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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2011
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number: 000-51103
GFI Group Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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80-0006224
(I.R.S. Employer
Identification No.)
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55 Water Street, New York, NY
(Address of principal executive offices)
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10041
(Zip Code)
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(212) 968-4100
(Registrant's telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, $0.01 par value per share
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New York Stock Exchange Euronext
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes
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No
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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
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a
smaller reporting company)
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Smaller reporting company
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
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No
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As of June 30, 2011, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was $320,839,407 based
upon the closing sale price of $4.59 as reported on the New York Stock Exchange Euronext.
Indicate
the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
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Class
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Outstanding at February 29, 2012
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Common Stock, $0.01 par value per share
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118,182,530 shares
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 2012 Annual Meeting of Stockholders, to be held on June 7, 2012, are incorporated by
reference in Part III in this Annual Report on Form 10-K.
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FORWARD-LOOKING STATEMENTS
Sections of this Annual Report on Form 10-K, including, but not limited to "Legal Proceedings" under
Part IItem 3, "Management's Discussion & Analysis" and "Quantitative and Qualitative Disclosures About Market Risk" under
Part IIItem 7 & 7A, may contain "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements
include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate," "intend," "project," "will be," "will likely continue," "will likely result," or words or phrases of similar meaning. These forward-looking statements are based largely on the expectations
of management and are subject to a number of risks and uncertainties including, but not limited to, the following:
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the risks and other factors described under the heading "Risk Factors" in Part IItem 1A of this
Annual Report on Form 10-K and elsewhere in the Annual Report on Form 10-K;
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economic, political and market factors affecting trading volumes, securities prices, or demand for our brokerage services,
including recent conditions in the world economy and financial markets in which we provide our services;
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the extensive regulation of the Company's business, changes in laws and regulations governing our business and operations
or permissible activities and our ability to comply with such laws and regulations;
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our ability to obtain and maintain regulatory approval to conduct our business in light of certain proposed changes in
laws and regulations in the U.S. and Europe and increased operational costs related to compliance with such changes in laws and regulations;
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our ability to attract and retain key personnel, including highly qualified brokerage personnel;
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our entrance into new brokerage markets, including investments in establishing new brokerage desks;
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competition from current and new competitors;
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risks associated with our matched principal and principal trading businesses, including risks arising from specific
brokerage transactions, or series of brokerage transactions, such as credit risk, market risk or the risk of fraud or unauthorized trading;
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our ability to keep up with rapid technological change and to continue to develop and support our electronic brokerage
systems in a cost-effective manner;
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financial difficulties experienced by our customers or key participants in the markets in which we focus our brokerage
services;
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our ability to assess and integrate acquisitions of businesses or technologies;
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the maturing of key markets and any resulting contraction in commissions;
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risks associated with the expansion and growth of our operations generally or of specific products or services, including,
in particular, our ability to manage our international operations;
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uncertainties associated with currency fluctuations;
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our failure to protect or enforce our intellectual property rights;
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uncertainties relating to litigation;
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liquidity and clearing capital requirements and the impact of the conditions in the world economy and the financial
markets in which we provide our services on the availability and terms of additional or future capital;
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our ability to identify and remediate any material weakness in our internal controls that could affect our ability to
prepare financial statements and reports in a timely manner;
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the effectiveness of our risk management policies and procedures and the impact of unexpected market moves and similar
events;
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future results of operations and financial condition; and
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the success of our business strategies.
The
foregoing risks and uncertainties, as well as those risks discussed under the headings "Item 7Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Item 7AQuantitative and Qualitative Disclosures About Market Risk" and elsewhere in this Annual Report on Form 10-K, may cause actual
results to differ materially from such forward-looking statements. The information included herein is given as of the filing date of this Annual Report on Form 10-K with the
Securities Exchange Commission (the "SEC") and future events or circumstances could differ significantly from these forward-looking statements. The Company does not undertake to publicly update or
revise any forward-looking statements, whether as a result of new information, future events or otherwise.
WHERE YOU CAN FIND MORE INFORMATION.
Our Internet website address is
www.gfigroup.com
. Through our Internet website, we make
available, free of charge, the following reports as soon as reasonably practicable after electronically filing them with, or furnishing them to, the SEC: our Annual Reports on
Form 10-K; our Quarterly Reports on Form 10-Q; and our Current
Reports on Form 8-K; our proxy statements on Schedule 14A, Forms 3, 4 and 5 filed on behalf of directors and executive officers; and amendments to those reports filed
or furnished pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act").
In
addition, you may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F. Street, N.E., Room 1580, Washington D.C. 20549. You
also may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that
contains our reports, proxy and information statements, and other information regarding the Company that we file electronically with the SEC at
http://www.sec.gov
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Information
relating to our corporate governance is also available on our website, including information concerning our directors, board committees and committee charters, our Code of
Business Conduct and Ethics for all employees and for senior financial officers and our compliance procedures for accounting and auditing matters. In addition, the Investor Relations page of our
website includes supplemental financial information that we make available from time to time.
Our
Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
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PART I.
ITEM 1. BUSINESS
Throughout this Annual Report, unless the context otherwise requires, the terms "GFI", "Company", "we", "us"
and "our" refer to GFI Group Inc. and its consolidated subsidiaries.
Our Business
Introduction
We are a leading provider of wholesale brokerage services, clearing services and electronic execution and trading support products for
global financial markets. We founded our business in 1987 and were incorporated under the laws of the State of Delaware in 2001 to be a holding company for our subsidiaries. We provide brokerage and
trade execution services, clearing services, market data and trading platform and other software products to institutional customers in markets for a range of fixed income, financial, equity and
commodity instruments. We provide execution services for our institutional wholesale customers by either matching their trading needs with counterparties having reciprocal interests or directing their
orders to an exchange or other trading venue. We have focused historically on more complex, and often less commoditized, markets for sophisticated financial instruments, primarily
over-the-counter ("OTC") derivatives, that offer an opportunity for higher commissions per transaction than the markets for more standardized financial instruments. In recent
years, we have developed other businesses that complement our brokerage of OTC derivatives, such as cash equity and cash bond brokerage services, clearing services, market data and analytics and
trading software businesses. We have been recognized by various industry publications as a leading provider of institutional brokerage and other services for a broad range of products in the fixed
income, financial, equity and commodity markets on which we focus.
We
offer our customers a hybrid brokerage approach, combining a range of telephonic and electronic trade execution services, depending on the nature of the products and the specific
needs of our customers. We complement our hybrid brokerage capabilities with decision support services, such as value-added data and analytics products, real-time auctions, fixing and
matching sessions and post-transaction services, such as straight-through processing ("STP"), clearing links and trade and portfolio management services.
During
2011, many of the financial markets in which we provide our services continued to be subject to major regulatory overhaul, as regulators and legislators in the United States and
abroad have proposed and, in some instances, already adopted, a slate of regulatory changes that call for, among other things, central clearing of certain derivatives, greater transparency and
reporting of derivatives transactions, mandatory trading of certain derivatives transactions on regulated exchanges or swap execution facilities
and the required or increased use of electronic trading system technologies. In the United States, The Dodd-Frank Wall Street Reform and Consumer Protection Act (the
"Dodd-Frank Act") was signed into law in July 2010. We are still in the midst of the rulemaking process mandated by the Dodd-Frank Act, with many rules yet to be finalized. The
Dodd-Frank Act creates a new form of regulated entity known as a Swap Execution Facility (referred to herein as a "SEF") and mandates that all cleared swaps trade on either an exchange or
a SEF. We intend to apply to become a SEF and this process, including the regulatory implications and risks associated with it, are discussed throughout this Form 10-K, including
under the heading "Recent Derivative Market Developments" below and under "Item 1ARisk Factors."
At
December 31, 2011, we employed 1,271 brokerage personnel (consisting of 1,035 brokers and 236 trainees and clerks). We serve over 2,600 brokerage, software, analytics and
market data customers, including leading commercial and investment banks, corporations, insurance companies, asset managers and hedge funds, through our principal offices in New York, London, Paris,
Nyon, Hong Kong, Seoul,
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Tokyo,
Singapore, Sydney, Cape Town, Santiago, Bogota, Dubai, Dublin, Tel Aviv, Los Angeles, and Sugar Land (TX).
Based
on the nature of our operations in each geographic region, our products and services, customers and regulatory environment, we have four operating segments: Americas Brokerage;
Europe, the Middle East and Africa ("EMEA") Brokerage; Asia Brokerage and Clearing and Backed Trading. Our brokerage operations provide brokerage services in four broad product categories: fixed
income, financial, equity and commodity. Our Clearing and Backed Trading segment encompasses our clearing, risk management, settlement and other back-office services, as well as capital to
start-up trading groups, small hedge funds, market-makers and individual traders. We also have an All Other segment, which captures revenues and costs that are not directly assignable to
one of the other operating business segments, primarily consisting of our corporate business activities and operations and commercial revenues from sales and licensing of trading systems software,
analytics and market data. See Note 21 to our Consolidated Financial Statements in Part II-Item 8 for further information on our revenues by segment and geographic
region.
Our Industry
Wholesale brokers (sometimes called "inter-dealer" brokers), such as us, operate as intermediaries in the center of the wholesale
financial markets by aggregating and disseminating prices and fostering transactional liquidity for financial institutions around the globe. Wholesale brokers provide highly sophisticated trade
execution services, combining teams of traditional "voice" brokers with sophisticated electronic trading systems that match institutional buyers and sellers in transactions for financial products that
are listed on traditional exchanges or transacted over-the-counter. We refer to this integration of voice brokers with electronic brokerage systems as 'hybrid brokerage'.
Although wholesale brokers may provide their institutional customers with access to traditional exchange products through their many STP links and electronic connections to exchanges and clearing
firms, wholesale brokers do not generally provide independent clearing and settlement services.
Wholesale
market trading institutions, such as major banks, investment banks, asset managers and broker-dealer firms, have long utilized the services of wholesale brokers to help them
identify complementary trading parties for transactions in a broad range of equity, fixed income, financial and commodity products across the globe. These major trading firms pay brokerage commissions
to wholesale brokers in return for timely and valuable pricing information, strong execution capabilities and access to deep pools of trading liquidity for both exchange-traded and OTC products.
Exchange traded markets and OTC markets have generally developed and grown in parallel to each other as trading efficiencies have
increased with the help of pre-trade data and analytics, trading software and automated post-trade processing and clearing services. The relationship between exchange-traded
and OTC markets generally has been complementary as each market typically provides unique services to different trading constituencies for products with distinctive characteristics and liquidity
needs. Increasingly, wholesale brokers cross exchange-traded products in the OTC market or direct customer orders to an appropriate exchange or other electronic trading venue for execution.
Additionally, transactions executed OTC by wholesale brokers are often exchanged for an exchange-traded instrument after the initial OTC trade takes place.
Traditional
stock exchanges, such as NYSE Euronext, NASDAQ OMX and the London Stock Exchange, and listed derivatives exchanges, such as CME Group and Eurex, provide a trading venue for
fairly simple and commoditized instruments that are based on standard characteristics and single key measures or parameters. Exchange-traded markets rely on relatively active order submission by
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buyers
and sellers and generally high transaction flow. These markets allow a broad base of trading customers meeting relatively modest margin requirements to transact standardized contracts in a
relatively liquid market. Exchanges offer price transparency and transactional liquidity. Exchanges are often associated or tied to use of a central counterparty clearer ("CCP"), thereby providing a
ready utility for controlling counterparty credit risk.
In
comparison, OTC markets provide wholesale dealers and other large institutional traders with access to trading environments for individually negotiated transactions,
non-standardized products and larger-sized orders of both OTC and exchange cleared instruments. OTC markets generally serve counterparties that are professional trading institutions and
wholesale dealers. These professional counterparties often have in place bilateral arrangements to offset their contingent credit risk on each other by giving or taking collateral against that risk.
In some of the more significant OTC asset classes, such as U.S. treasury securities, equities, and equity and commodity derivatives, OTC trades are either "given up" to a third-party CCP, underwritten
by a clearing house or exchanged for exchange-traded instruments.
The
existence of both exchange-traded and OTC markets provides benefits for different sectors of the global financial marketplace. Exchange-traded markets serve the needs of both major
and minor market participants for access to frequently traded, highly commoditized instruments. OTC markets, on the other hand, provide professional market participants and wholesale dealers with an
arena in which to execute larger-sized transactions in a broad range of non-standardized and standardized products that are less actively traded and, often, individually negotiated. OTC
markets are also conducive for trading large "block" transactions of actively traded standardized and centrally cleared instruments. Last, OTC markets often serve as incubators for new financial
products that originate as relatively inactively traded OTC products before achieving a significant level of trading activity among a broader spectrum of investors.
As
a result of the new regulations being passed in the United States and Europe and considered elsewhere, certain OTC derivative products will be required to be centrally cleared and
traded via exchanges or SEFs. As this happens, it is expected that the OTC markets for certain products will diminish and the associated exchange and SEF markets for those products will expand. We are
actively preparing to serve the resulting SEF markets. It is unclear what impact this transition will have on the relevant markets or on the demand for brokerage and trade execution services in these
markets. For further information, see the discussion under "Recent Derivative Market Developments" below and "Item 1ARisk Factors."
On most business days around the globe, wholesale brokers and other market intermediaries facilitate the execution of millions of
sophisticated transactions, either on exchanges or OTC, involving trillions of dollars of securities, commodities, currencies and derivative instruments. These products range from standardized
financial instruments, such as common equity securities, futures contracts and standardized OTC derivative contracts, to more complex, less standardized instruments, such as
non-standardized OTC derivatives, that are typically traded between wholesale dealers, money center banks, asset managers and hedge funds. Wholesale brokers serve professional traders in
these markets by assisting in market price discovery, fostering trading liquidity, preserving pre-trade anonymity, providing market intelligence and, ultimately, matching counterparties
with reciprocal interests or directing their orders to an exchange or other electronic trading venue.
The
essential role of a wholesale broker is to enhance trading liquidity. Liquidity is the degree to which a financial instrument can be bought or sold quickly with minimal price
disturbance. The liquidity of a market for a particular financial product or instrument depends on several factors, including: the number of market participants and facilitators of liquidity, the
availability of pricing
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reference
data, the availability of standardized terms and the volume of trading activity. Liquid markets are characterized by substantial price competition, efficient execution and high trading
volume. Highly liquid markets exist for both commoditized, exchange-traded products and certain, more standardized instruments traded over the counter, such as the market for U.S. treasury securities,
equities and equity and commodity derivatives. In such highly liquid markets, the services of wholesale brokers assist market participants achieve better execution or pricing, especially for larger
transactions that may be privately negotiated.
In
contrast to the highly liquid markets for more commoditized instruments, less commoditized financial instruments and less liquid standardized transactions, such as high yield debt and
derivatives with longer maturities, are generally traded over the counter in markets with variable or non-continuous liquidity. In such markets, a wholesale broker can enhance the
efficient execution of a trade by applying its market knowledge to locate bids and offers and aggregate pools of liquidity in which such professional traders and dealers may meet counterparties with
which to trade. A wholesale broker ordinarily accomplishes this by contacting potential counterparties directly by telephone or electronic messaging and, in an increasing number of cases, via
proprietary trading systems provided by the broker through which market participants may post prices and execute transactions. Additionally, in a relatively less liquid market with fewer participants,
disclosure of the intention of a participant to buy or sell could disrupt the market and lead to poor pricing. By using a
broker, the identities of the transaction parties are often not disclosed until the trade is consummated. In this way, market participants better preserve their anonymity. For all these reasons, in
relatively less liquid markets for non-commoditized products, a wholesale broker can provide professional traders and dealers with crucial liquidity enhancement through
in-depth market knowledge, access to a range of potential counterparties and singular focus and attention on efficient execution.
Wholesale
brokers generally provide brokerage or execution services on either an agency (often called "name give-up") or matched principal (often called "riskless principal")
basis. In an agency transaction, which is the conventional method of brokerage for OTC derivatives, we simply match a buyer and a seller and do not take title to or hold a position in the derivative
instrument, or the underlying security, instrument or asset, at any stage of the process. In a matched principal transaction, which is a conventional method of brokerage for cash products, such as
equities and corporate fixed income, we are the counterparty to both sides of the transaction and the trade is settled through a third-party clearing organization. Third party clearing organizations
are able to reduce our counterparty risk by matching the trade and assuming the legal counterparty risk for the trade. In some cases, principally in the OTC cash markets, a wholesale broker may
temporarily take unmatched positions for its own account, generally in response to customer demand, or enter into principal investing transactions in which the broker commits its own capital to
facilitate customer trading activities.
Generally, as a market for a particular financial instrument develops and matures, more buyers and sellers enter the market, generating
more transactions and pricing information. In addition, the terms of such financial instruments tend to become more standardized, generally resulting in a more liquid market. In this way, a relatively
illiquid market for an instrument may evolve over a period of time into a more liquid market. As this evolution occurs, the characteristics of trading, the preferred mode of execution and the size of
commissions that wholesale brokers charge may also change. In some cases, as the market matures, a wholesale broker may provide a client with an electronic screen or system that displays the most
current pricing information. In addition, a market may have some characteristics of both more liquid and less liquid markets, requiring a wholesale broker to offer integrated telephonic and electronic
brokering. We refer to this integrated service as hybrid brokerage. Hybrid brokerage may range from coupling traditional voice brokerage services with various electronic
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enhancements,
such as electronic communications, price discovery tools and automated order entry, to full electronic execution supported by telephonic communication between the broker and its
customers.
For
highly liquid OTC markets, such as certain U.S. Treasury and cash foreign exchange products, electronic marketplaces have emerged as the primary means of conducting transactions and
creating markets. In such electronic markets, many of the pre- and post-trade activities of market participants are facilitated through an electronic medium, such as a private
electronic network or over the Internet. These electronic capabilities reduce the need for actual voice-to-voice participant interaction for certain functions, such as
negotiation of specific terms, and allow voice brokers to focus on executing larger-sized or "block" trades, providing market intelligence and otherwise assisting in the execution process. For many
professional traders, the establishment of electronic marketplaces has increased trading profits by leading to new trading methods and strategies, fostering new financial products and increasing
market volumes.
Most
large exchanges worldwide, including certain exchanges in the United States, France, Canada, Germany, Japan, Sweden, Switzerland and the United Kingdom, are now partially or
completely electronic. Additionally, in an increasing number of OTC markets for less commoditized products, a voice broker will often assist the customer by entering the customer's prices directly
into the wholesale broker's electronic trading systems at the request of the customer so that any resulting trades can be electronically processed using STP. In many of these markets, customers may
benefit from a range of electronic enhancements to liquidity, including pricing dissemination, interactive trading, post-trade processing and other technology services. As these OTC
markets have adopted greater use of technology, some market participants have sought to outsource the electronic distribution of their products and prices to qualified wholesale brokers in order to
achieve optimal liquidity and to avoid the difficulty and cost of developing and maintaining their own electronic solutions.
Cash, or spot markets, exist across the fixed income, financial, equity and commodity product spectrum. The cash or spot markets are
also known as physical markets, because prices are settled in cash on the spot at current market prices, as opposed to forward prices. A cash market may be a self-regulated centralized
market, such as an equity or commodity exchange, or a decentralized OTC market where private transactions occur. The cash markets are often highly liquid, commoditized markets. Wholesale brokers, such
as us, provide value in these markets through the capacity to source liquidity from other market participants and efficiently transact large positions through their access to exchanges, electronic
communications networks and other trading counterparties and platforms with minimal price movement. Wholesale brokers may also provide traders in these markets with critical market information and
analysis.
Cash
markets for equities, commodities and debt securities exist on both exchanges and in the OTC markets, while cash foreign exchange products are traded principally in the OTC markets.
In cash transactions, market participants generally seek to purchase or sell a specified amount of securities, commodities or currencies at a specified price for cash, with settlement occurring within
a few days
after the trade is executed. In certain cash OTC transactions, the broker executes the transaction and the transaction is then cleared by a third- party clearinghouse on behalf of the parties to the
trade. The clearing process reduces the counterparty risk inherent in a bilateral OTC transaction as the clearinghouse becomes the buyer and seller in the transaction, thereby guaranteeing the trade.
For this service, the clearinghouse imposes margin requirements and charges a fee. When we execute transactions for certain cash products, our customers may have their own relationship with a CCP,
either directly or through a third party clearing firm or prime broker. In these cases, our customers are responsible for the margin payments and other CCP fees. Once we execute the transaction, our
role is to collect a commission and step out of the trade. However, in most cleared markets, including in equities and cash fixed income, we remain the counterparty until the trade is settled. We
believe that central counterparty clearing will play an increasing role in the future of both the cash and derivative OTC markets.
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Derivatives are widely used to manage risk or take advantage of an anticipated direction of a market by allowing holders to guard
against gains or declines in the price of underlying financial assets, indices or other investments without having to buy or sell such underlying assets, indices or other investments. Derivatives
derive their value from the underlying asset, index or other investment that may be, among other things, a physical commodity, an interest rate, a stock, a bond, an index or a currency. Derivatives
enable mitigation of risks associated with interest rate movements, equity ownership, changes in the value of foreign currency, credit defaults by large corporate and sovereign debtors and changes in
the prices of commodity products.
Historically,
the lower capital utilization of derivatives made these products a more efficient and attractive medium for trading than cash markets for many professional market
participants. For this reason, trading volumes in derivatives were frequently a multiple of volumes in the equivalent underlying cash markets. However, with the passage of the Dodd-Frank
Act and other regulations abroad, regulators are likely to increase the net capital requirements or require additional dedicated collateral to support the trading of many derivative products, which
may impact trading volumes for the affected derivatives.
Derivatives
may be exchange-traded or traded in the OTC market. Exchange-traded derivatives, including "options" and "futures," are highly commoditized instruments featuring standardized
terms, including delivery places and dates, volume, technical specifications, and trading and credit procedures. Exchange-traded derivatives are generally cleared through a CCP. Wholesale brokers,
like us, often match exchange-traded derivatives as OTC transactions and the trades are then either exchanged for exchange-traded instruments, such as a futures contract, or "given up" to an exchange,
other third-party CCP or futures clearing merchant ("FCM") for clearing. We have relationships with FCMs through which we are able to give up our customer's exchange-traded futures and options
for clearing and settlement. On a limited number of our desks focusing on exchange-traded or OTC derivatives, we act as principal and our FCM acts as our clearing agent. In these cases, we are
responsible for providing the required collateral and margin payments.
OTC
derivatives, on the other hand, are bilateral, privately-negotiated agreements that range from highly customizable derivatives with long maturities structured for a user's specific
needs to very liquid, highly standardized derivatives with shorter maturities. OTC derivatives are generally structured as forwards, swaps or options. A forward is an agreement between two parties to
exchange assets or cash flows at a specified future date at a price agreed on the trade date. A swap is an agreement between two parties to exchange cash flows or other assets or liabilities at
specified payment dates during the agreed-upon life of the contract. An option is an agreement that gives the buyer the right, but not the obligation, to buy or sell a specified amount of
an underlying asset or security at an agreed upon price on, or until, the expiration of the contract. Forwards have many of the same characteristics as exchange-traded futures and options. OTC
derivative transactions can be hedged and arbitraged against both cash and related exchange-traded instruments and vice versa. However, a party generally cannot offset a position resulting from an OTC
derivative against margin deposits or collateral held by an exchange. Currently, swaps tend to be traded primarily OTC, but are increasingly being cleared by CCPs. In the future, many of these cleared
swaps in the U.S. will be required to be executed on an exchange or through a SEF.
OTC
derivatives provide investors and corporations with a wide variety of structures to address specific risk mitigation and trading strategies. In its 2011 annual survey, Risk magazine
identified 97 categories across interest rates, foreign exchange, fixed income and equity derivatives. As a result, corporations and other investors are able to offset unique types of business risks
that cannot be mitigated using standardized, exchange-traded derivatives. Indeed, while many large corporations hedge some risks using the relatively limited set of exchange-traded derivatives, such
as futures, they often
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rely
on the wide range of customizable OTC derivatives to hedge those risks for which there is no close match available on organized exchanges. Such specific hedging also allows such end users to
satisfy hedge accounting requirements.
The
number of different derivative instruments has grown as companies and financial institutions have developed new and innovative derivative instruments to meet industry demands for
sophisticated risk management and complex financial arbitrage. Novel derivative instruments often have distinct terms and little or no trading history with which to estimate a price. Markets for new
derivative instruments therefore require reliable market data, market intelligence and pricing tools, as well as the services of highly skilled and well-informed brokers.
The
OTC derivatives markets are currently far larger than the exchange-traded derivatives markets. According to a recent report from the Bank for International Settlements (the "BIS"),
OTC derivatives accounted for approximately 90% of the total outstanding global derivatives transactions, as of June 2011 (as measured by notional amount), with the remainder being exchange-traded
derivatives. OTC derivatives markets generally feature lower and more episodic liquidity than exchange-traded derivatives markets. In these large, variably liquid OTC derivatives markets, wholesale
brokers provide an essential service of liquidity aggregation and anonymous, efficient execution.
According to the BIS, the size of the global OTC derivative markets, as measured by notional amount outstanding, rose by 17.7%
sequentially to $707.6 trillion in the first half of 2011 from $601.0 trillion in the second half of 2010, and 21.4% year-over-year from $582.7 trillion in the first half of
2010. This compares to growth rates of 9.6% and 21.6% sequentially and year-over-year, respectively, for notional amounts outstanding in the exchange traded derivative markets
over the same periods. OTC Interest rate and foreign exchange notional amounts outstanding grew 22.6% and 21.7%, respectively, year-over-year while credit default swaps grew at
a lower rate of 7.1%. The interest rate and foreign exchange growth comes largely from currency swaps and interest rate swaps, respectively, while the growth rate in the notional amount of credit
default swaps outstanding was accelerated by growth in multi-name (index) products.
The
2011 BIS statistics indicate the first significant growth in the OTC derivative markets since the global financial crisis started in 2008. The compound annual growth rates in OTC and
exchange-traded notional amounts outstanding over the two year period ended December 31, 2010 were 0.2% and 8.5%, respectively, compared to compound annual growth rates of 24.9% and 9.5%,
respectively, over the five years ended December 31, 2008. Following the financial crisis in 2008, OTC derivative growth had lagged that of exchange-traded products due to (i) a shift in
market preference towards standardized, cleared or shorter dated products that typically trade on an exchange, (ii) regulatory uncertainty and (iii) the OTC industry's effort to net
derivative exposure. However, heightened volatility in the markets and significant growth in interest rate and foreign exchange notional amounts outstanding have contributed to recent growth in OTC
derivative products.
On
July 21, 2010, President Obama signed the Dodd-Frank Act into law. The Dodd-Frank Act was intended to reduce the risk of future financial crises and
will make
major changes to the United States financial regulatory system. The Dodd-Frank Act will significantly alter the way we operate portions of our OTC business in the United States. The
Dodd-Frank Act gives the Commodity Futures Trading Commission ("CFTC") and SEC expansive authority over much of the OTC derivatives markets and market participants, and provides the
Federal Reserve Board with authority over systemically important financial entities. Through extensive rulemaking authority granted under the Dodd-Frank Act, the CFTC and SEC will create a
comprehensive new regulatory regime governing many OTC derivative
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markets
and market participants, including much of our OTC markets and customers. Key derivatives market provisions under the Dodd-Frank Act
include:
-
-
requiring clearing of standardized swaps (with limited exceptions);
-
-
requiring trading of clearable swaps on SEFs or exchanges (with an exemption for those swaps that are not made available
for trading by an exchange or a SEF);
-
-
requiring all swaps to be reported to a swap data repository and reported in near real time through a market data
disseminator;
-
-
giving the CFTC authority to impose aggregate position limits across markets on certain commodity derivatives;
-
-
imposing margin requirements on cleared and uncleared swaps at levels established by regulators;
-
-
establishing a comprehensive framework for the registration and regulation of, including the imposition of capital
requirements on, dealers and "major" non-dealer market participants under new categories of regulated entities known as swap dealers and major swap participants;
-
-
imposing limits on proprietary trading in certain derivative instruments by federally insured depository institutions and
non-bank entities deemed systemically important; and
-
-
giving the CFTC and the SEC broad power to draft rules setting specific requirements under the core principles applicable
to designated contract markets, SEFs, derivatives clearing organizations, national securities exchanges, swap data repositories and clearing agencies, thus altering the flexibility that these entities
have to determine how to operate their business in compliance with law.
