42,231,551 shares were outstanding, respectively.  Class B common stock is comprised of 100 authorized shares, of which 100 shares were issued and outstanding as of September 30, 2011 and December 31, 2010, respectively.  In addition, 10,000 shares of preferred stock have been authorized, of which no shares are issued or outstanding as of September 30, 2011 and December 31, 2010, respectively.
 
As a result of a federal income tax election made by IBG LLC applicable to the acquisition of IBG LLC member interests by IBG, Inc. the income tax basis of the assets of IBG LLC acquired by IBG, Inc. have been adjusted based on the amount paid for such interests.  A deferred tax asset of $380,785 was recorded as of the IPO date, which deferred tax asset is a component of Other Assets in the unaudited condensed consolidated statement of financial condition and is being amortized as additional deferred income tax expense over 15 years from the IPO date, as allowable under current tax law.  In connection with the 2011 redemption of IBGH member interests in exchange for Common Stock, a deferred tax asset of $2,984 was recorded, which deferred tax asset is being amortized as additional deferred income tax expense, over 15 years from August 2011.  As of September 30, 2011 and December 31, 2010, the unamortized balance of these deferred tax assets was $300,617 and $313,526, respectively.

 
 
16

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)

IBG, Inc. also entered into an agreement (the “Tax Receivable Agreement”) with IBG Holdings LLC to pay IBG Holdings LLC (for the benefit of the former members of IBG LLC) 85% of the tax savings that IBG, Inc. actually realizes as the result of tax basis increases.  As of the IPO date, a payable to IBG Holdings LLC of $323,668 was recorded by IBG, Inc. and, in connection with the 2011 redemption, an additional payable of $2,536 was recorded.  These payables, net of payments made to IBGH, are reported as Payable to Affiliate in the unaudited condensed consolidated statement of financial condition.

Amounts payable under the Tax Receivable Agreement are subject to repayment to IBG Holdings LLC annually upon the filing of IBG, Inc.’s federal income tax return.  The Company has paid IBG Holdings LLC a total of $38.8 million through September 30, 2011 pursuant to the terms of the Tax Receivable Agreement.

The remaining 15%, $57,117 and $448 at the IPO and in connection with the 2011 redemption, respectively, is accounted for as a permanent increase to additional paid-in capital in the unaudited condensed consolidated statement of financial condition.

Stock Repurchase Program

In September 2008, the Company’s Board of Directors approved the repurchase of up to eight (8) million shares of its Class A common stock by IBG LLC.  Shares may be purchased from time to time in the open market and in private transactions if the company deems the price appropriate.  In November 2008, 65,800 shares were repurchased at a cost of $866, and are being held as Treasury Stock.

Earnings Per Share
 
Basic earnings per share are calculated utilizing net income available for common stockholders divided by the weighted average number of shares of Class A and Class B common stock outstanding for that period:


      Three months ended   Nine months ended
      September 30,   September 30,
       
2011
   
2010
   
2011
   
2010
Basic earnings per share:
                     
                           
 
Net income available for common stockholders
$
             22,494
   $
              11,036
   $
              48,306
  $
              18,767
                           
 
Weighted average shares of common stock outstanding:
                 
 
 
Class A
 
         44,832,445
   
         42,222,349
   
         43,370,191
   
         41,750,873
   
Class B
 
                     100
   
                     100
   
                     100
   
                     100
       
         44,832,545
   
         42,222,449
   
         43,370,291
   
         41,750,973
                           
 
Basic earnings per share
 $
                  0.50
   $
                  0.26
   $
                  1.11
   $
                 0.45

Diluted earnings per share are calculated utilizing the Company’s basic net income available for common stockholders divided by diluted weighted average shares outstanding with no adjustments to net income available to common stockholders for potentially dilutive common shares:

 
17

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)



            Three months ended   Nine months ended
            September 30,   September 30,
             
2011
   
2010
   
2011
   
2010
Diluted earnings per share:
                       
 
Net income available for common stockholders - basic
  $
22,494
   $
              11,036
   $
              48,306
   $
              18,767
 