Since
July 2010, the CFTC and SEC have proposed various rules to implement the Dodd-Frank Act. Many of the rules proposed to date are not final. As with other parts of the
Dodd-Frank Act, many of the details of the new regulatory regime relating to swaps are left to the CFTC and SEC to determine through rulemaking. Subject to such rulemaking, we currently
expect to establish and operate a SEF and a security-based SEF.
The
SEC's regulations will apply to security-based swaps, such as single name credit default swaps, certain equity swaps and total return swaps referencing a single security or loan. The
CFTC's regulations will apply to non-security based swaps, such as interest rate swaps, commodity swaps and swaps based on broad-based credit and equity indices.
The
CFTC's and SEC's proposed rules relating to SEFs would require, among other things, that to maintain registration as a SEF, an entity would be obligated to comply with certain
enumerated core principles. These principles generally relate to trading and product requirements, compliance and audit-trail obligations, governance and disciplinary requirements, operational
capabilities, surveillance obligations and financial information and resource requirements. In addition, SEFs will be required to maintain certain trading systems that meet the minimum functionality
requirements set by the CFTC and SEC for trading in certain OTC derivatives that are required to be cleared.
In
November 2011, the CFTC issued a final rule modifying position limits for several OTC products that we currently broker, including WTI crude oil, Henry Hub natural gas and RBOB
gasoline. Presently, we are unable to assess the impact of this rule on our trading volumes, although we recognize the potential for this rule to cause reduced volumes and trade sizes on a
market-wide basis as market participants are no longer able to hold positions in excess
of those established by the CFTC. Our trading volumes and typical order size in these products may see a reduction in size that is commensurate with any changes in market activity caused by these new
rules.
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The
Dodd-Frank Act also will make changes to the regulatory requirements of our customers, including large market participants such as investment banks and hedge funds. For
example, many of our customers will have to register as swap dealers or major swap participants. Registration as a swap dealer or major swap participant will result in additional regulation for these
entities, including greater reporting and recordkeeping requirements, higher capital and margin requirements and higher business conduct standards. They will also be required to segregate clients' or
counterparties' margin in a manner similar to the segregation of futures margin. Depending on the final rules that are issued relating to swaps dealers, we may be required to register as a swaps
dealer to conduct certain existing businesses and would be required to meet these additional regulatory requirements listed above.
In
Europe, the European Commission published a formal proposal for OTC derivatives, central clearing parties and trade repositories regulation in September 2010, which is referred to as
the European Market Infrastructure Regulation ("EMIR"). EMIR was approved by the European Parliament in February 2012 and proposes central clearing and transparent reporting requirements for OTC
derivatives. The proposed rules are expected to be in-place by year-end 2012. Additionally, a consultation paper relating to the Markets in Financial Instruments Directive
("MiFID") was released in December of 2010 focusing on OTC derivatives and areas such as dark pools, high frequency trading and consolidated tape for cash equities. The paper concluded that all
trading in derivatives that are eligible for central clearing should trade exclusively on regulated markets, multilateral trading facilities or organized trading facilities. Subject to final rules
being adopted, we currently intend to establish and operate an organized trading facility.
In
the fourth quarter of 2011, the European Commission published a draft revised Markets in Financial Instruments Directive ("MiFID II") and related draft Regulations ("MiFIR") that, if
adopted, will revise and replace MiFID. The MiFID II proposals will migrate the European regulatory landscape from a principles' based system to a rule based system and extends the MiFID framework to
additional asset classes and markets. These draft proposals are now subject to approval by the European Parliament and individual member states. Similar to the United States regulations, until such
regulations are finalized, it is difficult to predict how our business will be specifically impacted. For additional discussion of the risks relating to these new regulatory changes, see
"Item 1ARisk FactorsBroad changes in laws or regulations or in the application of such laws and regulations may have an adverse effect on our ability to conduct our
business."
Our Market Opportunity
We believe the financial markets in which we operate present us with the following opportunities to provide value to our customers:
Continued Global Demand for Investment Hedging and Risk Management.
In recent years, governments worldwide have issued billions
of dollars of
sovereign debt in order to fund financial system rescues and fiscal stimulus packages. Global corporate borrowings are also expected to increase as and when economic recovery takes hold. Investors in
the sovereign and corporate debt markets will need to utilize a range of derivatives products to effectively hedge their credit, interest rate and foreign exchange related risks. Additionally, the
continuing growth of key emerging market countries, such as China, Brazil and India, should lead to increased demand for basic commodities and a corresponding need for hedging instruments, such as
energy and commodity futures and derivatives. These hedging activities account for a growing proportion of the daily trading volume in derivative products. In the current financial environment, we
believe wholesale brokers will be needed to provide crucial liquidity aggregation and anonymous, efficient execution for those derivative products which are commonly used to hedge the risks associated
with credit defaults by sovereign and corporate debtors, equity ownership, fluctuations in the value of foreign currencies and energy and commodity price volatility. We believe growing global demand
for hedging and risk management will, in time, drive higher trading volumes in
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the
financial products and markets in which we provide our execution, market information and software services.
Increased Centralized Clearing of OTC Derivatives.
Increased clearing of certain OTC derivatives has been a focal point in both
the U.S. and Europe
under new legislation as governments, regulators and market participants seek to improve global financial markets. International governments and regulators have pushed for the centralized clearing of
credit derivatives and several exchanges and industry utilities have launched, or are in the process of developing, clearinghouses and platforms to clear certain credit, interest rate and foreign
exchange derivative products. We were a leader in initiatives to launch clearing of credit derivatives and believe that the increased central clearing of credit and other OTC derivatives products that
we specialize in will be an important driver of future volume growth.
Demand for Superior Execution.
Sophisticated market participants around the world require efficient and effective execution of
transactions in
increasingly complex financial markets. We believe that in certain highly liquid markets for cash products, such as corporate fixed income and equities, the services of wholesale brokers are needed to
achieve best execution, especially for larger transactions that may be privately negotiated. Wholesale brokers can source liquidity from other market participants or assess which competing markets,
market makers, or electronic communications networks offer the most favorable terms of execution and efficiently transact large positions with minimal price movement. In addition, we believe that
wholesale brokers, such as us, who provide hybrid brokerage services are better positioned to meet the particular needs in the broad range of markets in which we operate than competitors that do not
offer this combination of voice and electronic services. In the wake of the global financial crisis and the adoption of the Dodd-Frank Act and European legislation, intermediated execution
generally will be mandatory for clearable swaps transactions, which we believe will lead to increased demand for superior hybrid electronic execution facilities in certain wholesale derivatives
markets, such as the North American credit derivatives and energy markets, that traditionally have under-utilized such systems. Accordingly, we believe that there will be an increased need for our
trade support technology, including our hybrid brokerage systems and Trayport GlobalVision
SM
products.
Opportunity for Increased Market Share.
As a result of the major push for regulatory reform in the global markets, which will
carry significant costs
for compliance, including the need to have, maintain or expand sophisticated technology platforms, many smaller wholesale or inter-dealer brokers may cease to exist. We already operate hybrid
execution platforms and have an ability to build and deploy sophisticated trade execution and support technology. As a result, we may be able to increase our market share in certain derivative
markets.
Greater Importance of Product Expertise.
Wholesale brokers provide important price discovery and liquidity aggregation services
in both liquid and
illiquid markets. The presence of a broker provides customers with market intelligence, enhanced liquidity and, ultimately, improved pricing and execution. Wholesale brokers that execute a higher
volume of trades of a particular financial product and have access to more market participants are better positioned to provide valuable pricing information, and can offer superior market data and
analytics tools, than brokers who less frequently serve that market. In less commoditized financial markets, including markets for novel and complex financial instruments where liquidity is
intermittent, market leadership becomes more important because reliable pricing information is difficult to obtain. Market participants in these less liquid markets utilize the services of leading
wholesale brokers in order to gain access to the most bids and offers for a particular product. For example, some market participants pursue trading strategies that combine credit default swaps with
convertible bonds or equity derivatives of the securities of a single issuer or a basket of issuers. As a wholesale broker with high volumes of bids and offers in the credit derivative and other
specialized markets and access to technology that tracks such market data against activity in correlated markets, we
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are
well-positioned to meet the needs of professional market participants for analytical insight, price discovery, and product expertise.
Increasing Benefits of Automated Trade Processing.
The combination of hybrid execution with straight-through processing has
significantly improved
confirmation and settlement processes, resulting in cost savings for customers. Following the adoption of the Dodd-Frank Act, we expect to see continued demand in the markets for wholesale
brokers or SEFs that have the ability to couple superior execution with automated trade reporting, confirmation and processing services.
Need for Expertise in the Development of New Markets.
In order to better support their clients' evolving investment and risk
management strategies,
our dealer customers create new products, including new derivative instruments. Dealers also modify their trading techniques in order to better support their clients' needs, such as by integrating the
trading of derivative instruments with the trading of related underlying or correlated financial assets, indices or other investments. We believe the markets for these new products and trading
techniques create an opportunity for those wholesale brokers, such as us, who, through market knowledge and extensive client relationships, are able to identify these new product opportunities and to
focus their brokerage services appropriately.
Continuing Globalization of Financial Markets.
The continuing globalization of trading is expected to propel long term growth in
trading volumes in a
wide array of financial and commodity products across the globe. We believe that the economic growth of emerging markets in South America, EMEA and Asia is fueling demand for the services of wholesale
brokers to foster liquidity in new and emerging markets. We believe that our presence in multiple international financial centers, including the expansion of our services in South America, EMEA, and
Asia, positions us to capitalize on such demand.
Increased Demand for Trading and Broking Support Services.
Our Kyte subsidiary provides clearing, risk management, settlement
and other back office
services to professional trading and brokerage groups in listed fixed income, foreign exchange, commodity and equity products. As a result of the regulatory uncertainty relating to large financial
institutions and their proprietary trading operations, as well as compensation restrictions for employees of certain banks, some traders and brokers are seeking to start their own companies or hedge
funds or otherwise partner with providers of connectivity and support services such as Kyte. We believe that the services offered by Kyte will be in further demand if
proposed financial regulations requiring large banks to scale-down, sell or exit their proprietary trading operations are passed in their current form.
Our Competitive Strengths
We believe that the following principal competitive strengths will enable us to enhance our position as a leading wholesale broker:
Strong Brand and Leading Position in Key Markets.
We believe that over our twenty-five year history, we have successfully
created value
in several brands that our customers associate with high quality services in the markets on which we focus. Our leadership in multiple markets, such as the markets for certain fixed income and equity
derivatives, foreign exchange options and commodity products, has been recognized by rankings in industry publications such as Risk magazine, FX Week, Profit & Loss and Energy Risk magazine.
Risk magazine has frequently ranked us as the leading broker in credit derivatives and numerous currency and equity derivative markets. Energy Risk magazine also listed GFI as Commodity Broker of the
year in recent years, with top positions in natural gas and metals. We are also successfully building name recognition for our services in certain cash markets for corporate fixed income and equity
securities under our "Christopher Street Capital" brand in Europe. In addition, FENICS Professional
TM
, GFI's pricing, trading and risk management platform, is a leading analytic and risk
management tool in the foreign exchange markets. Our
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electronic
brokerage platforms, CreditMatch®, GFI ForexMatch® and, EnergyMatch®, as well as the Trayport GlobalVision
SM
products, are recognized
platforms in the markets in which they serve. We believe that, because of our leading market positions, strong brands and differentiated technological capabilities, we are better positioned than many
of our competitors to serve the comprehensive needs of our customers in both exchange-traded and OTC markets.
Expertise in Liquidity Formation in OTC Cash and Derivative Markets.
We believe we have expertise in fostering liquidity in OTC
markets for complex
and innovative financial products where liquidity is harder to achieve and expert brokerage services are therefore more valuable to market participants. We have long sought to anticipate the
development and growth of markets for evolving, innovative financial
products in which we believe we can move early to foster liquidity, garner a leading market position and enjoy higher commissions. For example, we fostered liquidity in the credit derivative and
currency derivative markets in their early stages and have grown our services offerings for these markets through the years. We have also been involved in efforts to improve the transparency and
standardization of the credit derivatives market as well as the development of clearing mechanisms for credit derivatives. We have introduced hybrid execution, matching and auction technology to the
fixed income and currency derivatives market globally. Similarly, we were an early entrant to the shipping, property and emissions derivatives markets. Recently, we successfully increased our
brokerage services in certain cash fixed income markets. While these cash products are far more commoditized than the OTC derivatives products for which we are recognized, their trading activity is
often correlated to activities in the corresponding derivatives markets, in which we are active intermediaries. We believe that our expertise in fostering liquidity in various derivatives markets
gives us certain advantages when providing brokerage services in correlated cash markets. It also allows us to extend the reach of our services to a broader clientele, such as larger institutional
investors and hedge funds, that are more active in cash markets than derivatives markets.
Ability to Build and Deploy Technology.
We believe we have a strong ability to develop and deploy sophisticated trade execution
and support
technology that is tailored to the transactional nuances of each specific market. Depending on the needs of the individual markets, we deploy customized brokerage systems that leverage our range of
electronic and voice execution services, which we refer to as "hybrid brokerage." For example, our customers in certain of our more complex, less commoditized markets may choose between utilizing our
CreditMatch®, GFI ForexMatch® or EnergyMatch® electronic brokerage platforms to trade a range of fixed income derivatives, foreign exchange options, energy
derivatives and emission allowances entirely on screen or execute the same transaction through instant messaging devices or over the telephone with our brokers.
Our
Trayport subsidiary supports OTC and exchange traded markets and is a market leader in providing electronic trading software to the European energy markets. Its primary revenue
source comes from trading firms desiring a single, electronic access point for all of their energy trading requirements, both OTC and exchange-traded. Trayport software also supports brokers in their
electronic market operations, as well as their electronic distribution of prices to trading clients. Trayport also provides trading system technology to exchanges and clearing houses that offer
connectivity to trading communities across a range of markets, including commodities, equities (cash, derivatives) and fixed income. Trayport technology accommodates electronic trading, information
sharing, STP capabilities and clearing links.
We
have internally built or purchased most of our core trade execution and support technology. We believe that this distinguishes us from our competitors as we are not overly beholden to
the licensing rights of third party vendors and can tailor our technology offerings to serve the unique needs of our diverse product markets and customers.
Quality Data and Analytics Products.
We are one of the few wholesale brokers that offers a broad array of data and analytics
products to participants
in the complex financial markets in which we
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specialize.
Our data products are derived from the historical trade data compiled from our brokerage services in our key markets. Our analytics products benefit from the reputation of the
Fenics® brand for reliability, ease of use and independence from any large dealer. Our Fenics® tools are used, not only by our traditional brokerage customers, but also by
their customers, such as national and regional financial institutions and large corporations worldwide. In addition, our Fenics® Trader allows approximately 300 bank, corporate and hedge
fund customers around the world to have electronic access to tradable prices for currency derivatives provided by a group of global dealers using "request for quote" technology.
Clearing and Settlement Services.
Through our Kyte subsidiary, which is a member of a number of leading exchanges, we provide
clearing, risk
management, settlement and back-office services to proprietary traders, brokers, market makers and hedge funds. The provision of these services allows us to broaden our customer base and
further diversify our revenue stream.
Experienced Senior Management, Skilled Brokers and Technology Developers.
We have a senior management team that is experienced
in identifying and
developing brokerage markets for evolving, innovative financial instruments. Our founder and chief executive officer, Michael Gooch, has over 30 years of experience in the brokerage industry.
Our president, Colin Heffron, has been with our company since 1988 and, prior to becoming our president, was instrumental in developing a number of brokerage desks and leading the growth of our
European operations. Reporting to them is an experienced management team that includes senior market specialists in each of our product categories. We also employed over 1,000 skilled and specialized
brokers as of December 31, 2011, many of whom have extensive product and industry experience. Although the competition for brokers has been intense in recent years, we have been able to
effectively hire new brokers and establish new brokerage desks in areas in which we seek to expand our operations. In addition, our in-house technology developers are experienced at
developing electronic brokerage platforms and commercial grade software that are tailored to the needs of certain select markets in which we focus. Our brokers utilize this technology and market
information to provide their customers with enhanced services. We believe that the combination of our experienced senior management, skilled brokers and technology developers gives us a competitive
advantage in executing our business strategy.
Diverse Product and Service Offerings.
We offer our products and services in a diverse array of financial markets and geographic
regions providing us
with a balanced revenue stream. Historically, the markets on which we focus have volume and revenue cycles that are relatively distinct from each other and have generally been uncorrelated to and
independent of the direction of broad equity indices. While we primarily serve the wholesale and professional trader community, some of the markets in which we are active have seen new entrants from
the ranks of hedge funds and asset managers. We think this trend will allow us, in time, to serve a broader customer base. Further, our back-office and decision support products, including
our clearing and settlement services, risk management platforms, market data, analytical tools and trading system software give us an opportunity to further expand our customer base, providing revenue
sources beyond our traditional brokerage customers. We believe our diverse product and service offerings provide us with an advantage over many of our competitors that may have more limited product
and service offerings and, therefore, may be more susceptible to downturns in a particular market or geographic region.
Our Strategy
We intend to continue to grow our business and increase our profitability by being a leading provider of wholesale brokerage services,
data and analytics and trading system software to the markets on which we focus. We intend to employ the following strategies to achieve our goals:
Maintain and Enhance our Leading Positions in Key Markets.
We plan to continue building upon the leading market share and brand
recognition that we
have developed for a range of OTC derivative
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instruments
and underlying cash securities in fixed income, financial, equity and commodity markets. We will continue deploying our specialized brokers and proprietary trading technology and systems
in markets where liquidity is harder to achieve and our unique brokerage services and systems are therefore more valuable to dealers and professional traders. Building on our strength in derivative
products, we plan to continue to build our brokerage capabilities in corporate bond and equity markets that have correlations to the underlying derivative markets in which we are well recognized. We
also intend to continue offering our quality brand data and analytics products in certain select markets requiring reliable decision support tools. Through these means, we seek to enhance our strong
reputation and long-standing relationships in existing markets, while offering additional services and serving new customers in increasingly global financial and commodities markets.
Leverage Technology and Infrastructure to Gain Market Share and Improve Margins.
We intend to continue to develop and deploy
technology, including
proprietary electronic brokerage platforms, to further enhance broker productivity, increase customer and broker loyalty and improve our competitive position and market share. We intend to continue to
pursue technological innovations, such as state of the art electronic brokerage platforms, to improve our brokers' productivity and increase our market share in key products. During 2011, we continued
to see substantial use of our CreditMatch® electronic brokerage platform in Europe in both credit derivatives and cash bonds, and have seen increasing use of CreditMatch® for
electronic trading of credit derivatives in North America. GFI ForexMatch®, an electronic brokerage platform for foreign exchange products that is integrated it with our
Fenics® trader tools, has seen increased usage in emerging market products, particularly in Latin American products. We provide our EnergyMatch® system to certain natural gas
and electric power markets in North America and Europe. We believe that there will be increased demand for our hybrid electronic brokerage platforms in many of our existing wholesale derivatives
markets following the implementation of the Dodd-Frank Act. We believe that as the usage of these systems becomes more widespread, we will be able to gain increased market share. Moreover,
where possible, we plan to continue to install STP connections with our customers' settlement, risk management and compliance operations, in order to better serve their needs and to provide us with
additional opportunities to increase our revenues.
Continue to Identify and Develop New Products, and High-growth Markets.
Our brokerage personnel headcount as of December 31,
2011
was 1,271. We plan to continue our practice of developing new brokerage desks through the strategic redeployment of experienced brokers from established brokerage desks and through the selective
hiring of new brokers. Individual brokerage desks are separately tracked and monitored in an effort to drive performance. We will continue to focus on identifying high growth markets where liquidity
is more valuable, thereby yielding early-mover opportunities. At the same time, we plan to continue to develop our capabilities in selected cash equities and fixed income products where we can
leverage our expertise in the underlying derivatives products and long-standing relationships with the world's largest financial institutions. We also intend to continue to expand our
presence globally in markets where we believe there are opportunities to increase our revenues. As part of this effort, we have grown our operations in recent years in a number of locations in South
America and Europe.
Align our Business with the Goals of New Regulations.
Recent U.S. and European legislation as well as pending legislative and
regulatory proposals
for OTC derivatives require, among other things, greater use of clearing facilities, transaction reporting, greater price transparency and mandatory execution of transactions by regulated
intermediaries. Our business benefited from the introduction of clearing in the United States energy markets in the mid-2000s and we have long supported greater use of clearing for credit
derivatives. We believe that increased use of clearing will bring new entrants into our markets and increase trading volumes. Similarly, we have worked with major industry participants to develop
transaction confirmation and reporting protocols that will be utilized in enhanced regulatory trade warehousing. Although we already operate hybrid brokerage systems that we believe will be able to
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meet
the new regulatory requirements to operate as a swap execution facility, or SEF, in the United States, we intend to continue to invest in those areas of our business that will serve the goals of
expected regulation, including increased market transparency.
Continue to Pursue New Customers and Diverse Revenue Opportunities.
We offer our products and services in a diverse range of
financial markets and
geographic regions and to hundreds of institutional customers. We have been successful in expanding our wholesale brokerage customer base through new product offerings and the implementation of our
proprietary technology. At the end of 2007, approximately 71% of our total revenues came from our traditional dealer bank customers. By the end of 2011, that percentage had dropped to approximately
61%. In cash markets for corporate fixed income and equities, as well as in certain energy and commodities markets, we are increasingly providing brokerage services to a broader range of customers
than our traditional clientele of large primary dealers. Our data, analytics and software products and clearing services are already purchased by a broad range of customers outside of the dealer
community. We intend to increase the diversity of our customer base by expanding our services to the wider professional trader community in order to lessen the impact of a downturn in any particular
market or geographic region on us. We also intend to maintain the geographic diversity of our revenues. On a geographic basis, approximately 59% of our total revenues for the year ended
December 31, 2011 were generated by our EMEA operations, 31% were generated by our Americas operations and 10% were generated by our operations in the Asia-Pacific region.
Additionally, for the year ended December 31, 2011, no one customer accounted for more than 6% of our total revenues from all products, services and regions, and our largest brokerage desk
accounted for approximately 3% of total brokerage revenues.
Strategically Expand our Operations and Customer Base through Business Acquisitions and Investments.
Historically, the wholesale
brokerage industry
was fragmented and concentrated mainly on specific country or regional marketplaces and discrete product sets, such as foreign exchange or energy products. The industry was also predominantly focused
on executing trades between large dealer banks and securities houses. Over time, however, the wholesale brokerage industry has experienced increasing consolidation as larger wholesale brokers have
sought to enhance their global brokerage services and offset customer commission pressure in maturing product categories by acquiring smaller competitors that specialized in specific product markets.
At the same time, inter-dealer brokers have expanded their customer base within the wholesale universe to include hedge funds, corporations and asset managers. In addition, several wholesale brokers,
such as us, have acquired technology focused companies which enhance brokerage execution and pre- and post- trade analysis and processing. We plan to continue to selectively
seek opportunities to grow our customer base, further our operational and technological depth and breadth and to grow our business in new and existing product areas through the acquisition of
complementary businesses.
Continue to Generate Cash and Return Value to Shareholders.
Our brokerage, software, analytics and market data businesses have
generated significant
operating cash flows that have allowed us to invest in software development, open new brokerage or trading desks and otherwise re-position our business to suit current and future market
conditions. At the same time, we have been able to provide our shareholders with a consistent quarterly dividend stream since 2008. Despite the recent global financial crisis, over the past three
years, we generated in excess of $214 million of positive cash flow from operations and paid in excess of $102 million of dividends to our shareholders. We believe that our cash flows
also benefit from the significant amount of matched principal transactions we broker for cash products. Matched principal transactions generally settle within three days and we receive our commission
much sooner than we do when we execute a trade on an agency basis. We intend to continue to invest in businesses that generate operating cash flows and to use these cash flows to continue to return
value to our shareholders.
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Overview of Our Products and Services
Our global brokerage operations focus on a wide variety of fixed income, financial, equity and commodity instruments, including both
cash and derivative products. Within these markets we have been successful, historically, in serving the more complex, less commoditized markets for sophisticated financial instruments, primarily OTC
derivatives. As the trading strategies of market participants continue to evolve and diversify, and the derivatives and cash markets continue to converge, wholesale brokers like us can bridge the gap
between these markets and offer services in a number of related markets.
We
support and enhance our brokerage operations by providing clearing and risk management services, trading system software, analytics and market data products to our customers. We also
provide our customers with STP links and electronic connections with exchanges and clearing firms where applicable.
We
provide brokerage services to our customers by executing transactions on either an agency or principal basis. In agency transactions, we charge a commission for connecting buyers and
sellers and
assisting in the negotiation of the price and other material terms of the transaction. After all material terms of a transaction are agreed upon, we identify the buyer and seller to each other and
they then settle the trade directly. Commissions charged to our customers in agency transactions vary across the products for which we provide brokerage services.
We
generate revenue from principal transactions on the spread between the buy and sell price of the security that is brokered or from an agreed commission rate that is built into the
pricing of the instrument. Our principal transactions revenue is primarily derived from matched principal transactions. In matched principal transactions, we act as a "middleman" by serving as the
counterparty on one side of a customer trade and entering into an offsetting trade with another party relatively quickly (often within minutes and generally on the same trading day). These
transactions are then settled through clearing institutions with which we have a contractual relationship. Because the buyer and seller each settle their transactions through us rather than with each
other, the parties are able to maintain their anonymity.
We
generally do not take unmatched positions for our own account or gain, but may do so in response to customer demand, primarily to facilitate the execution of existing customer orders
or in anticipation that future customer orders will become available to fill the other side of the transaction. Although the significant majority of our principal trading is done on a "matched
principal" basis, we have authorized a limited number of our desks to enter into principal investing transactions in which we commit our capital within predefined limits, either to facilitate customer
trading activities or, in limited cases, to engage in principal trading for our own account. For more information on these limits, see "Item 7A Quantitative and Qualitative Disclosure About
Market RiskMarket Risk." Most of our principal transactions are executed in the OTC cash trading markets, such as the fixed income and equity markets, or in certain listed derivative
markets.
Fixed Income Products.
We provide brokerage services in a variety of fixed income derivatives, bond instruments and other
related fixed income
products. Our offices in New York, London, Sydney, Hong Kong, Singapore and Tokyo each provide brokerage services in a broad range of fixed income derivative products that may include single-entity
credit default swaps, emerging market credit default swaps, credit indices, options on single-entity credit default swaps, options on credit indices and credit index tranches. We also provide
brokerage services in a range of non-derivative credit instruments, such as investment grade corporate bonds, high yield corporate bonds, emerging market Eurobonds, European government
bonds, bank capital preferred shares, asset-backed bonds and floating rate notes. We largely provide our services for these non-derivative fixed income products out of our New York,
London, Paris, Singapore and Hong Kong offices.
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We
support our fixed income product execution services with CreditMatch®, our electronic brokerage platform that provides trading, trade processing and STP functionality to
our customers. Consistent with our hybrid brokerage model, customers may choose between utilizing CreditMatch® to trade certain credit derivative products entirely via an electronic
platform or executing the same transaction over the telephone, or via other messaging mediums, with our brokers. In Europe, our customers consistently use CreditMatch® when using our
services to trade certain credit derivative products. Our customers in the Americas and Asia are also increasing their use of CreditMatch® for the pricing and execution of certain credit
derivative products.
We
hold an economic interest in ICE Trust, a clearinghouse for derivative instruments formed as a result of IntercontinentalExchange Inc.'s March 2009 purchase of The Clearing
Corporation, a company in which we were a minority shareholder. In March 2009, ICE Trust became the first clearinghouse to clear credit derivatives. We believe that our hybrid electronic brokerage
systems and STP capabilities will complement the movement to greater automation and centralized clearing in the OTC credit derivatives markets. Ultimately, we believe that centralized clearing may
expand the market for OTC derivative products through added settlement efficiency and reliability.
Through
Christopher Street Capital, a division of GFI Securities Limited in the UK, we offer traditional brokerage services to a broad range of customers in the cash bond markets,
including investment grade and cross-over corporate debt, distressed debt, agencies, high yield debt, and asset backed securities.
Kyte
Capital Management Limited, through its subsidiaries, undertakes proprietary trading, market making, and liquidity provider services on fixed income futures and options on the major
U.S., European and Asian exchanges and OTC trading venues.
Financial Products.
We provide brokerage services in a range of financial instruments, including foreign exchange options, exotic
options,
non-U.S. Dollar interest rate swaps and options, repurchase agreements, forward and non-deliverable forward contracts and certain government and municipal bond options. Exotic
options include non-standard options on baskets of foreign currencies. Non-deliverable forward contracts are forward contracts that settle in cash and do not require physical
delivery of the underlying asset.
We
offer telephone brokerage services in our New York, London, Hong Kong, Singapore, Sydney,Santiago, Bogota and Nyon offices, augmented in select markets with our GFI
ForexMatch® brokerage platform. We also offer a STP capability that automatically reports completed telephone and electronic transactions directly to our customers' position-keeping
systems and provides position updates for currency option trades executed through our brokerage desks globally.
Our
New York office focuses on providing brokerage services for foreign exchange option trading among the U.S. Dollar, the Japanese Yen and the Euro, which are referred to as the G3
currencies, as well as the Canadian Dollar and emerging market foreign exchange options, forward contracts and non-deliverable forward contracts and non-U.S. Dollar interest
rate swaps. Our New York office also offers bond options, swap options and corporate and emerging market repo brokerage services. Our London office also covers foreign exchange option trading in the
G3 currencies along with nearly all European cross currencies, including the Russian Ruble and Eastern European currencies, for which we provide brokerage services for forwards and
non-deliverable forwards. In addition, our London office provides brokerage services for cross currency basis swaps, and non-US Dollar interest rate swaps and options. Our
brokers in Singapore, Hong Kong and Seoul provide brokerage services for foreign exchange currency options, non-deliverable forwards and non-U.S. Dollar interest rate swaps for
regional and G3 currencies. Our offices in Santiago and Bogota focus on interest rate swap and non-deliverable forward products while our Dubai office focuses on Islamic finance products.
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In
October 2011, we opened an office in Nyon, Switzerland that focuses on the brokering of emerging market products, including foreign exchange options, forward rate agreements, basis
swaps, interest rate swaps and government bonds in CE3 currencies (Czech Koruna, Polish Zloty and Hungarian Forint), South African Rand and Turkish Lira.
Equity Products.
We provide brokerage services in a range of cash-based and derivative equity products, including U.S. domestic
equity
and international equity stocks, Global Depositary Receipts ("GDRs"), American Depositary Receipts ("ADRs") and equity derivatives based on indices, stocks or customized stock structures.
We
offer voice broker assisted equity execution services from our brokerage desks in New York, London, Dublin, Paris, Tel Aviv, Hong Kong, Tokyo and Sydney and, where appropriate, they
are augmented with electronic and algorithmic trading capabilities. Through our various offices, we broker trades in the OTC market, as well as for certain exchange-traded securities and derivatives.
Our
New York office provides brokerage services in cash equities, single stock options, index options, sector options, equity default swaps, variance swaps, total return swaps,
convertible bonds and ADRs. Our London office provides brokerage services in equity index options, single stock options, GDRs, Pan-European equities, Japanese equity derivatives and
structured equities. Our Paris office provides brokerage in Pan-European equities, structured equities, single stock and
equity index options and financial futures. Our Hong Kong and Tokyo offices provide a varying degree of brokerage services in equity index and single stock options, while the Hong Kong office also
provides brokerage services in ADRs and GDRs. Our Dublin and Tel Aviv offices broker primarily Pan-European and international equities.
Through
Christopher Street Capital Equities, a division of GFI Securities Limited, we operate a cash equities brokerage desk that provides independent equity research focused on the
relationship between the credit and equity markets. Our research analyzes the relationship between credit default swap and equity markets using our historic credit default swap data. Christopher
Street Capital Equities focuses, in particular, on situations where credit default swap spreads and equity prices diverge outside their normal relationship.
Kyte
Capital Management Limited, through its subsidiaries, undertakes proprietary trading, market making, and liquidity provider services on cash equities and equity futures and options
on the major U.S., European and Asian exchanges and OTC trading venues.
Commodity Products.
We provide brokerage services in a wide range of cash-based and derivative commodity and energy products,
including
oil, natural gas, biofuel, electricity, wet and dry freight derivatives, dry physical freight, precious metals, coal, property derivatives, emissions, ethanol and soft commodities.
We
offer telephonic brokerage supported by electronic platforms and post-trade STP and confirmation services in certain markets. Our Trayport subsidiary is a leading provider
of electronic trading software and services to the European OTC energy markets, including electricity, natural gas, coal, emissions and freight. Trayport's GlobalVision
SM
platform
accommodates electronic trading, information sharing, STP capabilities in commodity and financial instruments and clearing links to NOS Clearing ASA, LCH Clearnet and CME ClearPort. In London, our
telephonic brokerage capabilities are augmented with electronic brokerage capabilities licensed by our wholly-owned subsidiary, Trayport. In North America, we offer EnergyMatch®, an
electronic brokerage platform for trading OTC energy derivatives which is currently used in varying degrees in certain electricity, natural gas and emissions markets. We intend to continue to expand
this platform to other energy markets. Through EnergyMatch®, we offer STP capabilities and clearing links to CME ClearPort and other third party clearing providers.
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From
our New York area offices, we provide brokerage services in natural gas, oil and petroleum products, electricity, ethanol and soft and agricultural commodities. Through our Amerex
subsidiary based in Sugar Land, Texas, we provide brokerage services in natural gas, electricity, environmental commodities and retail energy management. Our London office provides energy product
brokerage services in many European national markets, including for electricity, coal, emissions and gas. The London office also provides brokerage services in property derivatives, dry and wet
freight derivatives and dry physical freight. Our Singapore office brokers dry freight derivatives and dry physical freight. Desks in our New York, London and Sydney offices also provide brokerage
services for the global precious metal markets.
Through
collaboration with certain divisions of CB Richard Ellis Group Inc., we provide and continue to develop brokerage services in European property derivatives. The
collaboration in the U.K. is a leader in the property derivatives market.
Through
a joint venture with ACM Shipping Limited, we offer hybrid telephonic and electronic brokerage of wet freight derivatives in London, Singapore and New York.
Clearing and Settlement Services.
On July 1, 2010, we acquired a 70% equity ownership interest in each of The Kyte Group
Limited and Kyte
Capital Management Limited, and will acquire the remaining 30% equity interest in 2013. Kyte, which is a member of leading exchanges including NYSE Euronext, NYSE LIFFE and Eurex, provides clearing,
brokerage, settlement and back-office services to proprietary traders, brokers, market makers and hedge funds. In some instances, Kyte provides capital to start-up trading
groups, small hedge funds, market-makers and individual traders. We acquired Kyte because of its expertise in listed derivative markets, its risk management platforms and its unique clearing, broking
and investment services business model.
Software, Analytics and Market Data.
Our Trayport subsidiary licenses multi-asset class electronic trading and order management
software to brokers,
exchanges and traders in the commodities, fixed income, currencies and equities markets. Trayport's GlobalVision
SM
products have an industry leading position in supplying software to the
European OTC energy markets, including electric power, natural gas, coal, emissions and freight. Trayport's primary source of revenue is from recurring license fees charged to trading and brokerage
firms that are calculated by the number of active users. Trayport also receives consulting and maintenance fees to "white-label" or customize its products according to customer needs. Trayport's
products provide customers with STP capabilities and clearing links to multiple clearinghouses, including NOS Clearing ASA, LCH Clearnet and CME ClearPort.
Within
foreign exchange option markets, our GFI FENICS® division licenses FENICS® Professional, which provides customers with technology to control and monitor
the lifecycle of their foreign exchange options trades. Sold on a subscription basis through dedicated sales teams across the globe, FENICS® Professional is a suite of price discovery,
price
distribution, trading, risk management and STP components. This array of modules permits customers to quickly and accurately price and revalue both vanilla and exotic foreign exchange options using
math models and independent market data. Our GFI FENICS® division also recently launched a service through which approximately 300 bank, corporation and hedge fund customers around the
world will have electronic access to tradable prices for currency derivatives provided by a group of global dealers using "request for quote" technology.
Through
our GFI Market Data division, we license market data to third parties in the following product areas: foreign exchange options, credit derivatives, emerging market
non-deliverable forwards and interest rate swaps, equity index volatilities, interest rate options and European and North American energy. We make our data available through a number of
channels, including streaming data feeds, file transfer protocol downloads, directly from FENICS® Professional and to data vendors, such as ThomsonReuters and Quick, who license our data
for distribution to their global users. Revenue
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from
market data products consists of up-front license fees and monthly subscription fees, royalties from third party market data vendors who re-license our data and individual
large database sales.
Our Customers
As of December 31, 2011, we provided brokerage services, clearing services and data and analytics products to over 2,600
institutional customers, including leading investment and commercial banks, large corporations, asset managers, insurance companies, hedge funds and proprietary trading firms. Notwithstanding our
large number of customers, we primarily serve the wholesale and professional trader community that regularly transact in global capital markets, including many of the world's money-center banks and
wholesale dealers such as Bank of America, Barclays Bank, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley and UBS. Despite the importance of these
large financial institutions to our brokerage business, no single customer accounted for more than 6% of our total revenues from all products and services globally for the year ended
December 31, 2011. Customers using our Fenics branded analytics products and our market data products and services include small and medium sized banks and investment firms, brokerage houses,
asset managers, hedge funds, investment analysts and financial advisors. We also license our Trayport trading systems to various financial markets participants, including our major wholesale brokerage
competitors, exchanges and trading firms.
Sales and Marketing
In order to promote new and existing brokerage, data and analytics and software services, we utilize a combination of our brokerage
personnel, internal marketing and public relations staff and external advisers in implementing selective advertising and media campaigns. Our brokerage services are primarily marketed through the
direct and fairly constant interaction of our brokers with their customers. This direct interaction permits our brokers to discuss new product and market developments with our customers and to
cross-sell our other products and services. We also participate in numerous trade-shows to reach potential brokerage, data and technology customers and utilize speaking opportunities to
help promote market specialists and trading technologies in our core products and services.
Our
data, analytics and trading software products are actively marketed through dedicated sales and support teams, including at our Trayport subsidiary, that market products to customers
globally. As of December 31, 2011, we employed a total of 121 sales, marketing and customer support professionals globally.
Technology
Pre-Trade Technology.
Our brokers generally use an internally developed suite of proprietary market data and analytical software
tools to
assist customers with their trading decisions. This technology is often made available directly to customers via a license agreement. In most cases, our brokerage desks distribute prices and other
market data via our proprietary network, data vendor pages, secure websites and trading platforms.
Hybrid Brokerage Platform Technology.
We utilize several sophisticated proprietary electronic brokerage platforms to distribute
prices and offer
electronic trade execution to our customers. These platforms include our CreditMatch®, GFI ForexMatch® and EnergyMatch® electronic brokerage platforms. Price data
is transmitted over these platforms by our proprietary global private network and by third-party providers that connect to the financial community. Our hybrid brokerage platforms and systems operate
on a technology platform and network that emphasizes scalability, performance, adaptability and reliability, and that provides our
customers with a variety of means to connect to our brokers and brokerage platforms, including dedicated point-to-point data lines, virtual private networks,
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proprietary
application programming interfaces and the Internet. We provide customers with proprietary application programming interfaces ("APIs") that automate customer order flow and trade matching.
These efforts seek to automate large parts of the trade reporting and settlement process via straight-through processing, thereby reducing errors, risks and costs traditionally associated with
post-trade activities.
Post-Trade Technology.
Our hybrid brokerage platforms automate previously paper- and telephone-based transaction processing,
confirmation
and other functions, substantially improving and reducing the cost incurred by many of our customers' back offices and enabling straight-through processing. In addition to our own system, confirmation
and trade processing is also available through third-party hubs including Markitwire, Reuters RTNS, ConfirmHub, EFETnet and direct straight-through processing in Financial Information eXchange (FIX)
Protocol for various banks. We have electronic connections to most mainstream clearinghouses, including The Depository Trust & Clearing Corporation (through third party clearing firms),
Continuous Linked Settlement, Euroclear, Clearstream, LCH Clearnet, Eurex, the CME Group, Inc. ("CME"), Euro CCP and European Multilateral Clearing Facility N.V ("EMCF"). We intend to expand
the number of clearinghouses to which we connect in the future.
We
further provide data communication and STP connections with our customers' settlement, risk management and compliance operations in order to better serve their needs and to strengthen
our relationships with them. STP generally involves the use of technology to automate the processing of financial transactions, from execution to settlement, in order to minimize human error, reduce
operational costs and time, and enhance transaction information and reporting.
Risk Management Platforms.
GFI maintains a proprietary electronic risk monitoring system to monitor and mitigate market risks,
which provides
management with daily credit reports in each of our geographic regions that analyze credit concentration and facilitates the regular monitoring of transactions against key risk indicators. In
addition, our Kyte subsidiary maintains proprietary risk management platforms which are used to manage risk associated with its customers. These proprietary risk platforms create risk profile reports
using algorithms that calculate real time net position reports using information from exchanges and third-party market data providers, such as Reuters. The systems can calculate the net risk of a
customer's entire portfolio covering a broad range of products, including cash bonds, futures, options, equities and spot FX.
Systems Architecture.
Our systems are implemented as a multi-tier hub and spoke architecture comprised of several components,
which
provide matching, credit management, market data distribution, position reporting, customer display and customer integration. The private network currently operates from concurrent data centers and
hub cities throughout the world acting as distribution points for all private network customers.
In
addition to our own network system, we also receive and distribute secure trading information from customers using the services of multiple, major Internet service providers
throughout the world. These connections enable us to offer our products and services via the Internet to our global customers.
Technology Development
We employ a technology development philosophy that emphasizes state-of-the-art technology with cost
efficiency in both our electronic brokerage platforms, such as CreditMatch®, GFI ForexMatch® EnergyMatch® and GlobalVision® (a product of
Trayport®), and our data and analytics products. We take a flexible approach by developing in-house, purchasing or leasing technology products and services and by outsourcing
support and maintenance where appropriate to manage our technology expense
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more
effectively. For each market in which we operate, we seek to provide the optimal mix of electronic and telephonic brokerage.
Market Data and Analytics Products Technology.
Our market data and analytics products are developed internally using advanced
development
methodologies and computer languages. Through years of developing Fenics products, our in-house software development team is experienced in creating simple, intuitive software for use with
complex derivative instruments.
Support and Development.
At December 31, 2011, we employed a team of 342 computer, telecommunication, network, database,
customer support,
quality assurance and software development specialists globally. We devote substantial resources to the continuous development and support of our electronic brokerage capabilities, the introduction of
new products and services to our customers and the training of our employees. Our software development capabilities allow us to be flexible in our decisions to either purchase or license technology
from third parties or to develop it internally.
Disaster Recovery.
We have contingency plans in place to protect against major carrier failures, disruption in external services
(market data and
internet service providers), server failures and power outages. All critical services are connected via redundant and diverse circuits and, where possible, we employ site diversity. Production
applications are implemented with a primary and back-up server, and all data centers have uninterruptible power source and generator back-up power. Our servers are
backed-up daily, and back-up tapes are sent off-site daily. We have a limited number of reserved "seats" available to relocate key personnel in the event that we
were unable to use certain of our offices for an extended period of time. We intend to increase this number of seats, some of which may be shared with other companies, as part of our business
continuity plans.
Intellectual Property
We seek to protect our internally developed and purchased intellectual property through a combination of patent, copyright, trademark,
trade secret, contract and fair business practice laws. Our proprietary technology, including our Trayport and Fenics software, is generally licensed to customers under written license agreements.
Where appropriate, we also license and incorporate software and technology from third parties that is protected by intellectual property rights belonging to those third parties.
We
pursue registration of some of our trademarks in the United States and in other countries. "GFI Group," "GFInet," "Fenics," "CreditMatch," "GFI ForexMatch," "EnergyMatch," "Amerex",
"Starsupply", "Trayport" and "Kyte" are registered trademarks in either the United States and/or numerous overseas jurisdictions.
We
have filed a number of patent applications to further protect our proprietary technology and innovations, and have received patents for some of those applications. We believe that no
single patent or application or group of patents or applications will be of material importance to our business as a whole. Our patents have expiration dates ranging from 2015 to 2028.
Competition
Competition in the wholesale brokerage industry is intense. We encounter competition in all aspects of our businesses, including for
customers, employees and acquisition candidates.
Inter-dealer Brokers.
Our primary competitors with respect to dealer to dealer, or "inter-dealer", OTC brokerage services are
currently four firms:
ICAP Plc, Tullett Prebon Plc, BGC Partners, Inc (a publicly traded subsidiary of Cantor Fitzgerald) and Compagnie Financière Tradition (which is majority owned by
Viel & Cie), all of which are currently publicly traded companies. We also compete, to a lesser extent, with several electronic brokerage platforms and a number of smaller, privately held firms
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or
consortia that tend to specialize in niche products or specific geographical areas. The current size of the inter-dealer brokerage market is difficult to estimate as there is little objective
external data on the industry and several participants are private companies that do not publicly report revenues. Over the past decade, the industry has been characterized by the consolidation of
well-established smaller firms into the four firms mentioned above and ourselves. We believe this consolidation has resulted from a number of factors, including: the consolidation of
primary institutional dealer customers; pressure to reduce brokerage commissions, particularly in more commoditized products; greater dealer demand for technological capabilities and the need to
leverage relatively fixed administrative and regulatory costs.
Historically,
the inter-dealer brokerage industry has been characterized by fierce competition for customers and brokers. Significant factors affecting competition in the inter-dealer
brokerage industry are the qualities, abilities and relationships of professional personnel, the depth and level of liquidity of the market available from the broker, the quality of the technology
used to service and assist in execution on particular markets and the relative prices of services and products offered by the brokers and by competing markets and trading processes.
In
time, our business may face growing competition from businesses that provide swaps execution services directed towards non-dealer institutions. Companies such as
Bloomberg, TradeWeb and MarketAxess have substantial customer relationships with institutional traders of cash instruments and we believe that they will seek to leverage these relationships to further
their business
in executing swaps transactions. We have not traditionally served such non-dealer institutions in certain of the swaps products that we broker. Rather, in such products, we have maintained
deep relationships with the swaps dealers who are the primary providers of liquidity to such markets. We intend to continue to skillfully serve the primary providers of liquidity in the swaps markets,
while complying with all regulations, including the Dodd-Frank Act, that require us to provide impartial access to broader categories of market participants.
Broker-Dealers.
In brokering certain cash equities and corporate fixed income products, we face competition from traditional
cash product
broker-dealers that include large, medium and smaller sized financial service firms.
Exchange and Exempt Commercial Markets.
In general, we do not compete directly with the major futures exchanges, such as CME,
the Chicago Board
Options Exchange, Eurex and Euronext.liffe, and exempt commercial markets like the one operated by IntercontinentalExchange (ICE). These exchanges allow participants to trade standardized futures and
options contracts. These contracts, unlike the less commoditized OTC products that we focus on, typically contain more standardized terms, and are typically traded in contracts representing smaller
notional amounts. Furthermore, the introduction of such standardized exchange-traded futures and options contracts has, in the past, generally been accompanied by continuing growth in the
corresponding OTC derivatives markets. We often cross exchange-traded derivatives as OTC transactions and the trades are then either exchanged for exchange-traded instruments, such as a futures
contract, or "given up" for clearing to one of the exchanges mentioned above or a third-party CCP or FCM. It is not clear what impact the Dodd-Frank Act will have on these traditional
roles as the rules relating to clearing of OTC derivatives and SEFs are still being issued and their impact is still unknown.
In
a growing number of markets and products, however, our hybrid brokerage platforms are competing directly with the execution arms of those same exchanges. Pursuant to the
Dodd-Frank Act, futures exchanges are authorized to execute swaps transactions, along with swap execution facilities. Accordingly, we expect that in the near future we will compete to be
the primary execution venue for swaps transactions with several futures exchanges, as well as our existing wholesale broker competitors.
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We believe that exchanges will continue to seek to leverage their platforms and attempt to grow by introducing products designed to compete with or compliment
certain products covered by wholesale brokers in the current OTC marketplace or through acquisitions. Exchanges have also acquired wholesale brokers, such as ICE's acquisition in 2008 of CreditEx, a
specialist inter-dealer broker of credit derivative products. Most major exchanges have either begun or announced plans to clear many of the existing OTC financial and derivative products. We
generally believe that efforts by exchanges to provide clearing venues for the OTC markets are complementary to our business and we expect that such efforts will enable us to provide our services to a
broader customer base.
Software, Analytics and Market Data.
Several large market data and information providers, such as Bloomberg and Reuters, compete
for a presence on
virtually every trading desk in our industry. Some of these entities currently offer varying forms of electronic trading of the types of financial instruments in which we specialize. In addition,
these entities are currently competitors to, and in some cases customers of, our data and analytical services. Our Trayport subsidiary competes against several independent providers of advanced
financial technology and high-end trading systems. Further, we face competition for certain sales of our data products from our inter-dealer, exchange and wholesale broker competitors and
from data and technology vendors, such as Markit, a consortium of major financial institutions. In some cases, we have entered into collaborations or joint venture agreements with these other entities
with regard to our software, analytics and market data services in order to create a more robust product, increase our distribution channels or, in some cases, white label products through our
respective distribution channels.
Overall,
we believe that we may also face future competition from other large computer software companies, market data and technology companies and securities brokerage firms, some of
which are currently our customers, as well as from any future strategic alliances, joint ventures or other partnerships created by one or more of our potential or existing competitors.
Regulation
Certain of our subsidiaries, in the ordinary course of their business, are subject to extensive regulation by government and
self-regulatory organizations both in the United States and abroad. As a matter of public policy, these regulatory bodies are responsible for safeguarding the integrity of the securities
and other financial markets. These regulations are designed primarily to protect the interests of the investing public generally. They cannot be expected to protect or further the interests of our
company or our stockholders and may have the effect of limiting or curtailing our activities, including activities that might be profitable.
U.S. Regulation and Certain Clearing Arrangements.
In order to conduct our securities related business in the U.S., GFI
Securities LLC, one of
our subsidiaries, is registered as a broker-dealer with the SEC, and the State of New York, and is regulated by the Financial Industry Regulatory Authority Inc. ("FINRA"). GFI
Securities LLC is subject to regulations and industry standards of practice that cover many aspects of its business, including initial licensing requirements, sales and trading practices,
safekeeping of customers' funds and securities, capital structure, record keeping, supervision and the conduct of affiliated persons, including directors, officers and employees. GFI
Securities LLC also operates CreditMatch®, an electronic brokerage platform that is regulated pursuant to Regulation ATS under the Exchange Act.
In
our futures and commodities related activities, our subsidiaries are also subject to the rules of the CFTC, futures exchanges of which they are members and the National Futures
Association ("NFA"), a futures self-regulatory organization. GFI Securities LLC is registered as an introducing broker with the NFA and the CFTC. The NFA and CFTC require their
members to fulfill certain obligations, including the filing of quarterly and annual financial reports. Failure to fulfill these obligations in a timely manner can result in disciplinary action
against the firm. Certain of our
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subsidiaries
also operate electronic brokerage platforms that are exempt from CFTC regulation either as an exempt board of trade (GFI ForexMatch® and Fenics®) or as an exempt
commercial market (EnergyMatch®).
The
SEC, FINRA, CFTC and various other regulatory agencies within the United States have stringent rules and regulations with respect to the maintenance of specific levels of net capital
by regulated entities. Generally, a broker-dealer's capital is defined as its net worth plus qualified subordinated debt less deductions for certain types of assets. The Net Capital Rule under the
Exchange Act requires that at least a minimum part of a broker-dealer's assets be maintained in a relatively liquid form.
If
these net capital rules are changed or expanded, or if there is an unusually large charge against our net capital, our operations that require the intensive use of capital would be
limited. A large operating loss or charge against our net capital could adversely affect our ability to expand or even maintain these current levels of business, which could have a material adverse
effect on our business and financial condition.
The
SEC and FINRA impose rules that require notification when net capital falls below certain predefined criteria. These rules also dictate the ratio of debt to equity in the regulatory
capital composition of a broker-dealer, and constrain the ability of a broker-dealer to expand its business under certain circumstances. If a firm fails to maintain the required net capital, it may be
subject to suspension or revocation of registration by the applicable regulatory agency, and suspension or expulsion by these regulators could ultimately lead to the firm's liquidation. Additionally,
the Net Capital Rule and certain FINRA rules impose requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to the SEC
and FINRA for certain capital withdrawals. At December 31, 2011, GFI Securities LLC was, and currently is, in compliance with the net capital rules and had net capital in excess of the
minimum requirements.
We
maintain clearing arrangements with selected financial institutions in order to settle our principal transactions and maintain deposits with such institutions in support of those
arrangements.
Foreign Regulation and Certain Clearing Arrangements.
Our overseas businesses are also subject to extensive regulation by
various foreign governments
and regulatory bodies. These foreign regulations, particularly in the U.K., are broadly similar to that described above for our U.S. regulated subsidiaries.
In
the United Kingdom, the Financial Services Authority ("FSA") regulates GFI Securities Limited and certain of our other subsidiaries. These U.K. regulated subsidiaries are also subject
to the European-wide Markets in Financial Instruments Directive ("MiFID"). Each of our subsidiaries subject to MiFID has taken the necessary steps in order to comply with these
requirements.
As
with those U.S. subsidiaries subject to FINRA rules, the ability of our regulated U.K. subsidiaries to pay dividends or make capital distributions may be impaired due to applicable
capital requirements. Our regulated U.K. subsidiaries are subject to "consolidated" prudential regulation, in addition to being subject to prudential regulation on a legal entity basis. Consolidated
prudential regulation impacts the regulated entity and its parent holding companies in the U.K, including the regulated entity's ability to pay dividends or distribute capital. We are also subject to
the European Union's Capital Requirements Directive ("CRD"). This directive requires us to have an "Internal Capital Adequacy Assessment Process" as set forth in the CRD, which puts the responsibility
on firms subject to the directive to ensure they have adequate capital after considering their risks.