Adjustments for potentially dilutive common shares
   
                         -
   
                         -
   
                         -
   
                         -
                                 
 
Net income available for common stockholders
   $
              22,494
   $
              11,036
   $
              48,306
   $
              18,767
                                 
 
Weighted average shares of common stock outstanding:
                       
   
Class A:
                       
     
Issued and outstanding
   
         44,832,445
   
         42,222,349
   
         43,370,191
   
         41,750,873
     
Potentially dilutive common shares:
                       
       
Issuable pursuant to 2007 ROI Unit Stock Plan
   
              376,012
   
              562,350
   
              462,267
   
              650,334
   
Class B
   
                     100
   
                     100
   
                     100
   
                     100
             
         45,208,557
   
         42,784,799
   
         43,832,558
   
         42,401,307
                                 
 
Diluted earnings per share
   $
                  0.50
   $
                  0.26
   $
                  1.10
   $
                  0.44

Diluted earnings per share were impacted by a tax benefit that the Company recognized during preparation of the 2010 income tax returns.  In connection with the special dividend paid by our Swiss operating company in December 2010, we were able to capture additional foreign tax credits that resulted in an estimated $0.12 increase in diluted earnings per share, which is reported in the quarter ended September 30, 2011.

Member and Stockholder Dividends

In April, June and September 2011, IBG LLC paid dividends to its members totaling $157.5 million, of which IBG, Inc.’s proportionate share was $18.9 million. On July 28, 2011, the Company declared a quarterly cash dividend of $0.10 per share of Common Stock, totaling $4.5 million, which was paid on September 14, 2011 to shareholders of record as of September 1, 2011.  In addition, holders of unvested Class A shares received payments in lieu of the quarterly dividend totaling $0.6 million, recorded as compensation expense.  Total cash dividends and payments in lieu of dividends for the nine months ended September 30, 2011 were $8.9 million and $1.2 million, respectively.  The remainder of dividends received by the Company have been retained to fund its income tax liabilities.


 
18

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
 

5.  Comprehensive Income

Comprehensive income is comprised of Net Income and Other Comprehensive Income (“OCI”).  The Company’s OCI is comprised of foreign currency translation adjustments, which arise from changes in the U.S. Dollar value of the net worth of the Company’s international Operating Companies during respective reporting periods.  The following table presents Comprehensive Income, net of income taxes, and Earnings Per Share on Comprehensive Income:

    Three months ended   Nine months ended
    September 30,   September 30,
    2011   2010    
2011
     
2010
 
                               
Net income available for common stockholders
$
22,494
    $
              11,036
  $
              48,306
    $
              18,767
 
                               
Other comprehensive income:
                           
 
Cumulative translation adjustment, before income taxes
 
              (10,127
   
                17,441
   
                (2,055
   
                  9,449
 
 
Income taxes related to items of other comprehensive income
 
                (3,722
   
                  6,410
   
                   (755
   
                  3,473
 
Other comprehensive income (loss), net of tax
 
                (6,405
   
                11,031
   
                (1,300
   
                  5,976
 
                               
Comprehensive income available for common stockholders
$
16,089
    $
              22,067
  $
              47,006
     $
              24,743
 
                               
                               
Earnings per share on comprehensive income:
                           
 
Basic $
0.36
    $
                  0.52
  $
                 1.08
     $
                  0.59
 
 
Diluted
$
                 0.36
    $
                  0.52
   $
                  1.07
    $
                  0.58
 
                               
                               
Weighted average common shares outstanding:
                           
 
Basic
 
44,832,545
     
42,222,449
   
43,370,291
     
41,750,973
 
 
Diluted
 
45,208,557
     
42,784,799
   
43,832,558
     
42,401,307
 


 
19

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)