Our
regulated U.K. subsidiaries are also subject to regulations regarding changes in control similar to those described above for GFI Securities LLC. Under FSA rules, regulated
entities must obtain prior approval for any transaction resulting in a change in control of a regulated entity. Under applicable FSA rules, control is broadly defined as a 10% interest in the
regulated entity or its parent or otherwise exercising significant influence over the management of the regulated entity. As a result of
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these
regulations, our future efforts to sell shares or raise additional capital may be delayed or prohibited by the FSA.
In
the second quarter of 2011, the Company informed the FSA that the Kyte Group Limited's U.K. consolidated group capital had fallen below the required level at December 31, 2010.
The amount of consolidated group capital was corrected and the Company has been in compliance since June 2011. In connection with this matter, the FSA issued a notice under Section 166 of the
Financial Services and Markets Act 2000 to appoint a "Skilled Person." The scope of the review to be conducted by such Skilled Person included the effectiveness of the Kyte Group Limited's systems and
controls relating to regulatory reporting, the procedures for calculating its capital adequacy requirements and a capital restructuring that the Company completed at the end of the second quarter. In
accordance with this, the Company appointed a Skilled Person and they completed their review prior to the end of 2011. The Company has discussed the results of such review with the FSA and has agreed
with the FSA to put in place remedial actions to improve certain controls, which we expect to be completed by the end of the first quarter of 2012.
GFI
Securities Limited is a member of Euroclear for the purpose of clearing certain debt and equity transactions. This membership requires GFI Securities Limited to deposit collateral or
provide a letter of credit to Euroclear so that Euroclear will extend a clearing line to GFI Securities Limited.
The
Kyte Group Limited and Kyte Broking Limited maintain execution and clearing relationships with Newedge Group, Bank of America Merrill Lynch, Societe Generale, International and
Commercial Bank of China, Deutsche Bank, BGC Brokers and Otkritie Securities in order to provide their clients with direct market access to a number of exchanges and multilateral trading facilities
(MTFs). These arrangements require the deposit of collateral to facilitate market access and clearing.
GFI
Securities Limited's Dublin branch was established through the exercise of its passport right to open a branch within a European Economic Area state. The establishment of the branch
was approved by the FSA and acknowledged by the Irish Financial Services Regulatory Authority ("IFSRA") in Ireland. The branch is subject to all of the conduct of business rules of the IFSRA and is
regulated, in part, by the FSA.
In
Paris, a branch of GFI Securities Limited was established through the exercise of its passport right to open a branch in a European Economic Area ("EEA") state. The establishment of
the branch was approved by the FSA and acknowledged by Banque de France in France. The branch is subject to the conduct of business rules of the Autorite Des Marches Financiers ("AMF") when dealing
with resident customers of France and is regulated, in part, by the FSA.
GFI
Securities Limited's Tel Aviv branch is registered as a foreign corporation in Israel and is conditionally exempt from the requirement to hold a Securities License in accordance with
the Israeli Securities law. The branch is therefore not subject to any capital requirements.
GFI
Securities Limited's Dubai branch is registered with the Dubai Financial International Centre and is authorized by the Dubai Financial Services Authority ("DFSA") to provide
financial service activities. The branch is subject to the conduct of business rules of the DFSA and has been granted a waiver from prudential regulation by the DFSA.
In
Hong Kong, the Securities and Futures Commission ("SFC") regulates our subsidiary, GFI (HK) Securities LLC, as a securities broker. The compliance requirements of the
SFC include, among other things, net capital requirements (known as the Financial Resources Rule) and stockholders' equity requirements. The SFC regulates the activities of the officers, directors,
employees and other persons affiliated with GFI (HK) Securities LLC and requires the registration of such persons.
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GFI
(HK) Brokers Ltd. is registered with and regulated by the Hong Kong Monetary Authority ("HKMA"). As part of this registration, GFI (HK) Brokers Ltd. is required to
maintain a minimum level of stockholders' equity.
In
Tokyo, the Japan Securities Dealers Association ("JSDA") regulates GFI Securities Limited's Japanese branch. The JSDA regulates the activities of the officers, directors, employees
and other persons affiliated with the branch. This branch is also subject to certain licensing requirements established by the Financial Instruments and Exchange Law (the "FIEL") in
Japan, including maintaining minimum levels of capital and stockholders' equity.
In
Singapore, GFI Group PTE Ltd is subject to the compliance requirements of the Monetary Authority of Singapore ("MAS"), which includes, among other things, a stockholders'
equity requirement.
In
Sydney, our brokerage operations are conducted through a branch of GFI Brokers Limited. GFI Brokers Limited is registered as a foreign corporation in Australia and is conditionally
exempt from the requirement to hold an Australian financial services license under the Australian Securities and Investments Commission Corporations Act 2001 in respect of the financial services it
provides in Australia. This exemption applies to foreign companies regulated by the FSA in accordance with UK regulatory standards.
In
Korea, GFI Korea Money Brokerage Limited is licensed and regulated by the Financial Supervisory Commission to engage in foreign exchange brokerage business, and is subject to certain
regulatory requirements under the Foreign Exchange Transaction Act and regulations thereunder. As a licensed foreign exchange brokerage company, GFI Korea Money Brokerage Limited is required to
maintain a minimum requirement of paid-in-capital.
In
Chile, GFI Brokers (Chile) Agentes De Valores SpA is licensed and regulated by the Superintendencia de Valores y Seguros de Chile. As part of its licensing requirements, GFI Brokers
(Chile) is subject to a minimum capital requirement.
In
Colombia, GFI Exchange Colombia S.A. and GFI Securities Colombia S. A. are licensed and regulated by the Superintendencia Financiera de Colombia.
At
December 31, 2011, all of our subsidiaries that are subject to foreign net capital rules were, and currently are, in compliance with those rules and have net capital in excess
of the minimum requirements. We do not believe that we are currently subject to any foreign regulatory inquiries that, if decided adversely, would have any material adverse effect on us and our
subsidiaries taken as a whole. As we expand our foreign businesses, we will also become subject to regulation by the governments and regulatory bodies in other countries. The compliance requirements
of these different overseer bodies may include, but are not limited to, net capital or stockholders' equity requirements.
Changes in Existing Laws and Rules.
Additional legislation and regulations, changes in rules promulgated by the government,
regulatory bodies or
clearing organizations described above or changes in the interpretation or enforcement of laws and regulations may directly affect the manner of our operation, our net capital requirements or our
profitability. In addition, any expansion of our activities into new areas may subject us to additional regulatory requirements that could adversely affect our business, reputation and results of
operations.
The
government agencies that regulate us continuously review legislative and regulatory initiatives and may adopt new or revised laws and regulations. The financial markets in which we
provide our services are currently in the midst of a major global regulatory overhaul, as regulators and legislators in the U.S. and abroad have proposed and, in some instances, already adopted, a
slate of regulatory changes that call for, among other things, central clearing of certain derivatives, greater transparency and reporting of derivatives transactions, mandatory trading of certain
derivatives transactions on
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regulated
execution facilities and the required or increased use of electronic trading system technologies. Many of these regulations are not harmonized with those of other jurisdictions and some are
in direct conflict. For a more detailed discussion of the changes in regulations in the U.S. and abroad, see Item 1"BusinessRecent Derivative Market Developments."
Exchange Memberships.
Through our various subsidiaries, we are members of the following exchanges: Baltic Exchange, BATS,
Chicago Mercantile Exchange
(non-member firm), Chi-X, Deutsche Boerse (International Securities Exchange, Eurex and Xetra), European Energy Exchange, Intercontinental Exchange (ICE Futures U.S., ICE
Canada and ICE Futures Europe), London Metals Exchange (Associate Member), London Stock Exchange, SIX Swiss Exchange, NASDAQ OMX Group (The NASDAQ Stock Market and NASDAQ OMX Europe) NYSE Arca, NYSE
Euronext, EDX London, Montreal Exchange ("MX"), Financial Futures Spanish Market ("MEFF"), Italian Derivatives Exchange Market ("IDEM") and Borsa Italiana.
Working Capital
For information regarding working capital items, see "Management's Discussion and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital Resources" in Part II, Item 7 of this Form 10-K.
Employees
As of December 31, 2011, we employed 2,176 employees. Of these employees, 1,271 are brokerage personnel (consisting of 1,035
brokers and 236 trainees and clerks), 342 are technology and telecommunications specialists and 121 comprise our sales, marketing and customer support professionals. Approximately 34% of our employees
are based in the Americas, 52% are based in EMEA and the remaining 14% are based in Asia-Pacific. None of our employees are represented by a labor union. We consider our relationships with
our employees to be strong and have not experienced any interruption of operations due to labor disagreements.
ITEM 1A. RISK FACTORS
Risks Related to Our Business and Competitive Environments.
Economic, political and market factors beyond our control could reduce trading volumes, securities prices and demand for our brokerage services, which could harm our
business and our profitability.
Difficult market conditions, economic conditions and geopolitical uncertainties have in the past adversely affected and may in the
future adversely affect our business and profitability. Our business and the brokerage and financial services industry in general are directly affected by national and international economic and
political conditions, broad trends in business and finance, the level and volatility of interest rates, substantial fluctuations in the volume and price levels of securities transactions and changes
in and uncertainty regarding tax and other laws. In each of the three years in the period ended December 31, 2011, over 78% of our revenues were generated by our brokerage operations. As a
result, our revenues and profitability are likely to decline significantly during periods of low trading volume in the financial markets in which we offer our services. The financial markets and the
global financial services business are, by their nature, risky and volatile and are directly affected by many national and international factors that are beyond our control. Any one of the following
factors, among others, may cause a substantial decline in the United States and global financial markets in which we offer our services, resulting in reduced trading volumes. These factors
include:
-
-
economic and political conditions in the United States, Europe and elsewhere in the world;
-
-
concerns about terrorism and war;
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-
-
concerns over inflation and wavering institutional and consumer confidence levels;
-
-
the availability of cash for investment by our customers and their clients;
-
-
concerns over the credit default or bankruptcy of one or more sovereign nations or corporate entities;
-
-
the level and volatility of interest rates and foreign currency exchange rates;
-
-
the level and volatility of trading in certain equity and commodity markets;
-
-
the level and volatility of the difference between the yields on corporate securities being traded and those on related
benchmark securities (which difference we refer to as credit spreads); and
-
-
legislative and regulatory changes.
Declines
in the volume of trading in the markets in which we operate generally result in lower revenue from our brokerage business. In addition, although less common, some of our
brokerage revenues are determined on the basis of the value of transactions or on credit spreads. Therefore, declines in the value of instruments traded in certain market sectors or the tightening of
credit spreads could result in lower revenue for our brokerage business. Our profitability would be adversely affected by a decline in revenue because a portion of our costs are fixed. For these
reasons, decreases in trading volume or declining prices or credit spreads could have an adverse effect on our business, financial condition or results of operations.
Because competition for the services of brokers is intense, we may not be able to attract and retain the highly skilled brokers we need to support our business or we may be
required to incur additional expenses to do so.
We strive to provide high-quality brokerage services that allow us to establish and maintain long-term
relationships with our customers. Our ability to continue to provide these services and maintain these relationships depends, in large part, upon our brokers. As a result, we must attract and retain
highly qualified brokerage personnel.
Competition for the services of brokers is intense, especially for brokers with extensive experience in the specialized markets in which we participate or may seek to enter. If we are unable to hire
highly qualified brokers, we may not be able to enter new brokerage markets or develop new products. If we lose one or more of our brokers in a particular market in which we participate, our revenues
may decrease and we may lose market share in that particular market.
We
may not be successful in our efforts to recruit and retain brokerage personnel. If we fail to attract new personnel or to retain and motivate our current personnel, or if we incur
increased costs associated with attracting and retaining personnel (such as sign-on or guaranteed bonuses to attract new personnel or retain existing personnel), our business, financial
condition and results of operations may suffer.
In
addition, recruitment and retention of qualified staff could result in substantial additional costs. We pursue our rights through litigation when competitors hire our employees who
are under contract with us. We are currently involved in legal proceedings with our competitors relating to the recruitment of employees. An adverse settlement or judgment related to these or similar
types of claims could have a material adverse effect on our financial condition or results of operations. Regardless of the outcome of these claims, we generally incur significant expense and
management time dealing with these claims.
We operate in a rapidly evolving business and technological environment and we must adapt our business and keep up with technological innovation in order to compete
effectively.
The pace of change in our industry is extremely rapid. Operating in such a fast paced business environment involves a high degree of
risk. Our ability to succeed and compete effectively will depend
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on
our ability to adapt effectively to these changing market conditions and to keep up with technological innovation.
To
remain competitive, we must continue to enhance and improve the responsiveness, functionality, accessibility and other features of our hybrid brokerage systems, network distribution
systems and other technologies. The financial services industry is characterized by rapid technological change, changes in use and client requirements and preferences, frequent product and service
introductions employing new technologies and the emergence of new and complex regulatory requirements, industry standards and practices that could render our existing practices, technology and systems
obsolete. In more liquid
markets, development by our competitors of new electronic or hybrid trade execution, STP, affirmation, confirmation or clearing functionalities or products that gain acceptance in the market could
give those competitors a "first mover" advantage that may be difficult for us to overcome. Our success will depend, in part, on our ability to:
-
-
develop, test and implement hybrid or electronic brokerage systems that meet regulatory requirements, are desired and
adopted by our customers and/or increase the productivity of our brokers;
-
-
enhance our existing services;
-
-
develop or acquire new services and technologies that address the increasingly sophisticated and varied needs of our
existing and prospective customers; and
-
-
respond to technological advances and emerging industry standards and practices on a cost-effective and timely
basis.
The
development of proprietary brokerage systems and other technology to support our business entails significant technological, financial and business risks. Changes in existing laws
and regulations, including those being proposed and implemented under the Dodd-Frank Act, may require us to develop and maintain new brokerage systems, services or functionalities in order
to meet the standards set forth in such regulations or as may be required by regulators, such as the CFTC or SEC. Further, the adoption of new Internet, networking or telecommunications technologies
may require us to devote substantial resources to modify, adapt and defend our services. We may not successfully implement new technologies or adapt our hybrid brokerage systems and
transaction-processing systems to meet our clients' requirements or emerging regulatory or industry standards. We may not be able to respond in a timely manner to changing market conditions or client
requirements or successfully defend any challenges to any technology we develop. If we are unable to anticipate and respond to the demand for new services, products and technologies on a timely and
cost-effective basis, and to adapt to technological advancements and changing standards, we may be unable to compete effectively, which could negatively affect our business, financial
condition or results of operations.
We face substantial competition that could negatively impact our market share and our profitability.
The financial services industry generally, and the wholesale and inter-dealer brokerage businesses in which we are engaged in
particular, is very competitive, and we expect competition to continue to intensify in the future. Our current and prospective competitors include:
-
-
other large inter-dealer brokerage firms;
-
-
small brokerage firms that focus on specific products or regional markets;
-
-
securities, futures and derivatives exchanges, swap execution facilities and electronic communications networks;
-
-
in certain equity and corporate fixed income markets, traditional cash product broker-dealers, including large, medium and
smaller sized financial service firms;
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-
-
with regard to our Kyte business, futures commissions merchants and other firms providing settlement and clearing
services; and
-
-
other providers of data and analytics products, including those that offer varying forms of electronic trading of the
types of financial instruments in which we specialize.
Some
of our competitors offer a wider range of services, have broader name recognition, have greater financial, technical, marketing and other resources than we have and have larger
client bases than we do. Some of them may be able to respond more quickly to new or evolving opportunities, technologies and client requirements than we can, and may be able to undertake more
extensive marketing activities. Our competitors often seek to hire our brokers, which could result in a loss of brokers by us or in increased costs to retain our brokers. In addition to the
competitors described above, our large institutional clients may increase the amount of trading they do directly with each other rather than through us, or they may decrease their trading of certain
OTC products in favor of exchange-traded products. In either case, our revenues could be adversely affected. If we are not able to compete successfully in the future, our business, financial condition
and results of operations would be adversely affected.
We
have experienced intense price competition in our brokerage business and clearing services in recent years. Some competitors may offer brokerage or clearing services to clients at
lower prices than we are offering, which may force us to reduce our prices or to lose market share and revenue. In addition, we focus primarily on providing brokerage services in markets for less
commoditized financial instruments. As the markets for these instruments become more commoditized, we could lose market share to other inter-dealer brokers, exchanges and electronic multi-dealer
brokers who specialize in providing brokerage services in more commoditized markets.
We
increasingly compete with exchanges for the execution of trades in certain products. If a financial instrument for which we provide brokerage services becomes listed on an exchange or
if an exchange introduces a competing product to the products we broker in the OTC market, the need for our services in relation to that instrument could be significantly reduced and our business,
financial condition and results of operations could be adversely affected.
In
addition, increased competition has contributed to a decline in clearing revenue per transaction in recent years and may continue to create downward pressure on our clearing revenue
per transaction in the future. If the decline in clearing revenue per transaction continues, we may not be able to increase our overall clearing volumes at a comparable rate and our revenues from
clearing services would be adversely affected.
Convergence of OTC and exchange-traded markets may impact volumes, liquidity and demand for our services in certain markets.
New regulation in the United States and abroad, including the Dodd-Frank Act, could result in a convergence of the
traditional OTC market and the exchange traded market, as certain OTC products are required to and become centrally cleared and traded via an exchange or SEF. As the convergence of the OTC and
exchange traded markets occurs, the resulting OTC or SEF market for those products may be less robust, there may be less volume and liquidity in these markets and there may be less demand for our
services. If any of this were to occur, our business could be significantly reduced and our business, financial condition and results of operations could be adversely affected.
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Consolidation and layoffs in the banking and financial services industries could materially adversely affect our business, financial condition and results of operations.
In recent years, there has been substantial consolidation and convergence among companies in the banking and financial services
industries, resulting in increased competition. Continued consolidation or significant layoffs in the financial services industry could result in a decrease in the number of traders for whom we are
able to provide brokerage services, which may reduce our trading volumes. In addition, continued consolidation could lead to the exertion of additional pricing pressure by our customers and our
competitors, impacting the commissions we generate from our brokerage services. Following the enactment of the Dodd-Frank Act in the United States, many banks have reduced, spun off or are
in the process of spinning off their proprietary trading operations due to the increased regulations, costs and uncertainty involved with such operations. It is not yet clear what affect this will
have on our transaction volumes, revenues and business or whether we will be able to successfully compete for the business of any new entities created as a result of these spinoffs.
Further,
the recent consolidation among exchange firms, and expansion by these firms into derivative and other non-equity trading markets, will increase competition for
customer trades and place additional pricing pressure on commissions and spreads. These developments have increased competition from firms with potentially greater access to capital resources than us.
Finally,
consolidation among our competitors other than exchange firms could result in increased resources and product or service offerings for our competitors. If we are not able to compete successfully in
the future, our business, financial condition and results of operations could be materially adversely affected.
If we are unable to continue to identify and exploit new market opportunities, our ability to maintain and grow our business may be adversely affected.
When a new intermediary enters our markets or the markets become more liquid, the resulting competition or increased liquidity may lead
to lower commissions. This may result in a decrease in revenue in a particular market even if the volume of trades we handle in that market has increased. As a result, we seek to broker more trades
and increase market share in existing markets and to seek out new markets in which we can charge higher commissions. Pursuing this strategy requires significant management attention and broker
expense. We may not be able to attract new clients or successfully enter new markets. If we are unable to continue to identify and exploit new market opportunities on a timely and
cost-effective basis, our revenues may decline, which would adversely affect our profitability.
Financial or other problems experienced by our clients or third parties could affect the markets in which we provide brokerage services. In addition, any disruption in the
key derivatives markets in which we provide services could affect our brokerage revenues.
Problems experienced by third parties could also affect the markets in which we provide brokerage services. In recent years, an
increasing number of financial institutions have reported losses or significant exposures tied to write-downs of mortgage and asset backed securities, government securities, structured credit products
and other derivative instruments and investments. As a result, there is an increased risk that one of our clients, counterparties or third-party clearing firms could fail, shut down, file for
bankruptcy or be unable to satisfy their obligations under certain derivative contracts. The failure of a significant number of counterparties or a counterparty that holds a significant amount of
derivatives exposure, or which has significant financial exposure to, or reliance on, the mortgage, asset backed, sovereign debt or related markets, could have a material adverse effect on the trading
volume and liquidity in a particular market for which we provide brokerage services or on the broader financial markets. The occurrence of any of these events or failures by our customers or clearing
firms could adversely affect our financial condition and results of operations. In addition, in recent years, a significant percentage of our business, directly or indirectly, results from trading
activity by hedge funds. Hedge funds typically employ a significant amount of leverage to achieve their results
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and,
in the past, certain hedge funds have had difficulty managing this leverage, which has resulted in market-wide disruptions. During the economic turmoil of the last few years, many
hedge funds have significantly decreased their leverage or have gone out of business. If this deleveraging continues or one or more hedge funds that was a significant participant in a derivatives
market experiences problems in the future, that derivatives market could be adversely affected and, accordingly, our brokerage revenues in that market will likely decrease.
Our brokerage, clearing and execution business exposes us to certain client and counterparty credit risks.
We generally provide brokerage services to our clients in the form of either agency or matched principal transactions. In agency
transactions, we charge a commission for connecting buyers and sellers and assisting in the negotiation of the price and other material terms of the transaction. After all material terms of a
transaction are agreed upon, we identify the buyer and seller to each other and leave them to settle the trade directly. We are exposed to credit risk for commissions we bill to clients for our agency
brokerage services. In executing matched principal transactions, we are exposed to the risk that one of the counterparties to a transaction may fail to fulfill its obligations, as described in further
detail in the Risk Factor captioned "The securities settlement process exposes us to risks that may impact our liquidity and profitability. In addition, liability for unmatched principal trades could
adversely affect our results of operations and statement of financial condition." Our clients may default on their obligations to us arising from either agency or principal transactions due to
disputes, bankruptcy, lack of liquidity, operational failure or other reasons. Any losses arising from such defaults could adversely affect our financial condition or results of operations.
We
also have credit and counterparty risk in certain situations where we provide clearing and execution services. We provide agency clearing services through our relationships with
general clearing member firms and/or exchanges. In these instances, our accounts at such institutions are used, in our name, to provide access to clearing services for our customers.
Credit
risk arises from the possibility that we may suffer losses due to the failure of our customers or other counterparties to satisfy their financial obligations to us or in a timely
manner. We may be materially and adversely affected in the event of a significant default by our customers or counterparties. Credit risks we face include, among
others:
-
-
exposure to a customer's inability or unwillingness to meet obligations, including when adverse market movements result in
a trading loss and the customer's posted margin is insufficient to satisfy the deficit. Such margin deficiencies may be caused by a failure to monitor client positions and accurately evaluate risk
exposures, which may lead to our failure to require clients to post adequate initial margin or to increase variation margin, as necessary, to keep pace with market movements and subsequent account
deficits;
-
-
exposure to counterparties with whom we place funds, including those of our customers, such as when we post margin with
exchanges and clearing members;
-
-
exposure to counterparties with whom we trade; and
-
-
market risk exposure due to delayed or failed settlement, which, if not corrected, could become our responsibility as an
agency clearing broker. In addition, we have market risk exposure on matched and unmatched principal transactions until offsetting trades are executed and settled.
Customers
and counterparties that owe us money or securities may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. Our
reputation may be damaged if we are associated with a customer or counterparty that defaults, even if we do not have any direct losses from such an event. For further detail see the Risk Factor
captioned "The securities settlement process exposes us to risks that may impact our liquidity and profitability. In addition,
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liability
for unmatched principal trades could adversely affect our results of operations and statement of financial condition."
We
have adopted policies and procedures to identify, monitor and manage our credit risk, in both agency and principal transactions, through reporting and control procedures and by
monitoring credit standards applicable to our clients. These policies and procedures, however, may not be fully effective. Some of our risk management methods depend upon the evaluation of information
regarding markets,
clients or other matters that are publicly available or otherwise accessible by us. That information may not, in all cases, be accurate, complete, up-to-date or properly
evaluated. If our policies and procedures are not fully effective or we are not always successful in monitoring or evaluating the credit risks to which we are, or may, be exposed, our financial
condition or results of operations could be adversely affected. In addition, our insurance policies may not provide coverage for these risks.
In
addition, concerns about, or a default by, one institution could lead to significant liquidity problems, losses or defaults by other institutions, which in turn could adversely affect
us. We may also be adversely affected if settlement, clearing or payment systems become unavailable, fail or are subject to systemic delays for any reason outside our control.
In certain instances, we may extend credit to our clearing customers for margin requirements, which subjects us to credit risks and if we are unable to liquidate a
customer's securities when the margin collateral becomes insufficient, we may suffer a loss.
In certain instances, we may provide credit for margin requirements to customers; therefore, we are subject to risks inherent in
extending credit. Our credit risks include the risk that the value of the collateral we hold could fall below the amount of a customer's indebtedness. This risk can be amplified in any situation where
the market for the underlying security is rapidly declining. Agreements with customers that have margin accounts permit us to liquidate their securities in the event that the amount of margin
collateral becomes insufficient. Despite those agreements and our risk management policies with respect to margin, we may be unable to liquidate the customers' securities for various reasons, or at a
price sufficient to cover any deficiency in a customer's account. If we were unable to liquidate a position at a price sufficient to cover any deficiency or if a customer was unable to post additional
margin, we could suffer a loss.
Certain of our clearing customers may choose to obtain a direct relationship with a clearing member, an exchange or a clearinghouse as their operations grow, in which case,
we would lose the revenues generated by such customers.
We market our clearing services to our existing customers on the strength of our relationship with certain clearing members and
exchanges and on our ability to perform related back-office functions at a lower cost than the customers could perform these functions themselves. As our customers' operations grow, they
may consider the option of obtaining a direct relationship with a clearing member, clearinghouse or exchange themselves in an effort to save costs. If our customers choose to obtain their clearing
services directly, we would lose their revenue and our business could be adversely affected.
Risks Related to Our Operations.
We operate in a highly regulated industry and we may face restrictions with respect to the way we conduct certain of our operations.
Our business is subject to increasingly extensive government and other regulation and our relationships with our clients may subject us
to increasing regulatory scrutiny. These regulations are designed to protect public interests generally rather than our stockholders. The SEC, FINRA, CFTC and other agencies extensively regulate the
United States financial services industry, including much of our operations in the United States. Some of our international operations are subject to similar
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regulations
in their respective jurisdictions, including regulations overseen by the FSA in the United Kingdom, the AMF in France, the SFC in Hong Kong, the MAS in Singapore, the JSDA in Japan, the
Ministry of Finance and Economy in Korea and the SVS in Chile. These regulatory bodies are responsible for safeguarding the integrity of the securities and other financial markets and protecting the
interests of investors in those markets. Most aspects of our business are subject to extensive regulation, including:
-
-
the way we deal with clients;
-
-
capital requirements;
-
-
financial and reporting practices;
-
-
required recordkeeping and record retention procedures;
-
-
the licensing of employees;
-
-
the conduct of directors, officers, employees and affiliates;
-
-
systems and control requirements;
-
-
restrictions on marketing, gifts and entertainment; and
-
-
client identification and anti-money laundering requirements.