6.   Fair Value
 
         The following tables set forth, by level within the fair value hierarchy (Note 2), financial assets and liabilities, primarily financial instruments owned and financial instruments sold, but not yet purchased at fair value as of September 30, 2011 and December 31, 2010.  As required by ASC 820, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
 
 

    Financial Assets At Fair Value as of September 30, 2011
                         
     
Level 1
   
Level 2
   
Level 3
   
Total
                         
Securities segregated for regulatory purposes $
              747,726
   $
            439,998
  $
                       -
   $
      1,187,724
Financial instruments owned:                      
 
Stocks
 
             629,103
   
                         -
   
                         -
   
        629,103
 
Options
 
             6,313,050
      -       -    
        6,313,050
 
U.S. and foreign government obligations
 
                    6,383
      -       -    
               6,383
 
Warrants
 
                123,933
      -      -    
           123,933
 
Corporate and municipal bonds
 
                  32,442
   
                65,064
      -    
             97,506
 
Discount certificates
 
                  95,669
      -       -    
             95,669
 
Currency forward contracts
 
                           -
   
                  5,500
      -    
               5,500
     
             7,200,580
   
                70,564
   
                         -
   
        7,271,144
Financial instruments owned and pledged as collateral:                  
 
Stocks
 
                1,432,108
   
                         -
   
                         -
   
           1,432,108
 
U.S. and foreign government obligations
 
                181,607
   
                         -
   
                         -
   
           181,607
     
                1,613,715
   
                         -
   
                         -
   
           1,613,715
     
             8,814,295
   
                70,564
   
                         -
   
        8,884,859
Other assets:                      
 
Investments in common stock
 
                  20,405
   
                         -
   
                         -
   
             20,405
 
Other non-trading securities
 
                           -
   
                70,264
   
                         -
   
             70,264
     
                  20,405
   
                70,264
   
                         -
   
             90,669
                         
     $
           9,582,426
   $
            580,826
   $
                       -
   $
    10,163,252
                         
                         
     
Financial Liabilities At Fair Value as of September 30, 2011
                         
     
Level 1
   
Level 2
   
Level 3
   
Total
Financial instruments sold, not yet purchased:                      
 
Stocks
 $
           1,952,019
   $
                       -
  $
                       -
   $
      1,952,019
 
Options
 
             6,292,415
      -       -    
        6,292,415
 
U.S. and foreign government obligations
 
                       523
      -       -    
                  523
 
Warrants
 
                       433
      -       -    
                  433
 
Corporate bonds
 
                  59,872
   
                53,516
      -    
           113,388
 
Currency forward contracts
 
                           -
   
                  2,030
      -    
               2,030
    $
           8,305,262
   $
              55,546
   $
                       -
  $
      8,360,808
 
 
 
 
 
20

 
 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
 
     
Financial Assets At Fair Value as of December 31, 2010
                         
     
Level 1
   
Level 2
   
Level 3
   
Total
                         
Securities segregated for regulatory purposes $
              146,976
   $
            440,773
  $
                       -
  $
         587,749
 
Financial instruments owned:
                     
 
Stocks
 
             1,318,003
   
                         -
   
                         -
   
        1,318,003
 
Options
 
             3,893,695
   
                         -
      -    
        3,893,695
 
U.S. and foreign government obligations
 
                    8,408
      -       -    
               8,408
 
Warrants
 
                  85,740
      -       -    
             85,740
 
Corporate and municipal bonds
 
                  47,757
   
                48,895
      -    
             96,652
 
Discount certificates
 
                  18,217
      -       -    
             18,217
 
Currency forward contracts
 
                           -
   
                     214
      -    
                  214
     
             5,371,820
   
                49,109
   
                         -
   
        5,420,929
Financial instruments owned and pledged as collateral:                  
 
Stocks
 
             1,633,383
   
                         -
   
                         -
   
        1,633,383
 
U.S. and foreign government obligations
 
                368,105
   
                         -
   
                         -
   
           368,105
     
             2,001,488
   
                         -
   
                         -
   
        2,001,488
     
             7,373,308
   
                49,109
   
                         -
   
        7,422,417
                         
Other assets - investments in common stock  
                           -
   
                  2,239
   
                         -
   
               2,239
                         
    $
           7,520,284
   $
            492,121
   $
                       -
   $
      8,012,405
       
       
     
Financial Liabilities At Fair Value as of December 31, 2010
                         
     
Level 1
   
Level 2
   
Level 3
   
Total
Financial instruments sold, not yet purchased:                      
 
Stocks
$
           2,256,259
   $
                       -
  $
                       -
   $
      2,256,259
 
Options
 
             3,765,862
      -       -    
        3,765,862
 
Warrants
 
                         12
      -       -    
                    12
 
Corporate bonds
 
                  48,419
   
                50,734
      -    
             99,153
 
Currency forward contracts
 
                           -
   
                  3,938
      -    
               3,938
     $
           6,070,552
  $
              54,672
   $
                       -
  $
      6,125,224

7.   Collateralized Transactions

The Company enters into securities borrowing and lending transactions and agreements to repurchase and resell securities to finance trading inventory, to obtain securities for settlement and to earn residual interest rate spreads.  In addition, the Company’s customers pledge their securities owned to collateralize margin loans or lend fully-paid securities.  Under these transactions, the Company either receives or provides collateral, including equity, corporate debt and U.S. government securities.  Under many agreements, the Company is permitted to sell or repledge securities received as collateral and use these securities to secure repurchase agreements, enter into securities lending transactions or deliver these securities to counterparties to cover short positions.  At September 30, 2011 and December 31, 2010, the fair value of securities received as collateral where the Company is permitted to sell or repledge the securities was approximately $16.7 and $15.7 billion, respectively, of which $7.9 and $6.6 billion, respectively, had been repledged or resold, of which some were deposited in a separate bank account for the exclusive benefit of customers in accordance with SEC Rule 15c3-3.  The sources of collateral at September 30, 2011 and December 31, 2010 were: securities lending transactions and agreements to resell of $7.2 and $5.9 billion; and customer margin securities of $9.5 and $9.8 billion, respectively.

In the normal course of business, the Company pledges qualified securities with clearing organizations to satisfy daily margin and clearing fund requirements.  At September 30, 2011, substantially all government obligations owned were pledged to clearing organizations.

 
21

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)

 
Financial instruments owned and pledged, where the counterparty has the right to repledge, at September 30, 2011 and December 31, 2010 consisted of the following:

   
September 30,
   
December 31,
   
2011
   
2010
Stocks
$
                                          1,432,108
  $
         1,633,383
U.S. and foreign government obligations
 
            181,607
   
           368,105
  $
                                          1,613,715
  $
                                       2,001,488

The Company also engages in securities financing transactions with and for customers through margin lending.  Under these agreements and transactions, the Company either receives or provides collateral, including U.S. government securities, corporate debt and equity securities.  Customer receivables generated from margin lending activity are collateralized by customer-owned securities held by the Company.  Customers’ required margin levels and established credit limits are monitored continuously by risk management staff using automated systems.  Pursuant to Company policy and as enforced by such systems, customers are required to deposit additional collateral or reduce positions, when necessary to avoid automatic liquidation of positions.

Margin loans are extended on a demand basis and are not committed facilities.  Factors considered in the acceptance or rejection of margin loans are the amount of the loan, the degree of leverage being employed in the account and an overall evaluation of the portfolio to ensure proper diversification or, in the case of concentrated positions, appropriate liquidity of the underlying collateral.  Additionally, transactions relating to concentrated or restricted positions are limited or prohibited by raising the level of required margin collateral (to 100% in the extreme case).  Underlying collateral for margin loans is evaluated with respect to the liquidity of the collateral positions, valuation of securities, volatility analysis and an evaluation of industry concentrations.  Adherence to the Company’s collateral policies significantly limits the Company’s credit exposure to margin loans in the event of a customer’s default.  Under margin lending agreements, the Company may request additional margin collateral from customers and may sell securities that have not been paid for or purchase securities sold but not delivered from customers, if necessary.  At September 30, 2011 and December 31, 2010, there were approximately $6.8 billion and $7.0 billion, respectively, of customer margin loans outstanding.