If
we fail to comply with any of these laws, rules or regulations, we may be subject to censure, fines, cease-and-desist orders, suspension of business,
suspensions of personnel or other sanctions, including revocation of our registrations with FINRA, withdrawal of our authorizations from the FSA or revocation of our registrations with other similar
international agencies to whose regulation we are subject. For example, several of GFI Securities LLC's equity and corporate bond brokerage desks have experienced issues relating to reporting
trades to FINRA on a timely basis, which is required by FINRA rules. This subsidiary has also paid fines for trade reporting in recent years and is currently being reviewed by FINRA for similar issues
relating to trade reporting. For more details on recent disciplinary proceedings, see "Item 3Legal Proceedings."
Our
authority to operate as a broker in a jurisdiction is dependent on continued registration or authorization in that jurisdiction or the maintenance of a proper exemption from such
registration or authorization. Our ability to comply with all applicable laws and rules is largely dependent on our compliance, credit approval, audit and reporting systems and procedures, as well as
our ability to attract and retain qualified compliance, credit approval, audit and risk management personnel. Our
systems and procedures may not be sufficiently effective to prevent a violation of all applicable rules and regulations. In addition, the growth and expansion of our business may create additional
strain on our compliance systems and procedures and has resulted, and we expect will continue to result, in increased costs to maintain and improve these systems.
In
addition, because our industry is heavily regulated, regulatory approval may be required in order to continue or expand our business activities and we may not be able to obtain the
necessary regulatory approvals. Even if approvals are obtained, they may impose restrictions on our business or we may not be able to continue to comply with the terms of the approvals or applicable
regulations. The implementation of unfavorable regulations or unfavorable interpretations of existing regulations by courts or regulatory bodies could require us to incur significant compliance costs
or cause the development or continuation of business activities in affected markets to become impractical. For a further description of the regulations which may limit our activities, see
"Item 1BusinessRegulation."
Some
of our subsidiaries are subject to regulations regarding changes in control of their ownership. These regulations generally provide that regulatory approval must be obtained in
connection with any
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transaction
resulting in a change in control of the subsidiary, which may include changes in control of GFI Group Inc. As a result of these regulations, our future efforts to sell shares or
raise additional capital may be delayed or prohibited in circumstances in which such a transaction would give rise to a change in control as defined by the applicable regulatory body.
Broad changes in laws or regulations or in the application of such laws and regulations may have an adverse effect on our ability to conduct our business.
The financial services industry, in general, is heavily regulated. Proposals for legislation further regulating the financial services
industry are continually being introduced in the United States Congress, in state legislatures and by foreign governments. The government agencies that regulate us continuously review legislative and
regulatory initiatives and may adopt new or revised laws and regulations and have broad powers to investigate and enforce compliance and punish noncompliance with their rules, regulations and industry
standards of practice. In light of recent conditions in the United States financial markets and economy, regulators have increased their focus on the regulation of the financial services industry. We
are unable to predict whether any of these proposals will be implemented or in what form, or whether any additional or similar changes to statutes or regulations, including the interpretation or
implementation thereof, will occur in the future. Any
such action could affect us in substantial and unpredictable ways and could have an adverse effect on our business, financial condition and results of operations.
We
are also affected by the policies adopted by the Federal Reserve and international central banking authorities, which may directly impact our cost of funds for capital raising and
investment activities and may impact the value of financial instruments we hold. In addition, such changes in monetary policy may affect the credit quality of our customers. Changes in domestic and
international monetary policy are beyond our control and are difficult to predict.
Additionally,
governments and regulators in both the United States and Europe have called for increased regulation and transparency in the OTC markets. As a result, the
Dodd-Frank Act was passed in the United States in July 2010 and regulators in Europe are currently considering similar legislation. For a detailed description of the Dodd-Frank
Act, see the Risk Factor captioned "
Failure to qualify as a swap execution facility could significantly impact our business, financial condition and results of operations. Even
if we qualify as a swap execution facility, we will incur significant additional costs, our revenues may be lower than in the past and our financial condition and results of operations may be
adversely affected."
In
September 2010, the European Commission released a draft proposal referred to as the European Market Infrastructure Regulation ("EMIR") requiring that information on OTC derivative
contracts should be reported to trade repositories and be accessible to supervisory authorities, that some transaction and price related information should be made available to all market participants
and that standard OTC derivative contracts be cleared through central counterparties ("CCPs"). EMIR was approved by the European Parliament in February 2012 and it is expected that the proposed rules
will be operational by year-end 2012.
It
is difficult to predict the effect these new laws and regulations will have on our business, but they may have an adverse affect on our operations or our ability to maintain our
position as a provider of execution and brokerage services for many of the OTC products for which we have traditionally acted as an intermediary.
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Failure to qualify as a swap execution facility could significantly impact our business, financial condition and results of operations. Even if we qualify as a swap
execution facility, we will incur significant additional costs, our revenues may be lower than in the past and our financial condition and results of operations may be adversely affected.
The Dodd-Frank Act created a new type of regulated entity known as a swap execution facility (referred to herein as a SEF)
and mandated that certain cleared swaps (subject to an exemption from the clearing requirement) trade on either an exchange or SEF. The list of swaps that will be required to be cleared and therefore
executed through a SEF is not yet final, but is expected to encompass a vast number of swaps that have been traditionally executed OTC by wholesale brokers such as ourselves. As with other parts of
the Dodd-Frank Act, many of the details of the new regulatory regime relating to swaps are left to the CFTC and SEC to determine through rulemaking. Subject to such rulemaking, we
currently expect to establish and operate a swap execution facility and a security-based swap execution facility.
The
CFTC and SEC have each issued proposed rules relating to the requirements for registering and operating as a SEF. We are in the process of preparing for compliance with the proposed
rules. However, many of these rules are not yet final and are still subject to revision and therefore, the impact of the rules is not able to be predicted. The proposed rules relating to SEFs would
require, among other things, that an entity would have to comply with certain core principles to maintain registration as a SEF. These principles generally relate to trading and product requirements,
compliance and audit-trail obligations, governance and disciplinary requirements, operational capabilities, surveillance obligations and financial information and resource requirements. In addition,
SEFs will be required to maintain certain trading systems that meet the minimum functionality requirements set by the CFTC and SEC for trading in certain OTC derivatives that are required to be
cleared.
There
will be significant costs to prepare for and to comply with these ongoing regulatory requirements. We will incur increased legal fees, personnel expenses and other costs as we work
to analyze and implement the necessary legal structure for registration. There will also be significant costs related to the development, operation and enhancement of our technology relating to trade
execution, trade reporting, surveillance, compliance and back-up and disaster recovery plans designed to meet the requirements of the regulators.
In
addition, it is not clear at this point what the impact of these rules and regulations will be on the markets in which we currently provide our services. Following the adoption of the
Dodd-Frank Act and related rules, the markets for cleared and non-cleared swaps may be less robust, there may be less volume and liquidity in these markets and there may be
less demand for our services. There may also be a preference of market participants to trade certain swaps on an exchange, rather than a SEF. Certain banks and other institutions will be limited in
their conduct of proprietary trading and will be further limited or prohibited from trading in certain derivatives. The new rules, including the restrictions on the trading activities for certain
banks and large institutions, could materially impact transaction volumes and liquidity in these markets and our revenues, financial condition and business would be adversely impacted as a result.
If
we fail to qualify as a SEF under any of these proposed rules, we will be unable to maintain our position as a provider of execution and brokerage services in the markets for many of
the OTC products for which we have traditionally acted as an intermediary. This would have a broad impact on our business and could have a material adverse affect on our financial condition and
results of operations.
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Our regulated subsidiaries are subject to risks associated with net capital requirements, and we may not be able to engage in operations that require significant capital.
Many aspects of our business are subject to significant capital requirements. The SEC, FINRA, FSA, JSDA and various other domestic and
international regulatory agencies have stringent rules and regulations with respect to the maintenance of specific levels of net capital by broker-dealers. In addition, there may be capital
requirements for SEFs and swap dealers, which will be established by the CFTC and the SEC.
Generally,
a broker-dealer's net capital is defined as its net worth plus qualified subordinated debt less deductions for certain types of assets. While we expect to continue to maintain
levels of capital in excess of regulatory minimums, there can be no assurance that this will be the case in the future. If we fail to maintain the required capital levels, we will be required to
suspend our broker-dealer operations during any period in which we are not in compliance with capital requirements, and may be subject to suspension or revocation of registration by the SEC and FINRA
or withdrawal of authorization or other disciplinary action from domestic and international regulators, which would have a material adverse effect on our business. If these net capital rules are
changed or expanded, or if there is an unusually large charge against net capital, operations that require the intensive use of capital would be limited. Also, our ability to withdraw capital from our
regulated subsidiaries is subject to restrictions, which in turn could limit our ability to pay dividends, repay debt or purchase shares of our common stock. A large operating loss or charge against
net capital could adversely affect our ability to expand or even maintain our present levels of business, which could have a material adverse effect on our business. In addition, we may become subject
to net capital requirements in other foreign jurisdictions in which we currently operate or which we may enter.
In
addition, we are required to maintain capital with our clearing firms, prime brokers and futures commission merchants and at clearing organizations of which we are a member. The
amount of capital to be maintained is dependent on a number of factors, including the rules established by the clearing organization, the types of products to be cleared and the volume and size of
positions to be cleared. If we fail to maintain the capital required by these clearing organizations and firms, our ability to clear
through these clearing organizations and firms may be impaired, which may adversely affect our ability to process trades.
We
cannot predict our future capital needs or our ability to obtain additional financing. For a further discussion of our net capital requirements, see
"Item 1BusinessRegulation" and Note 20 to the Consolidated Financial Statements.
Our risk management policies might not be effective, which could harm our business.
To manage the significant risks inherent in our business, we must maintain effective policies, procedures and systems that enable us to
identify, monitor and control our exposure to financial, market, credit, legal, reputational and operational risks. For a description of our risk management approach, see "Item 7A. Quantitative
and Qualitative Disclosure About Market Risk." This risk management function requires, among other things, that we properly record and verify many thousands of transactions and events each day, and
that we continuously monitor and evaluate the size and nature of our or our clients' positions and the associated risks. In light of the high volume of transactions, it is impossible for us to review
and assess every single transaction or to monitor at every moment in time our or our customers' positions and the associated risks.
We
must rely upon our analysis of information regarding markets, personnel, clients or other matters that is publicly available or otherwise accessible to us. That information may not in
all cases be accurate, complete, up-to-date or properly analyzed. Furthermore, we rely on a combination of technical and human controls and supervision that are subject to
error and potential failure, the challenges of which are exacerbated by the 24-hour-a-day, global nature of our business.
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Our
risk-management methods are based on internally developed controls, observed historical market behavior and what we believe to be industry practices. However, our methods
may not adequately prevent future losses, particularly as they may relate to extreme market movements or events for which little or no historical precedent exists or our risk management efforts may be
insufficient. Thus, our risk-management methods may prove to be ineffective because of their design, their implementation or the lack of adequate, accurate or timely information. Our risk
management methods may also fail to identify a risk or understand a risk that might result in losses. If our risk-management policies and efforts are ineffective, we could suffer losses
that
could have a material adverse effect on our financial condition or operating results. Additionally, we could be subject to litigation, particularly from our clients, and sanctions or fines from
regulators.
The securities settlement process exposes us to risks that may impact our liquidity and profitability. In addition, liability for unmatched principal trades could adversely
affect our results of operations and statement of financial condition.
Through our subsidiaries, we provide brokerage services by executing transactions for our clients. A significant number of these
transactions are "matched principal transactions" in which we act as a "middleman" by serving as a counterparty to both a buyer and a seller in matching reciprocal back-to-back
trades. These transactions, which generally involve cash equities and bonds, are then settled through clearing institutions with which we have a contractual relationship.
In
executing matched principal transactions, we are exposed to the risk that one of the counterparties to a transaction may fail to fulfill its obligations, either because it is not
matched immediately or, even if matched, one party fails to deliver the cash or securities it is obligated to deliver. Our focus on less commoditized markets exacerbates this risk for us because
transactions in these markets tend to be more likely not to settle on a timely basis. Adverse movements in the prices of securities that are the subject of these transactions can increase our risk. In
addition, widespread technological or communication failures, as well as actual or perceived credit difficulties or the insolvency of one or more large or visible market participants, could cause
market-wide credit difficulties or other market disruptions. These failures, difficulties or disruptions could result in a large number of market participants not settling transactions or
otherwise not performing their obligations.
We
are subject to financing risk in these circumstances because if a transaction does not settle on a timely basis, the resulting unmatched position may need to be financed, either
directly by us or through one of our clearing organizations at our expense. These charges may be recoverable from the failing counterparty, but sometimes are not. Finally, in instances where the
unmatched position or failure to deliver is prolonged or widespread due to rapid or widespread declines in liquidity for an instrument, there may also be regulatory capital charges required to be
taken by us, which depending on their size and duration, could limit our business flexibility or even force the curtailment of those portions of our business requiring higher levels of capital.
In
the process of executing matched principal transactions, miscommunications and other errors by our clients or us can arise whereby a transaction is not completed with one or more
counterparties to the transaction, leaving us with either a long or short unmatched position. These unmatched positions are referred to as "out trades," and they create a potential liability for our
subsidiary involved in the trade. If an out trade is promptly discovered and there is a prompt disposition of the unmatched position, the risk to us is usually limited. If the discovery of an out
trade is delayed, the risk is heightened by the increased possibility of intervening market movements prior to disposition. Although out trades usually become known at the time of, or later on the day
of, the trade, it is possible that they may not be discovered until later in the settlement process. When out trades are discovered our policy is generally
to have the unmatched position disposed of promptly (usually on the same day and generally within three days), whether or not this disposition would result in a loss to us. The occurrence of out
trades generally rises with increases in the volatility of the market and, depending on their
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number
and amount, such out trades have the potential to have a material adverse effect on our financial condition and results of operations. In addition, the use of our electronic brokerage platforms
for products that we broker on a matched principal basis, such as CreditMatch®, can present these risks because of the potential for erroneous entries by our clients or brokers coupled
with the potential that such errors will not be discovered promptly.
We are exposed to market risk from principal transactions entered into by some of our desks.
We generally execute orders on a matched principal basis by entering into one side of a customer trade and entering into an offsetting
trade with another party relatively quickly (often within minutes and generally on the same trading day). However, we may take unmatched positions for our own account primarily to facilitate the
execution of existing customer orders or in anticipation that future customer orders will become available to fill the other side of the transaction. While we seek to minimize our exposure to market
risk by entering into offsetting trades or a hedging transaction relatively quickly (often within minutes and generally on the same trading day), we may not always enter into an offsetting trade on
the same trading day and any hedging transaction we may enter into may not fully offset our exposure. Therefore, although any unmatched positions are intended to be held short term, we may not
entirely offset market risk and may be exposed to market risk for several days or more or to a partial extent or both. Our exposure varies based on the size of the overall positions, the terms and
liquidity of the instruments brokered, and the amount of time the positions are held before we dispose of the position.
Although
the significant majority of our principal trading is done on a "matched principal" basis, we have authorized a limited number of our desks to enter into principal investing
transactions in which we commit our capital within predefined limits, either to facilitate customer trading activities or to engage in principal trading for our own account. These principal positions
may ultimately be matched against a customer order or through a market intermediary, either in the short term (such as the same trading day) or we may hold these positions for several days or more.
The number and size of these transactions may affect our results of operations in a given period and we may also incur losses from these trading activities due to market fluctuations and volatility
from quarter to quarter. To the extent that we have long positions in any of those markets, a downturn in the value of those positions could result in losses from a decline in the value of those long
positions. Conversely, to the extent that we have sold assets we do not own (i.e., have short positions) in any of those markets, an upturn in those markets could expose us to significant
losses as we attempt to cover our short positions by acquiring
assets in a rising market. In addition, in the event that one of our desks enters into principal transactions that exceed their authorized limit and we are unable to dispose of the position promptly,
we could suffer losses that could have a material adverse effect on our financial condition or operating results.
Due
to the factors described above, including the nature of the position and access to the market on which it trades, we may not be able to match a position or effectively hedge our
exposure and often may hold a position overnight or longer that has not been hedged. To the extent these principal positions are not disposed of intra-day, we mark these positions to
market. Adverse movements in the securities underlying these positions or a downturn or disruption in the markets for these positions could result in a substantial loss. In addition, any principal
gains and losses resulting from these positions could on occasion have a disproportionate positive or negative effect, on our financial condition and results of operations for any particular reporting
period.
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We have equity investments or profit sharing interests in entities whose primary business is proprietary trading. These investments could expose us to losses that would
adversely affect our net income and the value of our assets.
We have equity investments or profit sharing interests in entities whose primary business is proprietary trading. The accounting
treatment applied for these investments varies depending on a number of factors, including, but not limited to, our percentage ownership or profit share and whether we have any influence or control
over the relevant entity. Under certain accounting standards, any losses experienced by these entities on their investment activities would adversely impact our net income and the value of these
assets. In addition, if these entities were to fail and cease operations, we could lose the entire value of our investment and the stream of any shared profits from trading.
Our investments in expanding our brokerage and clearing services, hybrid brokerage systems and market data and analytics services may not produce substantial revenue or
profit.
We have made, and expect to continue to make, significant investments in our brokerage, clearing and market data and analytics
services, including investments in personnel, technology and infrastructure, in order to pursue new growth opportunities. With respect to our brokerage services and hybrid brokerage systems, we may
not receive significant revenue and profit from the development of a new brokerage desk or hybrid brokerage system or the revenue we do receive may not be sufficient to cover the start-up
costs of the new desk or the substantial development expenses associated with creating a new hybrid brokerage system. Even when our personnel hires and systems are ultimately successful, there is
typically a transition period before these hires or systems become profitable or increase productivity. In some instances, our clients may determine that they do not need or prefer a hybrid brokerage
system and the period before the system is successfully developed, introduced and adopted may extend over many months or years. The successful introduction of hybrid brokerage systems in one market or
country does not ensure that the same system will be used or favored by clients in similar markets or other countries. Our continued expansion of brokerage personnel and systems to support new growth
opportunities results in ongoing transition periods that could adversely affect the levels of our compensation and expense as a percentage of brokerage revenue.
With
respect to our investment in clearing, settlement and back-office services, we may not produce significant revenues or profits. In addition, any revenues we do receive
may not be sufficient to cover our invested capital or start-up costs. With respect to these services, we may incur significant costs developing and maintaining systems for
back-office, risk management and exchange and clearing connections with relevant exchanges and clearing firms. In addition, this business may involve significant management effort to
expand. If we are unable to generate sufficient revenue to cover the fixed costs associated with this business, our financial condition or results of operations could be adversely affected.
With
respect to our market data and analytics services, we may incur substantial development, sales and marketing expenses and expend significant management effort to create a new
product or service. Even after incurring these costs, we ultimately may not sell any or sell only small amounts of these products or services. Consequently, if revenue does not increase in a timely
fashion as a result of these expansion and development initiatives, the up-front costs associated with them may exceed the related revenue and reduce our working capital and income.
If we are unable to manage the risks of international operations effectively, our business could be adversely affected.
We provide services and products to clients globally through offices in Europe, the Middle East, Africa, South America and Asia and we
may seek to further expand our
operations in the future. On a geographic basis, approximately 59% and 54% of our total revenues for the years ended December 31,
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2011
and 2010, respectively, were generated by our operations in Europe, the Middle East and Africa (EMEA), 31% and 36%, respectively, were generated by our operations in the Americas, which include
operations in South America, and 10% and 10%, respectively, were generated by our operations in the Asia-Pacific region. There are certain additional risks inherent in doing business in
international markets, particularly in the regulated brokerage industry. These risks include:
-
-
additional regulatory requirements;
-
-
difficulties in recruiting and retaining personnel and managing the international operations;
-
-
potentially adverse tax consequences, tariffs and other trade barriers;
-
-
adverse labor laws; and
-
-
reduced protection for intellectual property rights.
Our
international operations also expose us to the risk of fluctuations in currency exchange rates. For example, a substantial portion of our revenue from our London office, our largest
international office, is received in Euros and U.S. Dollars, whereas many of our expenses from our London operations are payable in British Pounds. Our risk management strategies relating to exchange
rates may not prevent us from suffering losses that would adversely affect our financial condition or results of operations.
Our
international operations are also subject to the political, legal and economic risks associated with politically unstable and less developed regions of the world, including the risk
of war and other international conflicts and actions by governmental authorities, insurgent groups, terrorists and others. In addition, we are required to comply with the laws and regulations of
foreign governmental and regulatory authorities of each country in which we conduct business. These may include laws, rules and regulations, including registration requirements. For example, in
Europe, the European Commission published a formal proposal for the regulation of OTC derivatives, central clearing parties and trade repositories in September 2010, which is referred to as the
European Market Infrastructure Regulation ("EMIR"). EMIR, which is currently in the approval phase with the European Counsel and European Parliament, proposes central clearing and transparent
reporting requirements for OTC derivatives and is expected to be in place by year-end 2012. Our compliance with these laws and regulations may be difficult and time consuming and may
require significant expenditures and personnel requirements, and our failure to be in compliance would subject us to legal and regulatory liabilities. We may also experience difficulty in managing our
international operations because of, among other things, competitive conditions overseas, established domestic markets, language and cultural differences and economic or political instability. Any of
these factors could have a material adverse effect on the success of our international operations or limit our ability to grow our international operations and, consequently, on our business,
financial condition and operating results.
We may be exposed to risk from our operations in emerging market countries, including counterparty risks exposure.
Our businesses and operations are increasingly expanding into new regions, including emerging markets, and we expect this trend to
continue. We have entered into an increasing number of matched principal transactions with counterparties domiciled in countries in the Middle East, Latin America, Eastern Europe and Asia. Recent
events in the Middle East have created instability in the region, particularly with respect to certain sovereign entities. Transactions with these counterparties are generally in instruments or
contracts of sovereign or corporate issuers located in the same country or region as the counterparty. This exposes us to a higher degree of sovereign or convertibility risk than in more stable or
developed countries. In addition, these risks may be correlated risks. A correlated risk arises when the counterparty's inability to meet its obligations will also correspond to a decline in the value
of the instrument traded. In the case of a sovereign convertibility event or outright default, the
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counterparty
to the trade may be unable to pay or transfer payment of an instrument purchased out of the country when the value of the instrument has declined due to the default or convertibility
event. Various emerging market countries have experienced severe economic and financial disruptions, including significant devaluations of their currencies, defaults or threatened defaults on
sovereign debt, capital and currency exchange controls, and low or negative growth rates in their economies. These
conditions could have an adverse impact on our businesses and increased volatility in financial markets generally. Through our risk management procedures, we monitor the creditworthiness of emerging
countries and counterparties on an ongoing basis and when the risk of inconvertibility or sovereign default is deemed to be too great, correlated transactions or all transactions may be restricted or
suspended. However, there can be no assurance that our procedures will be effective in controlling these risks, which, if not successfully controlled, could result in a loss that could have a material
adverse effect on our financial condition and operating results.
We may have difficulty managing our expanding operations effectively.
We have significantly expanded our business activities and operations over the last several years, which have placed, and are expected
to continue to place, a significant strain on our management and resources. Continued expansion into new markets and regions will require continued investment in management and other personnel,
facilities, information technology infrastructure, financial and management systems and controls and regulatory compliance controls. The expansion of our international operations, particularly our
Asia-Pacific and South American operations, involves additional challenges that we may not be able to meet, such as the difficulty in effectively managing and staffing these operations and
complying with the increased regulatory requirements associated with operating in new jurisdictions.
We
may not be successful in implementing all of the processes that are necessary to support these initiatives, which could result in our expenses increasing faster than our revenues,
causing our operating margins and profitability to be adversely affected, or it could result in us having insufficient controls in our operations for a period of time. Accordingly, this expansion, if
not properly managed, could result in a loss that could have a material adverse effect on our financial condition and operating results.
In the event of employee misconduct or error, our business may be harmed.
Employee misconduct or error could subject us to legal liability, financial losses and regulatory sanctions and could seriously harm
our reputation and negatively affect our business. Misconduct by employees could include engaging in improper or unauthorized transactions or activities, failing to properly supervise other employees
or improperly using confidential information. Employee errors, including mistakes in executing, recording or processing transactions for customers, could cause us to enter into transactions that
clients may disavow and refuse to settle, which could expose us to the risk of material losses even if the errors are detected and the transactions are unwound or reversed. If our clients are not able
to settle their transactions on a timely basis, the time in which employee errors are detected may be increased and our risk of material loss could be increased. The risk of employee error or
miscommunication may be greater for products that are new or have non-standardized terms. It is not always possible to deter employee misconduct or error, and the precautions we take to
detect and prevent this activity may not be effective in all cases.
Brokerage services involve substantial risks of liability, and we therefore may become subject to risks of litigation.
Many aspects of our business, and the businesses of our clients, involve substantial risks of liability. Dissatisfied clients may make
claims regarding quality of trade execution, improperly settled trades or mismanagement against us. We may become subject to these claims as the result of failures or malfunctions of our trading
systems or other brokerage services provided by us, and third parties may
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seek
recourse against us. We attempt to limit our liability to our customers through the use of written or "click-through" agreements, but we do not have such agreements with many of our clients. We
could incur significant legal expenses defending claims, even those without merit. An adverse resolution of any lawsuit or claim against us could result in our obligation to pay substantial damages.
If we acquire other companies or businesses, or if we hire new brokerage personnel, we may have difficulty integrating their operations.
To achieve our strategic objectives, we have acquired or invested in, and in the future may seek to acquire or invest in, other
companies and businesses. We also may seek to hire brokers for new or existing brokerage desks. These acquisitions or new hires may be necessary in order for us to enter into or develop new product
areas or trading systems. Acquisitions and new hires entail numerous risks, including:
-
-
difficulties in the assimilation of acquired personnel, operations, services or products;
-
-
diversion of management's attention from other business concerns;
-
-
assumption of, or exposure to, known and unknown material liabilities of acquired companies or businesses, strategic
alliances, collaborations or joint ventures;
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-
litigation and/or arbitration related to the hiring of brokerage personnel;
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-
the decrease in our cash reserves, the increased cost of borrowing funds or the dilution resulting from issuances of our
equity securities, in each case as consideration to finance the purchase price of any significant acquisitions;
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-
to the extent that we pursue business opportunities outside the United States, exposure to political, economic, legal,
regulatory, operational and other risks that are inherent in operating in a foreign country, including risks of possible nationalization, expropriation, price controls, capital controls, exchange
controls and other restrictive governmental actions, as well as the outbreak of hostilities;
-
-
the up-front costs associated with recruiting brokerage personnel, including when establishing a new brokerage
desk, such as significant signing bonuses or contractual guarantees of a minimum level of compensation;
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failure to achieve financial or operating objectives; and
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-
potential loss of clients or key employees of acquired companies and businesses.
In
addition, we expect to face competition for acquisition targets and/or joint venture partners, which may limit the number of acquisitions and growth opportunities and could lead to
higher acquisition prices. We may not be able to successfully identify, acquire or manage profitably additional businesses or integrate businesses without substantial costs, delays or other
operational or financial difficulties.
If
we fail to manage these risks as we make acquisitions or make new hires, our profitability may be adversely affected, and we may never realize the anticipated benefits of the
acquisitions or hires. In addition, entering into new businesses may require prior approval from regulators. Our ability to obtain timely approval from applicable regulators may hinder our ability to
successfully enter new businesses.
Seasonal fluctuations in trading may cause our quarterly operating results to fluctuate.
In the past, our business has experienced seasonal fluctuations, reflecting reduced trading activity during summer months, particularly
in August. We also generally experience reduced activity in December due to seasonal holidays. As a result, our quarterly operating results may not be indicative
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of
the results we expect for the full year. Our operating results may also fluctuate quarter to quarter due to a variety of factors beyond our control, such as conditions in the global financial
markets, terrorism, war and other economic and political events. Furthermore, we may experience reduced revenues in a quarter due to a decrease in the number of business days in that quarter compared
to prior years.