8.   Senior Notes Payable

At September 30, 2011 and December 31, 2010, IBG LLC had $125,873 and $194,603, respectively, of senior notes outstanding. Senior notes issued during and subsequent to June 2011 have a 3% per annum interest rate. Of the senior notes outstanding at September 30, 2011 $40,136 were 5% notes and $85,737 were 3% notes. Of the senior notes outstanding at December 31, 2010 $46,918 were 7% notes and $147,685 were 5% notes.  All senior notes have either a 15-month or an 18-month maturity.  IBG LLC may, solely at its option, redeem the senior notes at any time on or after a specified date in the third month or the sixth month, respectively, after the date on which the senior notes are issued and sold (the “Optional Redemption Date”), at a redemption price equal to 100% of the principal amount of the senior notes to be redeemed plus accrued interest.

9. Senior Secured Revolving Credit Facility

On May 18, 2010, IBG LLC entered into a $100 million two-year senior secured revolving credit facility with Bank of America, N.A. as administrative agent and Citibank, N.A., as syndication agent.  IBG LLC is the sole borrower under this credit facility.  The facility’s interest rate is indexed to the overnight federal funds rate or to the LIBOR rate for the relevant term, at the borrower’s option, and is secured by a first priority interest in all of the capital stock of each entity owned directly by IBG LLC (subject to customary limitations with respect to foreign subsidiaries).  The facility may be used to finance working capital needs and general corporate purposes, including downstreaming funds to IBG LLC’s regulated broker-dealer subsidiaries as regulatory capital.  This allows IBG LLC to take advantage of market opportunities when they arise, while maintaining substantial excess regulatory capital.  The financial covenants contained in this credit facility are as follows:

 
·
minimum consolidated shareholders’ equity, as defined, of $3.625 billion, with quarterly increases equal to 25% of positive consolidated net income;

·      maximum total debt to capitalization ratio of 30%;

·      minimum liquidity ratio of 1.0 to 1.0; and

 
 
22

 
 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
 
·      maximum total debt to net regulatory capital ratio of 35%.
 
At maturity, subject to meeting certain terms of the facility, the Company will have an option to convert the facility to a one-year term loan.  At September 30, 2011, no borrowings were outstanding under this credit facility and IBG LLC was in compliance with all of the covenants.  This credit facility replaced a $100 million senior secured revolving credit facility that matured on May 19, 2010.
 

10.   Employee Incentive Plans

Return on Investment Dollar Units (“ROI Dollar Units”)
 
From 1998 through January 1, 2006, IBG LLC granted all non-member employees ROI Dollar Units, which are redeemable under the amended provisions of the plan, and in accordance with regulations issued by the Internal Revenue Service (Section 409A of the Internal Revenue Code).  Upon redemption, the grantee is entitled to accumulated earnings on the face value of the certificate, but not the actual face value.  For grants made in 1998 and 1999, grantees may redeem the ROI Dollar Units after vesting on the fifth anniversary of the date of their grant and prior to the tenth anniversary of the date of their grant.  For grants made between January 1, 2000 and January 1, 2005, grantees must elect to redeem the ROI Dollar Units upon the fifth, seventh or tenth anniversary date.  These ROI Dollar Units will vest upon the fifth anniversary of the date of their grant and will continue to accumulate earnings until the elected redemption date.  For grants made on or after January 1, 2006, all ROI Dollar Units shall vest on the fifth anniversary date of their grant and will be automatically redeemed.  Subsequent to the IPO, no additional ROI Dollar Units have been or will be granted, and non-cash compensation to employees will consist primarily of grants of shares of Common Stock as described below under “2007 Stock Incentive Plan.”
 
As of September 30, 2011 and December 31, 2010, payables to employees for ROI Dollar Units were $9,789 and $15,415, respectively.  Of these payable amounts, $-0- and $4,613 were vested as of September 30, 2011 and December 31, 2010, respectively.  These amounts are included in accounts payable, accrued expenses and other liabilities in the unaudited condensed consolidated statements of financial condition.  Compensation expense for the ROI Dollar Unit plan, included in the unaudited condensed consolidated statements of comprehensive income was $1,199 and $1,103 for the nine months ended September 30, 2011 and 2010, respectively.
 
2007 ROI Unit Stock Plan
 
In connection with the IPO, IBG, Inc. adopted the Interactive Brokers Group, Inc. 2007 ROI Unit Stock Plan (the “ROI Unit Stock Plan”).  Under this plan, certain employees of the Group who held ROI Dollar Units, at the employee’s option, elected to invest their ROI Dollar Unit accumulated earnings as of December 31, 2006 in shares of Common Stock.  An aggregate of 1,271,009 shares of Common Stock (consisting of 1,250,000 shares issued under the ROI Unit Stock Plan and 21,009 shares under the 2007 Stock Incentive Plan, as described below), with a fair value at the date of grant of $38,143, were issued to IBG LLC, to be held as Treasury stock, to be distributed to employees in accordance with the following schedule, subject to the conditions below:
 
 
·
10% on the date of the IPO (or on the first anniversary of the IPO, in the case of U.S. ROI Unit holders who made the above-referenced elections after December 31, 2006); and
 
 
·
an additional 15% on each of the first six anniversaries of the date of the IPO, assuming continued employment with IBG, Inc. and compliance with other applicable covenants.
 
Of the fair value at the date of grant, $17,806 represented the accumulated ROI Dollar Unit value elected to be invested by employees in Common Stock and such amount was accrued for as of December 31, 2006.  The remainder is being ratably accrued as compensation expense by the Company from the date of the IPO over the requisite service period represented by the aforementioned distribution schedule.  Compensation expense for the 2007 ROI Unit Stock Plan and related grants under the 2007 Stock Incentive Plan, net of the effect of forfeitures, included in the unaudited condensed consolidated statements of comprehensive income for the nine months ended September 30, 2011 and 2010 was $3,008 and $2,564, respectively.  Estimated future compensation costs for unvested awards at September 30, 2011 are $6.9 million.
 
2007 Stock Incentive Plan
 
                 Under the Interactive Brokers Group, Inc. 2007 Stock Incentive Plan (the “Stock Incentive Plan” or “SIP”), up to 20.0


 
23

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)

million shares of Common Stock may be granted and issued to directors, officers, employees, contractors and consultants of IBG, Inc. and its subsidiaries.  A 10.8 million share increase in shares allocated to the SIP, first reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, was approved by the Company’s Compensation Committee and Board of Directors in December 2010, and was approved by stockholders at the Company’s April 2011 annual meeting.  The purpose of the Stock Incentive Plan is to promote IBG, Inc.’s long-term financial success by attracting, retaining and rewarding eligible participants.
 
The Stock Incentive Plan is administered by the Compensation Committee of IBG, Inc.’s Board of Directors.  The Compensation Committee has discretionary authority to determine which employees are eligible to participate in the Stock Incentive Plan and establishes the terms and conditions of the awards, including the number of awards granted to each employee and all other terms and conditions applicable to such awards in individual grant agreements.  Awards are expected to be made primarily through grants of Common Stock.  Stock Incentive Plan awards are subject to issuance over time and may be forfeited upon an employee’s termination of employment or violation of certain applicable covenants prior to issuance, unless determined otherwise by the Compensation Committee.
 