Computer systems failures, capacity constraints, breaches of security and natural or other disasters could prevent us from operating parts of our business or otherwise
damage our reputation or business.
We internally support and maintain many of our computer systems, brokerage platforms and networks. Our failure to monitor, maintain or,
if necessary, replace these systems, brokerage platforms and networks in a timely and cost-effective manner could have a material adverse effect on our ability to conduct our operations.
We
also rely and expect to continue to rely on third parties to supply and maintain various computer systems, trading platforms and communications systems, such as telephone companies,
internet service providers, data processors, clearing organizations, software and hardware vendors and
back-up services. Our systems, or those of our third party providers, may fail or operate slowly, causing one or more of the following:
-
-
unanticipated disruptions in service to our clients;
-
-
slower response times;
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-
delays in our clients' trade execution;
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failed settlement of trades;
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-
decreased client satisfaction with our services or brokerage platforms;
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-
incomplete, untimely or inaccurate accounting, recording, reporting or processing of trades;
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financial losses;
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-
litigation or other client claims; and
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-
regulatory sanctions.
We
may experience systems or office failures from power or telecommunications outages, acts of God, war, terrorism, human error, natural disasters, fire, sabotage, hardware or software
malfunctions or defects, computer viruses, intentional acts of vandalism or similar events. Additionally, our business continuity or disaster recovery plans and related systems may not be effective to
deal with such events and the failure of such plans or systems may have a material adverse effect on our business. Any system failure that causes an interruption in service or decreases the
responsiveness of our service, including failures caused by client error or misuse of our systems, could damage our reputation, business and brand name. In addition, if security measures contained in
our systems are breached as a result of third-party actions, employee error, malfeasance, or otherwise, our reputation may be damaged and our business could suffer.
If
systems maintained by us or third parties malfunction, our clients or other third parties may seek recourse against us. We could incur significant legal expenses defending these
claims, even those which we may believe to be without merit. An adverse resolution of any lawsuits or claims against us could result in our obligation to pay substantial damages and could have a
material adverse effect on our financial condition or results of operations.
If
one or more of our offices were destroyed, damaged or unusable for a period of time we may suffer a loss of revenue, experience business interruption in that region or incur expenses
to relocate or
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repair
the affected office to the extent not covered by insurance. If any of these were to occur, it could have a material adverse effect on our financial condition or results of operations.
We may not be able to protect our intellectual property rights or may be prevented from using intellectual property necessary for our business.
Our business depends in part on whether we are able to maintain the proprietary aspects of our technology and to operate without
infringing on the proprietary rights of others. We rely primarily on trade secret, contract, copyright, trademark and patent law to protect our proprietary technology. However, these protections may
not be adequate to prevent third parties from copying or otherwise obtaining and using our proprietary technology without authorization or otherwise infringing on our rights.
We
may also face claims of infringement that could interfere with our ability to use technology that is material to our business operations. We may face limitations or restrictions on
the distribution of some of the market data generated by our brokerage desks, which may limit the comprehensiveness and quality of the data we are able to distribute or sell.
In
addition, in the past several years, there has been proliferation of so-called "business method patents" applicable to the computer and financial services industries.
There has also been a substantial increase in the number of such patent applications filed. Under current law, United States patent applications remain secret for 18 months and may, depending
upon where else such applications are filed, remain secret until a patent is issued. In light of these factors, it is not economically practicable to determine in advance whether our products or
services may infringe the present or future patent rights of others. In addition, although we take steps to protect our technology, we may not be able to protect our technology from disclosure or from
other developing technologies that are similar or superior to our technology. Any failure to protect our intellectual property rights could materially and adversely affect our business and financial
condition.
If we are unable to adequately protect our intellectual property rights or if we infringe on the rights of others, we could become involved in costly disputes and may be
required to pay royalties or enter into license agreements with third parties.
In the future, we may have to rely on litigation to enforce our intellectual property rights, protect our trade secrets, determine the
validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. This litigation could result from claims that we are violating the rights of others or
may be necessary to enforce our own rights. Any such litigation would be time consuming and expensive to defend or resolve and would result in the diversion of the resources and attention of
management, and the outcome of any such litigation cannot be accurately predicted. Any adverse determination in such litigation could subject us to significant liabilities or require us to pay
royalties or enter into license agreements with third parties, which we may not be able to obtain on terms acceptable to us or at all.
We depend on third-party software licenses. The loss of any of our key licenses could adversely affect our ability to provide our brokerage services.
We license software from third parties, some of which is integral to our execution services, hybrid brokerage systems and our business.
These licenses are generally terminable if we breach our obligations under the licenses or if the licensor gives us notice in advance of the termination. If any of these relationships were terminated,
or if any of these third parties were to cease doing business, we may be forced to spend significant time and money to replace the licensed software. These replacements may not be available on
reasonable terms, if at all. A termination of any of these relationships could have a material adverse effect on our financial condition and results of operations.
50
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Risks Related to Our Liquidity and Financing Needs
Our liquidity and financial condition could be adversely affected by United States and international markets and economic conditions.
Liquidity is essential to our business and is of particular importance to our trading business. Any perceived liquidity issues may
affect our clients' and counterparties' willingness to engage in brokerage transactions with us. In addition, our business is dependent upon the availability of adequate regulatory and clearing
capital. Clearing capital is the amount of cash, guarantees or similar collateral that we must provide or deposit with our third party clearing organizations in support of our obligations under our
contractual clearing arrangements with these organizations. Historically, these needs have been satisfied from internally generated funds, investments from our stockholders and lines of credit made
available by commercial banking institutions.
Our
liquidity could be impaired due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that affects our clients, third
parties or us. Further, our ability to sell assets to generate liquidity may be impaired if other market participants are seeking to sell similar assets at the same time.
Our
ability to raise capital in the long-term or short-term debt capital markets or the equity capital markets has been and could continue to be adversely
affected by conditions in the United States and international markets and economy. Global market and economic conditions have been, and continue to be, disrupted and volatile. In particular, our cost
and availability of raising debt capital may be adversely affected by illiquid credit markets and wider credit spreads. As a result of concern about the stability of the markets, the strength of
counterparties and other factors, including the impact of the Dodd-Frank Act and other pending legislation and regulatory proposals, many lenders and institutional investors have reduced
and, in some cases, ceased to provide funding to borrowers in the financial industry. In addition, our credit rating may impact our ability to obtain to raise additional long or short term capital.
See the Risk Factor captioned "Our business may be adversely affected by a reduction in our credit ratings" To the extent we need to raise additional capital, including for acquisitions or meeting
increased capital requirements arising from growth in our brokerage business, we may not be able to obtain such additional financing on acceptable
terms or on a timely basis, if at all. If we cannot raise additional capital on acceptable terms, we may not be able to develop or enhance our business, take advantage of future opportunities or
acquisitions, respond to competitive pressure or meet contractual, regulatory or other unanticipated requirements and as a result, our ability to conduct our business may be adversely affected.
Our business may be adversely affected by a reduction in our credit ratings.
There are a number of factors that might contribute to the possibility of having our credit rating downgraded by one or more credit
rating agencies, including our profitability and results of operations and the general conditions of the economy and the global markets in which we provide our services. In the event of a downgrade of
our credit rating by one or more credit rating agencies, our business may be adversely affected.
A
reduction in our credit ratings would increase our borrowing costs under the 8.375% Senior Notes we issued in July 2011, which will mature in July 2018 ("8.375% Senior Notes"). In
addition, any announcement by a rating agency that our credit rating is being downgraded could have a serious adverse impact on our business and, ultimately, on our operating results and financial
condition. Moreover, concerns about our credit ratings may limit our ability to pursue acquisitions and, to the extent we pursue acquisitions that affect our credit ratings, our business may suffer.
To avoid placing our credit rating at risk, we may need to limit the growth of our business, or we may even need to reduce our operations or other expenses to improve profitability. A credit-rating
downgrade could also compel us to raise additional capital on unfavorable terms, which could result in substantial additional
51
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interest
or other expenses and lower earnings. If we were forced to raise equity capital, that action could result in substantial dilution to our existing shareholders.
The financial maintenance covenants in our Credit Agreement could limit the manner in which we conduct our business, and we may be unable to engage in favorable business
activities or finance future operations or capital needs as a result.
We are party to a credit agreement with Bank of America N.A. and certain other lenders that provides for maximum borrowings of
approximately $129 million (the "Credit Agreement"). The Credit Agreement matures in December 2013. Under our Credit Agreement we are required to satisfy and maintain specified financial
ratios. Our ability to meet those financial ratios can
be affected by events beyond our control, and there can be no assurance that we will meet those ratios. An adverse development affecting our business could require us to seek waivers or amendments of
covenants, alternative or additional sources of financing or reductions in expenditures. We cannot assure you that such waivers, amendments or alternative or additional financings could be obtained
or, if obtained, would be on terms acceptable to us. A failure to comply with the covenants contained in our Credit Agreement could result in an event of default thereunder or under other agreements,
which, if not cured or waived could have a material adverse effect on our business, financial condition and results of operations. In the event of any default under our Credit Agreement, the lenders
may not be required to lend any additional amounts to us, or could elect to declare all indebtedness outstanding, together with any accrued and unpaid interest and fees, to be due and payable and
terminate all commitments to extend further credit. Such actions by the lenders could cause cross defaults under our other indebtedness, including the indenture governing our 8.375% Senior Notes.
Risks Related to Owning Our Stock
Jersey Partners has significant voting power and may take actions that may not be in the best interest of our other stockholders.
Jersey Partners Inc. ("JPI"), in which our chief executive officer and founder, Michael Gooch, is the controlling shareholder,
owns approximately 41% of our outstanding common stock. Our president, Colin Heffron, is also a minority shareholder of JPI. As a result, through JPI, Michael Gooch has the ability to exert
substantial influence over all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially
all of our assets and other corporate transactions. This concentration of control could be disadvantageous to other stockholders with interests different from those of Michael Gooch. This
concentration of voting power may have the effect of delaying or impeding actions that could be beneficial to our other stockholders, including actions that may be supported by our Board of Directors.
The trading price for our common stock could be adversely affected if investors perceive disadvantages to owning our stock as a result of this significant concentration of share ownership.
Provisions of our certificate of incorporation and bylaws, agreements to which we are a party, regulations to which we are subject and provisions of our equity incentive
plans could delay or prevent a change in control of our company and entrench current management.
Our second amended and restated certificate of incorporation and bylaws may be deemed to have an anti-takeover effect and
may delay, deter or prevent a
change of control of us, such as a tender offer or takeover proposal that might result in a premium over the market price for our common stock. In addition, certain of these provisions make it more
difficult to bring about a change in the composition of our board of directors, which could result in entrenchment of current management. For example, our second amended and restated certificate of
incorporation and bylaws:
-
-
provide for a classified board of directors;
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Table of Contents
-
-
do not permit our stockholders to remove members of our board of directors other than for cause;
-
-
do not permit stockholders to act by written consent or to call special meetings;
-
-
require certain advance notice for director nominations and other actions to be taken at annual meetings of stockholders;
-
-
require supermajority stockholder approval with respect to extraordinary transactions such as mergers and certain
amendments to our certificate of incorporation and bylaws (including in respect of the provisions set forth above); and
-
-
authorize the issuance of "blank check" preferred stock by our board of directors without stockholder approval, which
could discourage a takeover attempt.
Under
our Credit Agreement and our 8.375% Senior Notes, a change in control may lead the lenders to exercise remedies such as acceleration of the loan and, in the case of the Credit
Agreement, termination of their obligations to fund additional advances.
Our
brokerage businesses are heavily regulated and some of our regulators require that they approve transactions which could result in a change of control, as defined by the
then-applicable rules of our regulators. The requirement that this approval be obtained may prevent or delay transactions that would result in a change of control.
In
addition, our equity incentive plans contain provisions pursuant to which our Board may, in its discretion, determine to accelerate the vesting of outstanding options or restricted
stock units in the event of a change of control. If the Board determines to accelerate the vesting of these unvested grants, it could have the effect of dissuading potential acquirers from pursuing
merger discussions with us.
If we fail to maintain effective internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act, it may have an adverse effect on our
business.
We are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX") and the applicable SEC rules and
regulations that require our management to conduct an annual assessment and to report on the effectiveness of our internal controls over financial reporting. In addition, our independent registered
public accounting firm must issue an attestation report addressing the operating effectiveness of the Company's internal controls over financial reporting.
While
our internal controls over financial reporting currently meet all of the standards required by SOX, failure to maintain an effective internal control environment could have a
material adverse effect on our business, financial condition and results of operations. We cannot be certain as to our ability to continue to comply with the requirements of SOX. If we are not able to
continue to comply with the requirements of SOX in a timely manner or with adequate compliance, we may be subject to sanctions or investigation by regulatory authorities, including the SEC, PCAOB or
FINRA. In addition, should we identify a material weakness, there can be no assurance that we would be able to remediate such material weakness in a timely manner in future periods. Moreover, if we
are unable to assert that our internal control over financial reporting is effective in any future period (or if our auditors are unable to express an opinion on the effectiveness of our internal
controls), we could lose investor confidence in the accuracy and completeness of our financial reports, and incur significant expenses to restructure our internal controls over financial reporting,
which may have a material adverse effect on our Company.
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We cannot provide assurance that we will continue to declare and pay dividends at all or in any particular amounts and we may elect not to pay dividends in the future.
Our Board of Directors has approved a policy of paying quarterly dividends, subject to available cash flow from operations, other
considerations and the determination by our Board of Directors of the amount. However, there is no assurance that we will continue to declare and pay dividends at all or in any particular amounts and
we may elect not to pay dividends in the future. Our dividend policy may be affected by, among other things, our earnings, financial condition, future capital requirements, level of indebtedness,
contractual restrictions with respect to the payment of dividends, the issuance of special dividends from time to time, changes in tax rates and our determination to make certain investments or
acquisitions. Our ability to declare a dividend is also subject to the limits imposed by Delaware corporate law and our Credit Agreement.
The market price of our common stock may fluctuate in the future, and future sales of our shares could adversely affect the market price of our common stock.
The market price of our common stock has fluctuated in the past and may fluctuate in the future depending upon many factors, including
our actual results of operations and perceived prospects and the prospects of the financial marketplaces in general, differences between our actual financial and operating results and those expected
by investors and analysts, changes in analysts' recommendations or projections, seasonality, changes in general valuations for companies in our business segment, changes in general economic or market
conditions and broad market fluctuations.
Future
sales of our common stock also could adversely affect the market price of our common stock. If our existing stockholders sell a large number of shares, or if we issue a large
number of shares of our common stock in connection with future acquisitions, strategic alliances, new or amended equity incentive plans or otherwise, the market price of our common stock could decline
significantly. Moreover, the perception in the public market that our stockholders, including JPI, might sell shares of common stock could depress the market price of our common stock.
As
of December 31, 2011, we had registered under the Securities Act of 1933, as amended (the "Securities Act"), an aggregate of 602,592 shares of our common stock which are
reserved for issuance upon the exercise of outstanding options under our 2000 and 2002 Stock Option Plans. In addition, as of December 31, 2011, we had registered under the Securities Act an
aggregate of 30,400,000 shares of
our common stock available for issuance under our 2008 Equity Incentive Plan in connection with existing and new grants of restricted stock units, stock options or similar types of equity compensation
awards to our employees. Based on outstanding grants at December 31, 2011, there are 9,539,374 shares of our common stock available for future grants of awards under the 2008 Equity Incentive
Plan. These shares can be sold in the public market upon issuance, subject to any vesting requirements and restrictions under the securities laws applicable to resale by affiliates. These sales might
impact the liquidity of our common stock and might have a dilutive effect on existing stockholders making it more difficult for us to sell equity or equity-related securities in the future at a time
and price that we deem appropriate.
We may be required to recognize impairments of our goodwill or other intangible assets, which could adversely affect our results of operations or financial condition.
Accounting standards require periodic testing for the impairment of goodwill and intangible assets. While we have not recognized any
impairment of goodwill and intangible assets to date, any such non-cash charges in the future could have a material impact on our stockholders equity and our results of operations.
The
determination of the value of goodwill and intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. We are required
to test
54
Table of Contents
goodwill
for impairment annually, or in interim periods if certain events occur indicating that the carrying value may be impaired. We assess potential impairments to intangible assets when there is
evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Our judgments regarding the existence of impairment indicators and future cash
flows related to goodwill and intangible assets are based on several factors which include: the operational performance of any acquired businesses, management's current business plans which factor in
current market conditions, market capitalization, the trading price of our common stock and trading volumes, as well as other factors. Management uses discounted cash flow analysis in their impairment
assessments, which involves the subjective selection and interpretation of data inputs, and given market conditions at the testing date, can include a very limited amount of observable market inputs
available in determining the model.
Changes
to our business plan, increased macroeconomic weakness, declines in operating results and decreased market capitalization may result in our having to perform an interim goodwill
impairment test or an intangible asset impairment test. These types of events and the resulting analysis could result in goodwill or intangible asset impairment charges in future periods.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We have offices in the United States, Europe, Latin America, Asia, the Middle East and South Africa. Our executive headquarters are
located at 55 Water Street, New York, New York 10041, where we occupy approximately 89,000 square feet of leased space, pursuant to a lease that expires in December 2027. Our largest office outside of
the New York metropolitan area is our U.K. headquarters, which is located in London at 1 Snowden Street, EC2 2DQ, where we occupy approximately 44,000 square feet pursuant to a lease
that expires in March 2025.
Our
U.S. operations also lease office space in Sugarland (TX), Los Angeles (CA), and Stamford (CT). Our foreign operations lease office space in London, Dublin, Paris, Nyon, Hong Kong,
Seoul, Tokyo, Singapore, Sydney, Cape Town, Santiago, Bogota, Dubai and Tel Aviv. We believe our facilities will be adequate for our operations for the next twelve months.
55
Table of Contents
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, we are and have been party to, or otherwise involved in, litigations, claims and arbitrations that
involve claims for substantial amounts. These proceedings have generally involved either proceedings against our competitors in connection with employee hires, or claims from former employees in
connection with the termination of their employment from us. There is also potential for client claims alleging the occurrence of errors in the execution of brokerage transactions. We are also
currently and will, in the future, be involved, in examinations, investigations or proceedings by government agencies and self-regulatory organizations. These examinations or
investigations could result in substantial fines or administrative proceedings that could result in censure, the issuance of cease and desist orders, the suspension or expulsion of a broker dealer and
its affiliated persons, officers or employees or other similar consequences.
In
October 2010, the staff of the Market Regulation Department of FINRA (the "Staff") commenced a disciplinary proceeding by filing a complaint against GFI Securities LLC and four
of its former employees in connection with allegedly improper communications in 2005 and 2006 between certain of
these former employees and those at other interdealer brokerage firms. All of the former employees of GFI Securities LLC who were named in the complaint resigned in April 2008 to become
employed by affiliates of Compagnie Financiere Tradition. None of our current employees were named in the complaint. In February 2012, GFI Securities LLC reached an agreement with FINRA to
settle this matter pursuant to which GFI Securities LLC will be censured and will pay a fine for violations of FINRA rule 2110, interpretive material 2110-5 and FINRA
rule 3010. The amount of the fine will not have a material adverse impact on our financial position or results of operations.
Based
on currently available information, the outcome of the Company's outstanding matters are not expected to have a material adverse impact on the Company's financial position.
However, the outcome of any such matters may be material to the Company's results of operations or cash flows in a given period. It is not presently possible to determine the Company's ultimate
exposure to these matters and there is no assurance that the resolution of the Company's outstanding matters will not significantly exceed any reserves accrued by the Company.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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Table of Contents
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Common Stock
On October 5, 2010 we transferred the listing of our common stock from the Nasdaq Global Select Market ("Nasdaq") to the New
York Stock Exchange Euronext ("NYSE Euronext"). Our common stock is traded under the symbol "GFIG," the same symbol that was used on the Nasdaq since our initial public offering on January 26,
2005. The closing share price for our common stock on February 29, 2012, as reported by NYSE Euronext, was $3.84.
As
of February 29, 2012, we had approximately 46 holders of record of our common stock.
Set
forth below, for each of the last eight fiscal quarters, is the low and high sales prices per share of our common stock as reported on Nasdaq through the third quarter of 2010 and
NYSE Euronext in the fourth quarter of 2010 through the fourth quarter of 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
Price Ranges
|
|
|
|
|
|
Cash
Dividend
Declared
|
|
|
|
High
|
|
Low
|
|
Year Ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
5.75
|
|
$
|
4.40
|
|
$
|
0.05
|
|
Second Quarter
|
|
|
5.30
|
|
|
4.27
|
|
|
0.05
|
|
Third Quarter
|
|
|
4.80
|
|
|
3.68
|
|
|
0.05
|
|
Fourth Quarter
|
|
|
4.94
|
|
|
3.64
|
|
|
0.05
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
6.48
|
|
$
|
4.11
|
|
$
|
0.05
|
|
Second Quarter
|
|
|
7.01
|
|
|
4.75
|
|
|
0.05
|
|
Third Quarter
|
|
|
6.29
|
|
|
4.40
|
|
|
0.05
|
|
Fourth Quarter
|
|
|
5.24
|
|
|
4.45
|
|
|
0.30
|
|
Dividend Policy
Prior to 2008, we retained all earnings for investment in our business. In February 2008, our Board of Directors approved a policy of
paying quarterly dividends, subject to available cash flow from operations, other considerations and the determination by our Board of Directors of the amount.
Any
declaration and payment of dividends will be at the discretion of our Board of Directors and will depend upon, among other things, our earnings, financial condition, capital
requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends, and other considerations that our Board of Directors deems relevant. The Board's ability to
declare a dividend is also subject to limits imposed by Delaware corporate law. In addition, our subsidiaries are permitted to pay dividends to us subject to (i) certain regulatory restrictions
related to the maintenance of minimum net capital in those of our subsidiaries that are subject to net capital requirements imposed by applicable law or regulation, and (ii) general
restrictions imposed on dividend payments under the jurisdiction of incorporation or organization of each subsidiary. Finally, our Credit Agreement limits our ability to pay dividends in certain
circumstances without the approval of our lenders and any instruments governing our future indebtedness may also contain various covenants that limit our ability to pay dividends.
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Performance Graph
The following performance graph shows a comparison, from December 31, 2006 through December 31, 2011, of the cumulative
total return for our common stock, the NYSE Composite Index, Nasdaq Composite Stock Index, the Nasdaq Other Financial Index and our peer group. The peer group is comprised of ICAP plc, Tullet
Prebon plc, Compagnie Financiere Tradition, MarketAxess Holdings Inc., BGC Partners Inc., Deutsche Boerse Group, IntercontinentalExchange Inc. and the CME Group Inc.
The
performance graph assumes that the value of the initial investment in the Company's common stock, each index and the peer group was $100 on December 31, 2006 and that all
dividends have been reinvested. Such returns are based on historical results and are not intended to suggest future performance. The returns of each company within the peer group have been weighted
according to their respective stock market capitalization for purposes of arriving at a peer group average.
Comparison of Cumulative Total Return
Recent Sales of Unregistered Securities
For the year ended December 31, 2011, we granted a total of 9,250,544 restricted stock units ("RSUs") to officers, directors and
employees pursuant to our 2008 Equity Incentive Plan. The grant prices of these RSUs ranged from $4.02 to $5.12. These RSUs will be converted into common stock to be issued to the recipients of the
RSUs as they vest, which is generally on an annual basis over three years. These RSUs were granted pursuant to exemptions from registration provided by Rule 701 and/or Section 4(2) under
the Securities Act.
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Purchase of Equity Securities
The table below sets forth the information with respect to purchases made by the Company of its common stock during the quarterly
period ended December 31, 2011.
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total
Number of
Shares
Purchased
|
|
Average Price
Paid Per
Share
|
|
Total Number of
Shares Purchased
As Part of Publicly
Announced Plans
or Programs
|
|
Approximate
Number of Shares
that May Yet Be
Purchased Under
the Plans or
Programs(d)
|
|
October
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Repurchase Program(a)
|
|
|
|
|
$
|
|
|
|
|
|
|
9,278,640
|
|
Employee Transactions(b)
|
|
|
47,411
|
|
$
|
4.36
|
|
|
N/A
|
|
|
N/A
|
|
November
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Repurchase Program(a)
|
|
|
|
|
$
|
|
|
|
|
|
|
9,278,640
|
|
Employee Transactions(b)
|
|
|
7,026
|
|
$
|
4.20
|
|
|
N/A
|
|
|
N/A
|
|
Other Stock Repurchases(c)
|
|
|
2,217,294
|
|
$
|
4.51
|
|
|
N/A
|
|
|
N/A
|
|
December
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Repurchase Program(a)
|
|
|
|
|
$
|
|
|
|
|
|
|
9,278,640
|
|
Employee Transactions(b)
|
|
|
120,372
|
|
$
|
4.12
|
|
|
N/A
|
|
|
N/A
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Repurchase Program(a)
|
|
|
|
|
$
|
|
|
|
|
|
|
9,278,640
|
|
Employee Transactions(b)
|
|
|
174,809
|
|
$
|
4.19
|
|
|
N/A
|
|
|
N/A
|
|
Other Stock Repurchases(c)
|
|
|
2,217,294
|
|
$
|
4.51
|
|
|
N/A
|
|
|
N/A
|
|
-
(a)
-
In
August 2007, the Board of Directors authorized the Company to implement a stock repurchase program to repurchase a limited number of shares of the
Company's common stock on the open market. Under the repurchase plan, the Board of Directors authorized the Company to repurchase shares of the Company's common stock on the open market in such
amounts as determined by the Company's management, provided, however, such amounts are not to exceed, during any calendar year, the number of shares issued upon the exercise of stock options plus the
number of shares underlying RSUs that are granted or which management reasonably anticipates will be granted in such calendar year. Any repurchases are also subject to compliance with certain
covenants and limits under the Company's Credit Agreement.
-
(b)
-
Under
our 2008 Equity Incentive Plan, we withhold shares of common stock to satisfy minimum statutory tax withholding obligations arising on the vesting and
settlement of restricted stock units. When we withhold these shares, we are required to remit to the appropriate taxing authorities the market price of the shares withheld, which could be deemed a
purchase of the shares of our common stock by us on the date of withholding.
-
(c)
-
In
November 2011, the Company entered into a stock purchase agreement with Michael Gooch and Jersey Partners, Inc. ("JPI") pursuant to which the
Company purchased 1,053,746 and 1,163,548 shares of common stock owned by Michael Gooch and JPI, respectively, at a price of $4.51 per share. Michael Gooch is GFI's Chairman and Chief Executive
Officer. JPI is the largest stockholder of GFI and Michael Gooch is the majority shareholder of JPI. The review and approval of the stock purchase agreement was delegated by the Company's Board of
Directors to its Audit Committee, comprised of solely independent directors, which approved the stock purchase agreement.
-
(d)
-
Amounts
disclosed in this column include the number of RSUs granted by the Company and the number of shares issued upon the exercise of stock options less
the number of shares repurchased by the Company on the open market for the current calendar year through December 31, 2011.