The Stock Incentive Plan provides that, upon a change in control, the Compensation Committee may, at its discretion, fully vest any granted but unissued shares of Common Stock awarded under the Stock Incentive Plan, or provide that any such granted but unissued shares of Common Stock will be honored or assumed, or new rights substituted therefore by the new employer on a substantially similar basis and on terms and conditions substantially comparable to those of the Stock Incentive Plan.
 
IBG, Inc. granted awards of Common Stock in connection with the IPO and is expected to continue to grant awards on or about December 31 of each year following the IPO, to eligible employees as part of an overall plan of equity compensation.  Shares of Common Stock granted are issued to IBG LLC, to be held as Treasury Stock, and are distributable to employees in accordance with the following schedule:
 
 
·
10% on the first vesting date, which approximates the anniversary of the IPO; and
 
 
·
an additional 15% on each of the following six anniversaries of the first vesting, assuming continued employment with IBG, Inc. and compliance with non-competition and other applicable covenants.
 
Shares granted to directors vest, and are distributed, over a five-year period (20% per year) commencing one year after the date of grant.

Stock Incentive Plan share grants (excluding 21,009 shares issued pursuant to the 2007 ROI Unit Stock Plan above) and the related fair values at the date of grant were:
 
     
     
      Fair Value at
      Date of Grant
  Shares   ($000's)
In connection with IPO
                927,943
 
$             27,847
July 31, 2007
 16,665    404
December 31, 2007
                1,055,206
 
32,876
December 31, 2008
 2,065,432    35,600
December 31, 2009
                2,448,031
 
42,796
December 31, 2010
            2,513,738
 
43,255
 
9,027,015
  $           182,778
 


 
24

 

Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
 
Total share distributions under the SIP and ROI Unit Stock Plan have been as follows:



     
 
 
 Shares sold by
          employees to
      Fair Value at   meet
      Date of Grant   withholding
  Total Shares   ($000's)   obligations
In connection with IPO
                189,617
 
$               5,681
 
45,857
2008
                458,655
 
                  13,881
 
               121,852
2009
                680,164
 
                  17,898
 
               175,362
2010
             1,014,772
 
                  23,742
 
               265,971
2011
             1,353,910
 
                  29,498
 
               370,310


The following is a summary of Stock Plan activity for the period from January 1, 2011 through September 30, 2011:
 

 
Shares
 
2007 Stock
   
2007 ROI Unit
 
 
Incentive Plan
   
Stock Plan
 
           
Balance, December 31, 2010
             7,263,140
   
                 544,613
 
           
Granted
                            -
   
                            -
 
Forfeited
                (88,275
 
                      (764
Distributed
           (1,167,482
 
               (186,428
Balance, September 30, 2011
             6,007,383
   
                 357,421
 

Estimated future grants under the Stock Incentive Plan are being accrued for ratably during each year under the ASC 718 “Graded Vesting” method.  Compensation expense recognized in the unaudited condensed consolidated statements of comprehensive income for the nine months ended September 30, 2011 and 2010, was $27,978 and $27,621, respectively.  Estimated future compensation costs for unvested awards at September 30, 2011 are $47.1 million.

Shares granted under the 2007 ROI Unit Stock Plan and the Stock Incentive Plan are subject to forfeiture in the event an employee ceases employment with the Company.  The plans provide that employees who discontinue employment with the Company without cause and continue to meet the terms of the plans’ post-employment provisions will forfeit 50% of unvested previously granted shares unless the employee is over the age of 59, in which case the employee would be eligible to receive 100% of unvested shares previously granted.  Distributions of remaining shares to former employees will occur annually following the discontinuation of employment over a five (5) year vesting schedule, 12.5% in each of the first four years and 50% in the fifth year.  Through September 30, 2011, a total of 14,651 shares have been distributed under these post-employment provisions.  These distributions are included in the Stock Plans activity tables above.
 
11.   Commitments, Contingencies and Guarantees
 
Litigation

The Company is subject to certain pending and threatened legal actions which arise out of the normal course of business. Litigation is inherently unpredictable, particularly in proceedings where claimants seek substantial or indeterminate damages, or which are in their early stages.  IBG, Inc. cannot predict with certainty the actual loss or range of loss related to such legal proceedings, the manner in which they will be resolved, the timing of final resolution or the ultimate settlement.  Consequently, IBG, Inc. cannot estimate losses or ranges of losses related to such legal matters, even in instances where it is reasonably possible that a future loss will be incurred.  Although the results of legal actions cannot be predicted with certainty, it is the opinion of management that the resolution of these actions is not expected to have a material adverse effect, if any, on our business or financial condition, but may have a material impact on the results of operations for a given period.

    On February 3, 2010, Trading Technologies International, Inc. ("Trading Technologies") filed a complaint in the United


 
25

 
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)

 
States District Court for the Northern District of Illinois, Eastern Division, against Interactive Brokers Group, Inc., IBG LLC, IBG Holdings LLC, and Interactive Brokers LLC.  Thereafter, Trading Technologies dismissed Interactive Brokers Group, Inc. and IBG Holdings LLC from the case, leaving only IBG LLC and Interactive Brokers LLC as defendants ("Defendants").  The operative complaint, as amended, alleges that the Defendants have infringed and continue to infringe twelve U.S. patents held by Trading Technologies.  Trading Technologies is seeking, among other things, unspecified damages and injunctive relief.  The case is in the pleadings stage.  While it is too early to predict the outcome of the matter, we believe we have meritorious defenses to the allegations made in the complaint and intend to defend ourselves vigorously against them.  However, litigation is inherently uncertain and there can be no guarantee that the Company will prevail or that the litigation can be settled on favorable terms.

IBG, Inc. accounts for potential losses related to litigation in accordance with ASC 450, Contingencies.  As of September 30, 2011 and December 31, 2010, reserves provided for potential losses related to litigation matters were not material.
 
Guarantees

Certain of the Operating Companies provide guarantees to securities clearing houses and exchanges which meet the accounting definition of a guarantee under ASC 460, Guarantees.  Under the standard membership agreement, members are required to guarantee collectively the performance of other members.  Under the agreements, if another member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet shortfalls.  In the opinion of management, the Operating Companies’ liability under these arrangements is not quantifiable and could exceed the cash and securities they have posted as collateral.  However, the potential for these Operating Companies to be required to make payments under these arrangements is remote.  Accordingly, no contingent liability is carried in the unaudited condensed consolidated statements of financial condition for these arrangements.
 
In connection with its retail brokerage business, IB LLC performs securities and commodities execution, clearance and settlement on behalf of its customers for whom it commits to settle trades submitted by such customers with the respective clearing houses.  If a customer fails to fulfill its obligation, IB LLC must fulfill the customer’s obligation with the trade counterparty.  No contingent liability is carried on the unaudited condensed consolidated statements of financial condition for such customer obligations.
 
Other Commitments
 
Certain clearing houses and clearing banks and firms used by certain Operating Companies are given a security interest in certain assets of those Operating Companies held by those clearing organizations.  These assets may be applied to satisfy the obligations of those Operating Companies to the respective clearing organizations.


12.   Segment and Geographic Information
 
IBG, Inc. operates in two business segments, market making and electronic brokerage.  The Company conducts its market making business principally through its Timber Hill subsidiaries on the world’s leading exchanges and market centers, primarily in exchange-traded equities, equity options and equity-index options and futures.  IBG, Inc. conducts its electronic brokerage business through its Interactive Brokers subsidiaries, which provide electronic execution and clearing services to customers worldwide.
 
There are significant transactions and balances between the Operating Companies, primarily as a result of certain Operating Companies holding exchange or clearing organization memberships, which are utilized to provide execution and clearing services to affiliates. Charges for transactions between segments are designed to approximate full costs.  Intra-segment and intra-region income and expenses and related balances have been eliminated in this segment and geographic information to accurately reflect the external business conducted