59
Table of Contents
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the five years ended December 31, 2011. This selected
financial data as of December 31, 2010, December 31, 2009, December 31, 2008 and December 31, 2007 has been updated to reflect the immaterial restatement as discussed in
Note 2 to the Consolidated Financial Statements in Item 8 herein. This selected consolidated financial data should be read in conjunction with "Item 7Management's
Discussion and Analysis of Financial Condition and Results of Operations" and with our consolidated financial statements and the notes thereto contained in Part II-Item 8 in
this Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
(In thousands, except share and per share data)
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency commissions
|
|
$
|
561,026
|
|
$
|
534,239
|
|
$
|
481,326
|
|
$
|
757,310
|
|
$
|
749,223
|
|
Principal transactions
|
|
|
235,580
|
|
|
215,563
|
|
|
270,378
|
|
|
206,669
|
|
|
188,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total brokerage revenues
|
|
$
|
796,606
|
|
|
749,802
|
|
|
751,704
|
|
|
963,979
|
|
|
937,477
|
|
Clearing services revenues
|
|
|
112,735
|
|
|
41,878
|
|
|
|
|
|
|
|
|
|
|
Interest income from clearing services
|
|
|
2,300
|
|
|
671
|
|
|
|
|
|
|
|
|
|
|
Equity in net earnings of unconsolidated businesses(1)
|
|
|
10,466
|
|
|
3,974
|
|
|
1,574
|
|
|
(209
|
)
|
|
(698
|
)
|
Software, analytics and market data
|
|
|
73,620
|
|
|
60,637
|
|
|
54,347
|
|
|
51,250
|
|
|
19,522
|
|
Other income(2)
|
|
|
19,746
|
|
|
5,640
|
|
|
12,656
|
|
|
274
|
|
|
13,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,015,473
|
|
$
|
862,602
|
|
$
|
820,281
|
|
$
|
1,015,294
|
|
$
|
969,843
|
|
Total interest and transaction-based expenses(3)
|
|
|
134,702
|
|
|
67,558
|
|
|
30,354
|
|
|
43,420
|
|
|
32,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest and transaction-based expenses
|
|
|
880,771
|
|
|
795,044
|
|
|
789,927
|
|
|
971,874
|
|
|
937,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
627,368
|
|
|
558,248
|
|
|
583,315
|
|
|
665,973
|
|
|
604,847
|
|
Other expenses(1)(3)(4)
|
|
|
253,321
|
|
|
204,993
|
|
|
183,342
|
|
|
222,924
|
|
|
181,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
880,689
|
|
|
763,241
|
|
|
766,657
|
|
|
888,897
|
|
|
786,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
82
|
|
|
31,803
|
|
|
23,270
|
|
|
82,977
|
|
|
150,738
|
|
Provision for income taxes
|
|
|
2,647
|
|
|
5,884
|
|
|
6,982
|
|
|
29,871
|
|
|
55,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before attribution to non-controlling stockholders
|
|
|
(2,565
|
)
|
|
25,919
|
|
|
16,288
|
|
|
53,106
|
|
|
94,858
|
|
Less: Net income attributable to non-controlling interests
|
|
|
616
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GFI's net (loss) income
|
|
$
|
(3,181
|
)
|
$
|
25,615
|
|
$
|
16,288
|
|
$
|
53,106
|
|
$
|
94,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share available to common stockholders
|
|
$
|
(0.03
|
)
|
$
|
0.21
|
|
$
|
0.14
|
|
$
|
0.45
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share available to common stockholders
|
|
$
|
(0.03
|
)
|
$
|
0.20
|
|
$
|
0.13
|
|
$
|
0.44
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
118,334,995
|
|
|
120,275,918
|
|
|
118,178,493
|
|
|
117,966,596
|
|
|
116,595,920
|
|
Diluted
|
|
|
118,334,995
|
|
|
125,522,128
|
|
|
121,576,767
|
|
|
119,743,693
|
|
|
119,180,791
|
|
Dividends declared per share of common stock
|
|
$
|
0.20
|
|
$
|
0.45
|
|
$
|
0.20
|
|
$
|
0.255
|
|
|
|
|
60
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
(In thousands except headcount data)
|
|
Consolidated Statements of Financial Condition Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
245,879
|
|
$
|
313,875
|
|
$
|
342,379
|
|
$
|
342,375
|
|
$
|
240,393
|
|
Total assets(6)(7)
|
|
$
|
1,190,549
|
|
|
1,273,804
|
|
|
954,874
|
|
|
1,088,691
|
|
|
978,594
|
|
Total debt, including current portion
|
|
$
|
250,000
|
|
|
192,446
|
|
|
173,688
|
|
|
223,823
|
|
$
|
55,291
|
|
Total stockholders' equity(7)
|
|
$
|
447,212
|
|
|
494,111
|
|
|
487,502
|
|
|
480,363
|
|
|
455,593
|
|
Selected Statistical Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage personnel headcount(8)
|
|
|
1,271
|
|
|
1,161
|
|
|
1,082
|
|
|
1,037
|
|
|
1,037
|
|
Employee headcount
|
|
|
2,176
|
|
|
1,990
|
|
|
1,768
|
|
|
1,740
|
|
|
1,599
|
|
Broker productivity for the period(9)
|
|
$
|
647
|
|
$
|
669
|
|
$
|
705
|
|
$
|
910
|
|
$
|
934
|
|
Brokerage Revenues by Geographic Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
311,519
|
|
$
|
293,344
|
|
$
|
325,359
|
|
$
|
385,854
|
|
$
|
401,897
|
|
Europe, Middle East & Africa
|
|
|
392,895
|
|
|
379,660
|
|
|
364,752
|
|
|
489,517
|
|
|
449,949
|
|
Asia
|
|
|
92,192
|
|
|
76,798
|
|
|
61,593
|
|
|
88,608
|
|
|
85,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
796,606
|
|
$
|
749,802
|
|
$
|
751,704
|
|
$
|
963,979
|
|
$
|
937,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
During
the second quarter of 2011, the Company changed the name of its income statement line item "Equity in earnings (losses) of unconsolidated brokerage
businesses" to "Equity in net earnings (losses) of unconsolidated businesses" in order to better describe the results included in this line item. In addition, certain amounts related to equity in net
earnings (losses) of unconsolidated businesses totaling $489, $1,574, $(209) and $(698) for the years ended December 31, 2010, 2009, 2008 and 2007, respectively, were previously
presented in the "Other expenses" line item in the Consolidated Statements of Operations. In order to enhance transparency in the presentation of the Consolidated Statements of Operations these
amounts have been reclassified to the "Equity in net earnings (losses) of unconsolidated businesses" line item.
-
(2)
-
Certain
software development contract revenues for the years ended December 31, 2008 and 2007 totaling $86 and $215 were previously presented in a
line item called "Contract revenue" and have been combined into "Other income" to conform with the current year's presentation.
-
(3)
-
Clearing
fees for the years ended December 31, 2009, 2008 and 2007 totaling $30,354, $43,420 and $32,732 were previously presented in "Other
expenses" and are now presented in "Total interest and transaction- based expenses" to conform with the current year's presentation.
-
(4)
-
Other
expenses is Total other expenses excluding Compensation and employee benefits.
-
(5)
-
Restated
to reflect the four-for-one stock split effected March 31, 2008.
-
(6)
-
Total
assets included receivables from brokers, dealers and clearing organizations of $217.9 million, $243.8 million, $87.7 million,
$149.7 million and $317.8 million at December 31, 2011, 2010, 2009, 2008 and 2007, respectively. These receivables primarily represent securities transactions entered into in
connection with our matched principal business which have not settled as of their stated settlement dates. These receivables are substantially offset by the corresponding payables to brokers, dealers
and clearing organizations for these unsettled transactions.
-
(7)
-
Information
has been updated to reflect the restatement discussed in Note 2 of our Consolidated Financial Statements in Item 8 herein.
-
(8)
-
Brokerage
personnel headcount includes brokers, trainees and clerks. As of December 31, 2011, we employed 1,035 brokers and 236 trainees and clerks.
-
(9)
-
We
are presenting broker productivity to show the average amount of revenue generated per broker. Broker productivity is calculated as brokerage revenues
divided by average brokerage personnel headcount for the period.
61
Table of Contents
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction
with our consolidated financial statements and the notes thereof in Part II-Item 8 hereof. This discussion contains forward-looking statements. Actual results could differ
materially from the results discussed in these forward-looking statements. Please see "Forward-Looking Statements" and "Risk Factors" for a discussion of some of the uncertainties, risks and
assumptions associated with these statements.
Business Environment
As a leading provider of wholesale brokerage services, clearing services and electronic execution and trading support products for
global financial markets, our results of operations are impacted by a number of external market factors, including market volatility and transactional volumes, the organic growth or contraction of the
derivative and cash markets in which we provide our brokerage services, the particular mix of transactional activity in our various products, the competitive and regulatory environment in the various
jurisdictions and markets in which we operate and the financial condition of the dealers, hedge funds, traders and other market participants to whom we provide our services. Outlined below are
management's observations of these external market factors during the most recent fiscal period. The factors outlined below are not the only factors that impacted our results of operations for the
most recent fiscal period, and additional or other factors may impact, or have different degrees of impact, on our results of operations in future periods.
As a general rule, our business typically benefits from volatility in the markets that we serve, as periods of increased volatility
often coincide with more robust trading by our clients and a higher volume of transactions. However, periods of extreme volatility may result in significant market dislocations that can also lead
clients to reduce their trading activity.
Market
volatility is driven by a range of external factors, some of which are market specific and some of which are correlated to general macro-economic conditions. During 2011, several
of the markets in which we operate generally experienced higher volatility compared to 2010 due, in large part, to the continuing sovereign debt crisis and geo-political and market
uncertainties. The increased market volatility led to a more favorable trading environment across all our geographic regions, especially in emerging markets, during many of the first nine months of
2011. However, we believe the extreme market volatility during the third quarter contributed to slower trading conditions in the fourth quarter of 2011 as market participants reduced their risk
appetite and closed their trading positions earlier than in prior years.
Our business has historically benefited from growth in the over-the-counter ("OTC") derivatives markets due to
either the expansion of existing markets, including increased notional amounts outstanding or increased transaction volumes, or the development of new products or classes of products. The level of
growth in these markets is difficult to measure on a quarterly basis as there are only a few independent, objective measures of growth in outstanding notional amount of OTC derivatives, all of which
are published retrospectively and do not measure transactional volumes. Therefore, to help gauge growth in any particular quarter, management also looks to the published results of large OTC
derivatives dealers and certain futures exchanges as potential indicators of transactional activity in the related OTC derivative markets.
According
to the Bank of International Settlements ("BIS"), the size of the global OTC derivative markets, as measured by notional amounts outstanding, rose by 17.7% sequentially to
$707.6 trillion in
62
Table of Contents
the
first half of 2011 from $601.0 trillion in the second half of 2010, and 21.4% year-over-year from $582.7 trillion in the first half of 2010. This compares to growth rates
of 9.6% and 21.6% sequentially and year-over-year, respectively, for notional amounts outstanding in the exchange traded derivative markets over the same periods. OTC Interest
rate and foreign exchange notional amounts outstanding grew 22.6% and 21.7%, respectively, year-over-year while credit default swaps grew at a lower rate of 7.1%. The interest
rate and foreign exchange growth comes largely from currency swaps and interest rate swaps, respectively, while the growth rate in the notional amount of credit default swaps outstanding was
accelerated by growth in multi-name (index) products.
The
2011 BIS statistics indicate the first significant growth in the OTC derivative markets since the global financial crisis started in 2008. The compound annual growth rates in OTC and
exchange-traded notional amounts outstanding over the two year period ended December 31, 2010 were 0.2% and 8.5%, respectively, compared to compound annual growth rates of 24.9% and 9.5%,
respectively, over the five years ended December 31, 2008. Following the financial crisis in 2008, OTC derivative growth had lagged that of exchange-traded products due to (i) a shift in
market preference towards standardized, cleared or shorter dated products that typically trade on an exchange, (ii) regulatory uncertainty and (iii) the OTC industry's effort to net
derivative exposure. However, heightened volatility in the markets and significant growth in interest rate and foreign exchange notional amounts outstanding have contributed to recent growth in OTC
derivative products.
Another major external market factor affecting our business and results of operations is competition, which may take the form of
competitive pressure on the commissions we charge for our brokerage services or competition for brokerage and technology development personnel with extensive experience in the specialized markets we
serve. Competition for the services of productive brokers remained strong throughout 2011, although somewhat lesser than in prior periods. The consolidation and personnel layoffs by dealers, hedge
funds and other market participants over the last few years has increased competition to provide brokerage services to a smaller number of market participants in the near term.
In
addition, we believe the continuing global regulatory overhaul of many of the markets in which we provide our services led to uncertainty throughout 2011. Regulators and legislators
in the U.S. and abroad have proposed and, in some instances, adopted a slate of regulatory changes that call for, among other things, central clearing of certain derivatives, greater transparency and
reporting of derivatives transactions, mandatory trading of certain derivatives transactions on regulated exchanges or SEF and the required or increased use of electronic trading system technologies.
We believe that the new and proposed regulations have not eliminated the uncertainty that has persisted in many OTC derivatives markets since the start of the financial crisis.
We
are optimistic that unfolding regulatory reform, including requirements for enhanced regulatory transparency, central clearing and efficient execution will benefit and eventually grow
the global derivatives markets. We remain confident that our business will qualify in the U.S. as a SEF, and in Europe as an Organized Trading Facility. Over the past year, we believe that several of
our hybrid electronic trading platforms built upon their past successes and became more engrained in customer work-flows, which will enable us to more readily adjust to the new financial
regulations.
Financial Overview
Our results for the last three years reflect the challenging economic conditions that have existed following the late-2000s
financial crisis during which many market participants, including many of our key customers, experienced reduced liquidity with continued credit contraction, financial institution consolidation and
market participant bankruptcies. Our geographic and product diversity enabled us to
63
Table of Contents
take
advantage of areas of market strength over this period, even as several OTC derivative markets in which we provide our services were impacted by economic, market and regulatory uncertainty. As
more fully discussed below, our results of operations are significantly impacted by the amount of our revenues and the amount of compensation and benefits we provide to our employees. The following
factors had a significant impact on our revenues and employee costs during the three year period ended December 31, 2011:
Our
total revenues increased 17.7% to $1.02 billion for the year ended December 31, 2011 from $862.6 million for the year ended December 31, 2010. The main
factors contributing to this increase in our revenues were:
-
-
$70.9 million in incremental clearing services revenue as a result of the inclusion of a full year of results for
our Kyte subsidiary, which we acquired in July 2010;
-
-
Increased trading activity in certain commodity and emerging market financial products in which we have a leading market
share;
-
-
Contributions from new brokerage desks and new brokers hired across all product categories;
-
-
Increased market volatility due, in large part, to the continuing sovereign debt crisis in Europe, as well as
geo-political and market uncertainties, which led to increased trading activity in many of our markets during the first nine months of 2011;
-
-
The continued strong performance of our Trayport subsidiary, which led to an increase in our software, analytics and
market data revenue;
-
-
Increased electronic trading activity on our hybrid electronic trading platforms, especially in certain emerging market
financial and fixed income products;Higher equity in net earnings of unconsolidated businesses, primarily at Kyte; and
-
-
A gain related to the fair value mark-to-market on the future purchase commitment to acquire the
residual 30% equity interest in Kyte.
Partially
offsetting these factors were negative factors that affected our brokerage and other revenues, including:
-
-
Global economic concerns and competitive pressures in certain fixed income and commodity markets;
-
-
Low interest rate and inflationary environments globally led to reduced trading volumes in certain financial and fixed
income products;
-
-
Lower equity trading volumes in the U.S;
-
-
Decreased market volatility and trading activity in the fourth quarter; and
-
-
Regulatory and governmental uncertainty as it relates to market structure and operations in OTC derivative markets,
especially in North America and Europe.
The
main factors contributing to our increase in revenues for the year ended December 31, 2010 from the year ended December 31, 2009 are set forth below under "Year Ended
December 31, 2010 Compared to the Year Ended December 31, 2009."
The
most significant component of our cost structure is employee compensation and employee benefits, which includes salaries, sign-on bonuses, incentive compensation and
related employee benefits and taxes. Our compensation and employee benefits have increased from $558.2 million for the year ended December 31, 2010 to $627.4 million for the year
ended December 31, 2011. The main factors contributing to the increase were (i) increased headcount in brokers, back office and Trayport
64
Table of Contents
employees,
(ii) higher compensation expense related to Kyte and (iii) a charge taken in the fourth quarter of 2011 related to severance and other restructuring expenses.
Our
compensation and employee benefits for all employees have both a fixed and variable component. Base salaries and benefit costs are primarily fixed for all employees while bonuses
constitute the variable portion of our compensation and employee benefits. Within overall compensation and employee benefits, the employment cost of our brokerage personnel is the key component.
Bonuses for brokerage personnel are primarily based on individual performance and/or the operating results of their related brokerage desk. Additionally, a portion of our bonus expense is subject to
contractual guarantees that may require us to make bonus payments to brokers regardless of their performance in any particular period. For many of our brokerage employees, their bonuses constitute a
significant component of their overall compensation. Broker performance bonus expense increased to $244.0 million for the year ended December 31, 2011 from $229.1 million for the
year ended December 31, 2010, primarily due to higher brokerage revenues.
We
may pay sign-on bonuses to certain newly-hired brokers and retention bonuses to certain of our existing brokers who agree to long-term employment agreements.
These bonuses may be paid in the form of cash or restricted stock units ("RSUs") and are typically expensed over the term of the related employment agreement for cash bonuses and the related service
period for RSUs, which is generally two to four years. These employment agreements typically contain provisions requiring repayment of all or a portion of the cash payment and forfeiture provisions
for unvested RSUs should the employee voluntarily terminate his or her employment or if the employee's employment is terminated for cause during the initial term of the agreement. Compensation expense
resulting from the amortization of broker sign-on and retention bonus payments increased to $41.6 million for the year ended December 31, 2011 from $32.0 million for
the year ended December 31, 2010, primarily due to increased broker headcount and expenses incurred in the fourth quarter of 2011 related to severance and the restructuring of certain broker
employment arrangements.
65
Table of Contents
Results of Consolidated Operations
The following table sets forth our consolidated results of operations for the periods indicated. Beginning in the second quarter ended
June 30, 2011, we changed the name of the income statement line item "Equity in earnings of unconsolidated brokerage businesses" to "Equity in net earnings of unconsolidated businesses".
Additionally, we have reclassified amounts previously presented in the "Other expenses" line item into "Equity in net earnings of unconsolidated businesses." These changes have been applied to all
periods presented. See Note 2 to our Consolidated Financial Statements in Part II-Item 8 for further discussion.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
|
|
(dollars in thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Agency commissions
|
|
$
|
561,026
|
|
$
|
534,239
|
|
$
|
481,326
|
|
Principal transactions
|
|
|
235,580
|
|
|
215,563
|
|
|
270,378
|
|
|
|
|
|
|
|
|
|
Total brokerage revenues
|
|
|
796,606
|
|
|
749,802
|
|
|
751,704
|
|
Clearing services revenues
|
|
|
112,735
|
|
|
41,878
|
|
|
|
|
Interest income from clearing services
|
|
|
2,300
|
|
|
671
|
|
|
|
|
Equity in net earnings of unconsolidated businesses
|
|
|
10,466
|
|
|
3,974
|
|
|
1,574
|
|
Software, analytics and market data
|
|
|
73,620
|
|
|
60,637
|
|
|
54,347
|
|
Other income
|
|
|
19,746
|
|
|
5,640
|
|
|
12,656
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,015,473
|
|
|
862,602
|
|
|
820,281
|
|
Interest and transaction-based expenses
|
|
|
|
|
|
|
|
|
|
|
Transaction fees on clearing services
|
|
|
108,283
|
|
|
39,918
|
|
|
|
|
Transaction fees on brokerage services
|
|
|
24,541
|
|
|
27,213
|
|
|
30,354
|
|
Interest expense from clearing services
|
|
|
1,878
|
|
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and transaction-based expenses
|
|
|
134,702
|
|
|
67,558
|
|
|
30,354
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest and transaction-based expenses
|
|
|
880,771
|
|
|
795,044
|
|
|
789,927
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
627,368
|
|
|
558,248
|
|
|
583,315
|
|
Communications and market data
|
|
|
60,728
|
|
|
49,579
|
|
|
46,263
|
|
Travel and promotion
|
|
|
40,011
|
|
|
37,517
|
|
|
33,819
|
|
Rent and occupancy
|
|
|
24,664
|
|
|
22,413
|
|
|
20,325
|
|
Depreciation and amortization
|
|
|
38,943
|
|
|
34,431
|
|
|
31,493
|
|
Professional fees
|
|
|
27,413
|
|
|
25,949
|
|
|
18,402
|
|
Interest on borrowings
|
|
|
25,759
|
|
|
11,063
|
|
|
10,540
|
|
Other expenses
|
|
|
35,803
|
|
|
24,041
|
|
|
22,500
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
880,689
|
|
|
763,241
|
|
|
766,657
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
82
|
|
|
31,803
|
|
|
23,270
|
|
Provision for income taxes
|
|
|
2,647
|
|
|
5,884
|
|
|
6,982
|
|
|
|
|
|
|
|
|
|
Net (loss) income before attribution to non-controlling stockholders
|
|
|
(2,565
|
)
|
|
25,919
|
|
|
16,288
|
|
Less: Net income attributable to non-controlling interests
|
|
|
616
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
GFI's net (loss) income
|
|
$
|
(3,181
|
)
|
$
|
25,615
|
|
$
|
16,288
|
|
|
|
|
|
|
|
|
|
66
Table of Contents
The
following table sets forth our consolidated results of operations as a percentage of our revenues, net of interest and transaction-based expenses for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Agency commissions
|
|
|
63.7
|
%
|
|
67.2
|
%
|
|
60.9
|
%
|
Principal transactions
|
|
|
26.7
|
|
|
27.1
|
|
|
34.2
|
|
|
|
|
|
|
|
|
|
Total brokerage revenues
|
|
|
90.4
|
|
|
94.3
|
|
|
95.1
|
|
Clearing services revenues
|
|
|
12.8
|
|
|
5.3
|
|
|
|
|
Interest income from clearing services
|
|
|
0.3
|
|
|
0.1
|
|
|
|
|
Equity in net earnings of unconsolidated businesses
|
|
|
1.2
|
|
|
0.5
|
|
|
0.2
|
|
Software, analytics and market data
|
|
|
8.4
|
|
|
7.6
|
|
|
6.9
|
|
Other income
|
|
|
2.2
|
|
|
0.7
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
115.3
|
%
|
|
108.5
|
%
|
|
103.8
|
%
|
Interest and transaction-based expenses
|
|
|
|
|
|
|
|
|
|
|
Transaction fees on clearing services
|
|
|
12.3
|
|
|
5.0
|
|
|
|
|
Transaction fees on brokerage services
|
|
|
2.8
|
|
|
3.4
|
|
|
3.8
|
|
Interest expense from clearing services
|
|
|
0.2
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and transaction-based expenses
|
|
|
15.3
|
%
|
|
8.5
|
%
|
|
3.8
|
%
|
|
|
|
|
|
|
|
|
Revenues, net of interest and transaction-based expenses
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
71.2
|
|
|
70.2
|
|
|
73.8
|
|
Communications and market data
|
|
|
6.9
|
|
|
6.3
|
|
|
5.9
|
|
Travel and promotion
|
|
|
4.6
|
|
|
4.7
|
|
|
4.3
|
|
Rent and occupancy
|
|
|
2.8
|
|
|
2.8
|
|
|
2.6
|
|
Depreciation and amortization
|
|
|
4.4
|
|
|
4.3
|
|
|
4.0
|
|
Professional fees
|
|
|
3.1
|
|
|
3.3
|
|
|
2.3
|
|
Interest on borrowings
|
|
|
2.9
|
|
|
1.4
|
|
|
1.3
|
|
Other expenses
|
|
|
4.1
|
|
|
3.0
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
100.0
|
%
|
|
96.0
|
%
|
|
97.0
|
%
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
0.0
|
%
|
|
4.0
|
%
|
|
3.0
|
%
|
Provision for income taxes
|
|
|
0.3
|
|
|
0.7
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
Net (loss) income before attribution to non-controlling stockholders
|
|
|
(0.3
|
)%
|
|
3.3
|
%
|
|
2.1
|
%
|
Less: Net income attributable to non-controlling interests
|
|
|
0.1
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
GFI's net (loss) income
|
|
|
(0.4
|
)%
|
|
3.3
|
%
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010
GFI's net loss for the year ended December 31, 2011 was $3.2 million as compared to net income of $25.6 million
for the year ended December 31, 2010, a decrease of $28.8 million, or 112.5%. Total revenues increased by $152.9 million, or 17.7%, to $1.02 billion for the year ended
December 31, 2011 from $862.6 million for the same period in the prior year. The increase in total revenues for the year ended December 31, 2011 was due, in large part, to the
inclusion of a full year's revenue for our Kyte subsidiary, which we acquired on July 1, 2010. For the year ended
December 31, 2011, as compared to the year ended December 31, 2010, Kyte's operations contributed an increase of $70.8 million to our
67
Table of Contents
clearing
services revenue, as well as increases to our brokerage revenues and to our equity in net earnings of unconsolidated businesses. The increase in total revenues was also due to (i) a
$46.8 million increase in our brokerage revenues, as described below and (ii) an increase of $35.2 million in Other revenues, which is discussed in more detail below under the
section "Other Revenues."
Total
interest and transaction-based expenses increased by $67.1 million, to $134.7 million for the year ended December 31, 2011 from $67.6 million for the
year ended December 31, 2010. The increase was primarily due to the inclusion of a full year of revenue for our Kyte subsidiary. Kyte incurs exchange, clearing and execution costs in order to
provide clearing services to its customers.
Total
expenses other than interest and transaction-based expenses increased by $117.5 million, or 15.4% to $880.7 million for the year ended December 31, 2011 from
$763.2 million for the year ended December 31, 2010. The increase in total other expenses was largely attributable to (i) increased compensation and benefits expense, which
resulted from a $19.4 million charge taken in 2011 related to severance and other restructuring expenses, (ii) increased salary expense related to an increased headcount in brokers, back
office and Trayport employees, (iii) increased interest on borrowings due to the July 2011 issuance of $250.0 million of 8.375% Senior Notes and bond redemption costs associated with the
July 2011 redemption of the entire $60.0 million principal amount of our senior secured notes which were due in January 2013 ("7.17% Senior Notes"), (iv) $8.8 million of
impairment charges taken related to certain equity method investments and (v) an increase in expenses related to the inclusion of a full year of operations for our Kyte subsidiary, including
increased expenses relating to compensation and employee benefits, communications and market data, and depreciation and amortization.
The following table sets forth the changes in revenues for the year ended December 31, 2011, as compared to the same period in
2010 (dollars in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
%*
|
|
2010
|
|
%*
|
|
Increase
(Decrease)
|
|
%**
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income
|
|
$
|
234,498
|
|
|
26.6
|
%
|
$
|
237,681
|
|
|
29.9
|
%
|
$
|
(3,183
|
)
|
|
(1.3
|
)%
|
Equity
|
|
|
174,862
|
|
|
19.9
|
|
|
173,519
|
|
|
21.8
|
|
|
1,343
|
|
|
0.8
|
|
Financial
|
|
|
191,689
|
|
|
21.8
|
|
|
155,945
|
|
|
19.6
|
|
|
35,744
|
|
|
22.9
|
|
Commodity
|
|
|
195,557
|
|
|
22.2
|
|
|
182,657
|
|
|
23.0
|
|
|
12,900
|
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total brokerage revenues
|
|
|
796,606
|
|
|
90.5
|
|
|
749,802
|
|
|
94.3
|
|
|
46,804
|
|
|
6.2
|
|
Clearing services revenues
|
|
|
112,735
|
|
|
12.8
|
|
|
41,878
|
|
|
5.3
|
|
|
70,857
|
|
|
169.2
|
|
Other revenues
|
|
|
106,132
|
|
|
12.0
|
|
|
70,922
|
|
|
8.9
|
|
|
35,210
|
|
|
49.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,015,473
|
|
|
115.3
|
|
|
862,602
|
|
|
108.5
|
|
|
152,871
|
|
|
17.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and transaction-based expenses
|
|
|
134,702
|
|
|
15.3
|
|
|
67,558
|
|
|
8.5
|
|
|
67,144
|
|
|
99.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest and transaction-based expenses
|
|
$
|
880,771
|
|
|
100.0
|
%
|
$
|
795,044
|
|
|
100.0
|
%
|
$
|
85,727
|
|
|
10.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
*
-
Denotes
% of revenues, net of interest and transaction-based expenses
-
**
-
Denotes
% change in 2011 as compared to 2010
Brokerage Revenues
We offer our brokerage services in four broad product categories: fixed income, equity, financial, and commodity. Below is a
discussion of our brokerage revenues by product category for the year ended December 31, 2011.
68
Table of Contents
69
Table of Contents
Other Revenues
-
-
Other revenues were comprised of the following:
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
December 31,
2011
|
|
For the Year
Ended
December 31,
2010
|
|
Software, analytics and market data
|
|
$
|
73,620
|
|
$
|
60,637
|
|
Equity in net earnings of unconsolidated businesses
|
|
|
10,466
|
|
|
3,974
|
|
Remeasurement of foreign currency transactions and balances
|
|
|
(220
|
)
|
|
(6,770
|
)
|
Net realized and unrealized (losses) gains from foreign currency hedges
|
|
|
(415
|
)
|
|
3,529
|
|
Interest income on short-term investments
|
|
|
1,310
|
|
|
1,334
|
|
Interest income from clearing services
|
|
|
2,300
|
|
|
671
|
|
Other
|
|
|
19,071
|
|
|
7,547
|
|
|
|
|
|
|
|
Total other revenues
|
|
$
|
106,132
|
|
$
|
70,922
|
|
|
|
|
|
|
|
Other
revenues increased by $35.2 million for the year ended December 31, 2011 to $106.1 million from $70.9 million for the year ended December 31,
2010. This increase was largely related to (i) an increase in our software, analytics and market data revenue of $13.0 million, which was largely attributable to an increase in software
revenues at our Trayport subsidiary, (ii) a net increase of $11.5 million in Other, which was due, in part, to a $6.9 million gain related to the fair value
mark-to-market on the future purchase commitment to acquire the residual 30% equity interest in Kyte compared to a gain of $0.2 million in 2010, (iii) an increase
of $6.5 million in equity in net earnings of unconsolidated businesses, which was primarily related to equity method investments in certain Kyte backed traders and brokerage operations acquired
on July 1, 2010 and (iv) a net increase of $6.6 million related to the remeasurement of foreign currency transactions and balances. Foreign currency remeasurement gains and losses result
from the remeasurement of asset and liability balances that are denominated in currencies other than the functional currency of the business unit involved in such transactions. These increases in
Other were slightly offset by a net decrease of $3.9 million in net realized and unrealized losses related to hedges of certain non-U.S. dollar assets, as well as hedges of current
and anticipated revenues denominated in foreign currencies.
70
Table of Contents
The following table sets forth the changes in expenses for the year ended December 31, 2011 as compared to the same period in
2010 (dollars in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
%*
|
|
2010
|
|
%*
|
|
Increase
(Decrease)
|
|
%**
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
$
|
627,368
|
|
|
71.2
|
%
|
$
|
558,248
|
|
|
70.2
|
%
|
$
|
69,120
|
|
|
12.4
|
%
|
Communications and market data
|
|
|
60,728
|
|
|
6.9
|
|
|
49,579
|
|
|
6.3
|
|
|
11,149
|
|
|
22.5
|
|
Travel and promotion
|
|
|
40,011
|
|
|
4.6
|
|
|
37,517
|
|
|
4.7
|
|
|
2,494
|
|
|
6.6
|
|
Rent and occupancy
|
|
|
24,664
|
|
|
2.8
|
|
|
22,413
|
|
|
2.8
|
|
|
2,251
|
|
|
10.0
|
|
Depreciation and amortization
|
|
|
38,943
|
|
|
4.4
|
|
|
34,431
|
|
|
4.3
|
|
|
4,512
|
|
|
13.1
|
|
Professional fees
|
|
|
27,413
|
|
|
3.1
|
|
|
25,949
|
|
|
3.3
|
|
|
1,464
|
|
|
5.6
|
|
Interest in borrowings
|
|
|
25,759
|
|
|
2.9
|
|
|
11,063
|
|
|
1.4
|
|
|
14,696
|
|
|
132.8
|
|
Other expenses
|
|
|
35,803
|
|
|
4.1
|
|
|
24,041
|
|
|
3.0
|
|
|
11,762
|
|
|
48.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
$
|
880,689
|
|
|
100.0
|
%
|
$
|
763,241
|
|
|
96.0
|
%
|
$
|
117,448
|
|
|
15.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
*
-
Denotes
% of revenues, net of interest and transaction-based expenses
-
**
-
Denotes
% change in 2011 as compared to 2010
All Other Expenses
-
-
The increase in communications and market data of $11.1 million in 2011 was due, in large part, to a
$7.3 million increase related to the inclusion of a full year of results for our Kyte subsidiary, which we acquired on July 1, 2010 and which is therefore only partially reflected in the
year ended December 31, 2010. The remaining increase is primarily due to increased brokerage headcount and upgrades to existing systems.
71
Table of Contents
-
-
The increase in depreciation and amortization of $4.5 million was primarily due to the inclusion in 2011 of a full
year of amortization of intangibles related to our acquisition of Kyte and other entities in the second half of 2010.
-
-
The increase in interest on borrowings of $14.7 million is due, in large part, to the July 2011 issuance of
$250.0 million of 8.375% Senior Notes, which led to greater borrowings outstanding and a higher average effective interest rate on term debt borrowings, during the year ended
December 31, 2011 . The increase is also due, in part, to $6.0 million in bond redemption costs associated with the July 2011 redemption of the entire $60.0 million principal
amount of our 7.17% Senior Notes which were due in 2013.
-
-
Other expenses increased $11.8 million in 2011 from 2010 primarily due to $8.8 million of impairment charges
taken in 2011 related to certain equity method investments.
-
-
Our provision for income taxes was $2.6 million in 2011 compared to $5.9 million in 2010. Our low level of
profitability in 2011 caused non-deductible expenses to have a disproportionate effect on our effective tax rate in 2011.
Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009
GFI's net income for the year ended December 31, 2010 was $25.6 million as compared to $16.3 million for the year
ended December 31, 2009, an increase of $9.3 million or 57.1%. Total revenues increased by $42.3 million, or 5.2%, to $862.6 million for the year ended December 31,
2010 from $820.3 million for 2009. Our increased revenues were primarily due to our Kyte acquisition, investments in technology and brokerage staff, and growth in our commodity, financial and
fixed income derivative product businesses. However, we were adversely affected by foreign exchange rates in 2010 to the extent we earned revenues denominated in Euros and the British Pound as these
currencies were weaker, on average, relative to the U.S. Dollar than in 2009. We employed a total of 1,161 brokerage personnel at December 31, 2010 compared to 1,082 at December 31,
2009.
Total
interest and transaction-based expenses increased by $37.2 million, or 122.4% to $67.6 million for 2010 from $30.4 million for 2009. The increase is primarily related
to our clearing services business obtained in the acquisition of Kyte. Kyte incurs exchange, clearing and execution costs in order to provide clearing services to its customers. Total expenses other
than interest and transaction-based expenses decreased by $3.5 million, or 0.5%, to $763.2 million for 2010 from $766.7 million in 2009. The decrease in expenses is primarily
attributable to decreased compensation expense, which resulted from lower broker performance bonuses and the charge of $34.4 million taken in 2009 related to the renegotiation of certain
employment agreements and severance. The decrease in these compensation expenses were partially offset by an increase in expenses related to communications and market data, travel and promotion, rent
and occupancy, depreciation and amortization, professional fees related to acquisitions, investments in technology and brokerage staff, and investing resources in preparation for the new regulatory
framework being developed in the U.S. and Europe.
72
Table of Contents
The following table sets forth the changes in revenues for the year ended December 31, 2010, as compared to the same period in
2009 (dollars in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
%*
|
|
2009
|
|
%*
|
|
Increase
(Decrease)
|
|
%**
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income
|
|
$
|
237,681
|
|
|
29.9
|
%
|
$
|
276,377
|
|
|
35.0
|
%
|
$
|
(38,696
|
)
|
|
(14.0
|
)%
|
Equity
|
|
|
173,519
|
|
|
21.8
|
|
|
192,820
|
|
|
24.4
|
|
|
(19,301
|
)
|
|
(10.0
|
)
|
Financial
|
|
|
155,945
|
|
|
19.6
|
|
|
129,131
|
|
|
16.3
|
|
|
26,814
|
|
|
20.8
|
|
Commodity
|
|
|
182,657
|
|
|
23.0
|
|
|
153,376
|
|
|
19.4
|
|
|
29,281
|
|
|
19.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total brokerage revenues
|
|
|
749,802
|
|
|
94.3
|
|
|
751,704
|
|
|
95.1
|
|
|
(1,902
|
)
|
|
(0.3
|
)
|
Clearing services revenues
|
|
|
41,878
|
|
|
5.3
|
|
|
|
|
|
|
|
|
41,878
|
|
|
|
|
Other revenues
|
|
|
70,922
|
|
|
8.9
|
|
|
68,577
|
|
|
8.7
|
|
|
2,345
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
862,602
|
|
|
108.5
|
|
|
820,281
|
|
|
103.8
|
|
|
42,321
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and transaction-based expenses
|
|
|
67,558
|
|
|
8.5
|
|
|
30,354
|
|
|
3.8
|
|
|
37,204
|
|
|
122.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest and transaction-based expenses
|
|
$
|
795,044
|
|
|
100.0
|
%
|
$
|
789,927
|
|
|
100.0
|
%
|
$
|
5,117
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
*
-
Denotes
% of revenues, net of interest and transaction-based expenses
-
**
-
Denotes
% change in 2010 as compared to 2009
Brokerage Revenues
We offer our brokerage services in four broad product categories: fixed income, equity, financial, and commodity. Below is a
discussion of our brokerage revenues by product category for the year ended December 31, 2010.
-
-
Broker productivity (defined as total brokerage revenues during the period divided by average monthly brokerage personnel
headcount for the period) across all product categories decreased by approximately 5.1% for 2010, as compared to 2009.
-
-
The decrease in fixed income product brokerage revenues of $38.7 million, or 14.0%, in 2010 as compared with 2009
was primarily attributable to a decrease in revenues from our cash fixed income business of 32.7%. This decrease was due to increased competition that led us to reduce our corporate cash fixed income
presence in the U.S. and narrower credit spreads, on average, as they relate directly to the commissions we receive on certain desks. Offsetting this decrease was an increase in our fixed income
derivatives businesses of 18.8% in 2010 as compared to 2009 due to increased revenues in the U.K and U.S. We believe that this growth is due, in part, to the development of clearing and risk reduction
efforts for credit derivatives, increased brokerage personnel headcount and the increased customer usage of our CreditMatch® platform. Our fixed income product brokerage personnel
headcount increased by 20 to 325 employees at December 31, 2010 from 305 employees at December 31, 2009.
-
-
The decrease in equity product brokerage revenues of $19.3 million, or 10.0%, in 2010 as compared with 2009 was
primarily attributable to lower revenues in the U.S. as a result of the lower volatility and trading volumes that were prevalent in 2010. This decrease in the U.S. was partially offset by higher share
values in Europe, on average, which positively impacted equity product brokerage revenues in our European offices as commissions are often based on notional values. Our equity product brokerage
personnel headcount increased by 4 to 247 employees at December 31, 2010 from 243 employees at December 31, 2009.
73
Table of Contents
-
-
The increase in financial product brokerage revenues of $26.8 million, or 20.8%, in 2010 as compared to 2009 was
primarily attributable to improved market and economic conditions in certain emerging markets and Asia, increased brokerage personnel headcount, as well as the performance of new foreign exchange
product desks. In addition, during 2010, our GFI ForexMatch® trading platform was increasingly used by our customers on various financial desks globally. Our financial product brokerage
personnel headcount increased by 40 to 295 employees at December 31, 2010 from 255 employees at December 31, 2009.
-
-
The increase in commodity product brokerage revenues of $29.3 million, or 19.1%, in 2010 as compared to 2009 was
primarily attributable to higher commodity prices, increased demand for certain energy products, such as power, natural gas and coal and the commencement of new commodity product brokerage desks. In
addition, our commodity product brokerage personnel headcount increased by 15 to 294 employees at December 31, 2010 from 279 employees at December 31, 2009.
|
|
|
|
|
|
|
|
|
|
For the Year
Ended
December 31,
2010
|
|
For the Year
Ended
December 31,
2009
|
|
Software, analytics and market data
|
|
$
|
60,637
|
|
$
|
54,347
|
|
Equity in net earnings of unconsolidated businesses
|
|
|
3,974
|
|
|
1,574
|
|
Remeasurement of foreign currency transactions and balances
|
|
|
(6,770
|
)
|
|
3,767
|
|
Net realized and unrealized gains from foreign currency hedges
|
|
|
3,529
|
|
|
3,519
|
|
Interest income on short-term investments
|
|
|
1,334
|
|
|
1,043
|
|
Interest income from clearing services
|
|
|
671
|
|
|
|
|
Other
|
|
|
7,547
|
|
|
4,327
|
|
|
|
|
|
|
|
Total other revenues
|
|
$
|
70,922
|
|
$
|
68,577
|
|
|
|
|
|
|
|
Other
revenues increased by $2.3 million for the year ended December 31, 2010 to $70.9 million from $68.6 million in the same period in 2009. This increase
was largely related to (i) an increase in our software, analytics and market data revenue of $6.3 million, which was attributable to an increase in software revenues at our Trayport
subsidiary, (ii) $3.5 million equity in net earnings of unconsolidated businesses related to investments in certain Kyte operations acquired on July 1, 2010, for which there is no
comparable amount in the prior period, (iii) a net increase of $3.2 million in Other, which was primarily related to certain other Kyte operations for which there is no comparable amount
in the prior period, and (iv) a gain of $3.7 million as a result of remeasuring our existing equity
74
Table of Contents
interest
in an OTC brokerage business in the U.K. upon the purchase of the remaining 67% of the business on November 1, 2010 in an acquisition accounted for as a business combination achieved
in stages. Offsetting this increase is a net decrease of $10.5 million related to the remeasurement of foreign currency transactions and balances. Foreign currency remeasurement gains and
losses result from the remeasurement of asset and liability balances that are denominated in currencies other than the functional currency of the business unit undertaking such transactions.
The following table sets forth the changes in expenses for the year ended December 31, 2010 as compared to the same period in
2009 (dollars in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
%*
|
|
2009
|
|
%*
|
|
Increase
(Decrease)
|
|
%**
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
$
|
558,248
|
|
|
70.2
|
%
|
$
|
583,315
|
|
|
73.8
|
%
|
$
|
(25,067
|
)
|
|
(4.3
|
)%
|
Communications and market data
|
|
|
49,579
|
|
|
6.3
|
|
|
46,263
|
|
|
5.9
|
|
|
3,316
|
|
|
7.2
|
|
Travel and promotion
|
|
|
37,517
|
|
|
4.7
|
|
|
33,819
|
|
|
4.3
|
|
|
3,698
|
|
|
10.9
|
|
Rent and occupancy
|
|
|
22,413
|
|
|
2.8
|
|
|
20,325
|
|
|
2.6
|
|
|
2,088
|
|
|
10.3
|
|
Depreciation and amortization
|
|
|
34,431
|
|
|
4.3
|
|
|
31,493
|
|
|
4.0
|
|
|
2,938
|
|
|
9.3
|
|
Professional fees
|
|
|
25,949
|
|
|
3.3
|
|
|
18,402
|
|
|
2.3
|
|
|
7,547
|
|
|
41.0
|
|
Interest in borrowings
|
|
|
11,063
|
|
|
1.4
|
|
|
10,540
|
|
|
1.3
|
|
|
523
|
|
|
5.0
|
|
Other expenses
|
|
|
24,041
|
|
|
3.0
|
|
|
22,500
|
|
|
2.8
|
|
|
1,541
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
$
|
763,241
|
|
|
96.0
|
%
|
$
|
766,657
|
|
|
97.0
|
%
|
|
(3,416
|
)
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
*
-
Denotes
% of revenues, net of interest and transaction-based expenses
-
**
-
Denotes
% change in 2010 as compared to 2009
75
Table of Contents
All Other Expenses
-
-
Travel and promotion, as a percentage of our total revenues for 2010 increased to 4.7% from 4.3% for 2009. This increase
was primarily attributable to our business development activities relating to acquisitions and the changing regulatory environment, as well as an increase in our brokerage headcount.
-
-
The increase in rent and occupancy costs of $2.1 million was primarily due to new offices obtained in connection
with our acquisitions in 2010, as well as increased facilities requirements related to our brokerage personnel.
-
-
The increase in depreciation and amortization of $2.9 million was primarily due to our acquisitions in 2010.
-
-
The increase in professional fees of $7.5 million was primarily due to $4.2 million in professional and
other fees related to business development activities, with the remaining increase due to increased legal fees related to litigation, regulatory compliance and advocacy.
-
-
Other expenses increased $1.5 million in 2010 from 2009 primarily due to a $1.7 million increase in net
litigation settlement expense compared to the same period in the prior year.
-
-
Our effective tax rate was 18.5% for the year ended December 31, 2010 as compared to 30.0% for 2009. The reduction
in our effective tax rate was primarily due to the shifting of the geographic mix of our earnings for the year ended December 31, 2010 in favor of jurisdictions with lower tax rates, resulting
in a lower aggregate effective tax rate.
Results of Segment Operations
Based on the nature of our operations, products and services in each geographic region, we determined that we have four operating
segments:(i) Americas Brokerage, (ii) Europe, Middle East and Africa ("EMEA") Brokerage, (iii) Asia Brokerage, and (iv) Clearing and Backed Trading. Our brokerage operations
provide brokerage services in four broad product categories: fixed income, financial, equity and commodity. Additionally, we present our operating segments as five reportable segments, which includes
the four operating segments plus All Other. The All Other segment captures costs that are not directly assignable to one of the operating business segments, primarily consisting of our corporate
business activities and operations from software, analytics and market data.
76
Table of Contents
The
following tables summarize our Total revenues, Revenues, net of interest and transaction-based expenses, Other expenses and Income (loss) before income taxes by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2011
|
|
|
|
Americas
Brokerage
|
|
EMEA
Brokerage
|
|
Asia
Brokerage
|
|
Clearing
and Backed
Trading
|
|
All Other
|
|
Total
|
|
Total revenues
|
|
$
|
313,483
|
|
$
|
386,012
|
|
$
|
82,903
|
|
$
|
164,882
|
|
$
|
68,193
|
|
$
|
1,015,473
|
|
Revenues, net of interest and transaction-based expenses
|
|
|
299,590
|
|
|
374,802
|
|
|
82,839
|
|
|
54,104
|
|
|
69,436
|
|
|
880,771
|
|
Other expenses
|
|
|
218,282
|
|
|
286,680
|
|
|
67,306
|
|
|
44,908
|
|
|
263,513
|
|
|
880,689
|
|
Income (loss) before income taxes
|
|
|
81,308
|
|
|
88,122
|
|
|
15,533
|
|
|
9,196
|
|
|
(194,077
|
)
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2010
|
|
|
|
Americas
Brokerage
|
|
EMEA
Brokerage
|
|
Asia
Brokerage
|
|
Clearing
and Backed
Trading
|
|
All Other
|
|
Total
|
|
Total revenues
|
|
$
|
294,910
|
|
$
|
379,033
|
|
$
|
74,945
|
|
$
|
53,129
|
|
$
|
60,585
|
|
$
|
862,602
|
|
Revenues, net of interest and transaction-based expenses
|
|
|
278,553
|
|
|
367,494
|
|
|
74,875
|
|
|
12,140
|
|
|
61,982
|
|
|
795,044
|
|
Other expenses
|
|
|
212,154
|
|
|
252,457
|
|
|
59,061
|
|
|
15,181
|
|
|
224,388
|
|
|
763,241
|
|
Income (loss) before income taxes
|
|
|
66,399
|
|
|
115,037
|
|
|
15,814
|
|
|
(3,041
|
)
|
|
(162,406
|
)
|
|
31,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2009
|
|
|
|
Americas
Brokerage
|
|
EMEA
Brokerage
|
|
Asia
Brokerage
|
|
Clearing
and Backed
Trading
|
|
All Other
|
|
Total
|
|
Total revenues
|
|
$
|
327,127
|
|
$
|
364,761
|
|
$
|
61,603
|
|
$
|
|
|
$
|
66,790
|
|
$
|
820,281
|
|
Revenues, net of interest and transaction-based expenses
|
|
|
309,245
|
|
|
350,869
|
|
|
61,573
|
|
|
|
|
|
68,240
|
|
|
789,927
|
|
Other expenses
|
|
|
266,940
|
|
|
235,909
|
|
|
62,444
|
|
|
|
|
|
201,364
|
|
|
766,657
|
|
Income (loss) before income taxes
|
|
|
42,305
|
|
|
114,960
|
|
|
(871
|
)
|
|
|
|
|
(133,124
|
)
|
|
23,270
|
|
Segment Results for the Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010
Total Revenues
-
-
Total revenues for Americas Brokerage increased $18.6 million, or 6.3%, to $313.5 million for the year ended
December 31, 2011 from $294.9 million for the year ended December 31, 2010. Total revenues for EMEA Brokerage increased $7.0 million, or 1.8%, to $386.0 million for
the year ended December 31, 2011 from $379.0 million for the year ended December 31, 2010. Total revenues for Asia Brokerage increased $7.9 million, or 10.5%, to
$82.9 million for the year ended December 31, 2011 from $75.0 million for the year ended December 31, 2010. Total revenues for our three brokerage segments increased by
$33.5 million, or 4.5%, to $782.4 million for the year ended December 31, 2011 from $748.9 million for the year ended December 31, 2010. The increase in total
revenues for our brokerage operations was primarily due to increases in brokerage revenues in financial and commodity products resulting from the factors described above under "Year Ended
December 31, 2011 Compared to the Year Ended December 31, 2010."
-
-
Total revenues for Clearing and Backed Trading increased $111.8 to $164.9 million for the year ended
December 31, 2011 from $53.1 million for the year ended December 31, 2010. These
77
Table of Contents
revenues
are entirely related to our Kyte operations, which we acquired on July 1, 2010. Accordingly the year ended December 31, 2011 is not directly comparable to the year ended
December 31, 2010. Total revenues for Clearing and backed trading for the year ended December 31, 2011 consist primarily of clearing services revenues of $112.7 million, brokerage
revenues from principal transactions of $16.2 million, equity in earnings of unconsolidated subsidiaries of $14.7 million and other income of $19.0 million.
-
-
Total revenues for our All Other segment primarily consisted of revenues generated from sales of software, analytics and
market data. Total revenues from All Other increased by $7.6 million, or 12.5%, to $68.2 million for the year ended December 31, 2011 from $60.6 million for the year ended
December 31, 2010. The increase was primarily related to a $12.9 million increase in software, analytics and market data, primarily attributable to an increase in software revenues at
our Trayport subsidiary, partially offset by a $3.9 million decrease in equity in net losses of unconsolidated business.
Total interest and transaction-based expenses
-
-
Total interest and transaction-based fees for our three brokerage segments decreased by $2.8 million, or 10.0%,
from $28.0 million for the year ended December 31, 2010 to $25.2 million for the year ended December 31, 2011. The decrease was related to the decrease in transaction fees
paid for brokerage services by our Americas and EMEA brokerage segments, which decreased by $2.5 million, or 15.1%, and $0.3 million, or 2.9%, respectively.
-
-
Total interest and transaction-based fees for our Clearing and Backed Trading segment increased to $110.8 million
for the year ended December 31, 2011 from $41.0 million the prior year. All of these expenses were incurred by Kyte following the acquisition on July 1, 2010 and are primarily due
to transaction fees on clearing services of $108.3 million and $39.9 million in the years ended December 31, 2011 and 2010, respectively.
Other Expenses
-
-
Other expenses for Americas Brokerage increased $6.1 million, or 2.9%, to $218.3 million for the year ended
December 31, 2011 from $212.2 million for the year ended December 31, 2010. Other expenses for EMEA Brokerage increased $34.2 million, or 13.5%, to $286.7 million
for the year ended December 31, 2011 from $252.5 million for the year ended December 31, 2010. Other expenses for Asia Brokerage increased $8.2 million, or 13.9%, to
$67.3 million for the year ended December 31, 2011 from $59.1 million for the year ended December 31, 2010. Total Other expenses for our three brokerage segments increased
by $48.5 million, or 9.3%, to $572.3 million for the year ended December 31, 2011 from $523.8 million for the year ended December 31, 2010. The increase was
primarily due to a $41.5 million increase in compensation and employee benefits, as well as increases in communications and market data, travel and promotion, interest on borrowing expenses and
the other factors described above under "Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010."
-
-
We record certain direct expenses, including compensation and employee benefits, to the operating segments; however, we do
not allocate certain expenses that are managed separately at the corporate level to our operating segments. The unallocated costs including rent and occupancy, depreciation and amortization,
professional fees, interest and other expenses are included in the expenses for All Other described below. Management does not believe that allocating these costs to our brokerage segments is optimal
for evaluating the performance of its brokerage segments.
-
-
Other expenses for Clearing and Backed Trading increased $29.7 million to $44.9 million for the year ended
December 31, 2011 from $15.2 million for the year ended December 31, 2010. These
78
Table of Contents
expenses
are entirely related to the operations of Kyte, which we acquired on July 1, 2010. Accordingly, the year ended December 31, 2011 is not directly comparable to the year ended
December 31, 2010. Total expenses for Clearing and Backed trading for the year ended December 31, 2011 are comprised of, in large part, compensation and employee benefits expense of
$18.4 million, communications and market data expense of $10.7 million and depreciation and amortization of $5.2 million.
-
-
Other expenses for our All Other segment increased by $39.1 million, or 17.4%, to $263.5 million for the
year ended December 31, 2011 from $224.4 million for the year ended December 31, 2010. The increase was largely due to a $14.4 million increase in compensation and employee
benefits, an $11.5 million increase in interest on borrowings and a $10.1 million increase in other expenses. These factors are discussed above under "Year Ended December 31, 2011
Compared to the Year Ended December 31, 2010."
Segment Results for the Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009
Total Revenues
-
-
Total revenues for Americas Brokerage decreased $32.2 million, or 9.8%, to $294.9 million for the year ended
December 31, 2010 from $327.1 million for the year ended December 31, 2009. Total revenues for EMEA Brokerage increased $14.2 million, or 3.9%, to $379.0 million for
the year ended December 31, 2010 from $364.8 million for the year ended December 31, 2009. Total revenues for Asia Brokerage increased $13.3 million, or 21.6%, to
$74.9 million for the year ended December 31, 2010 from $61.6 million for the year ended December 31, 2009. Total revenues for our three brokerage segments decreased by
$4.7 million, or 0.6%, to $748.8 million for the year ended December 31, 2010 from $753.5 million for the year ended December 31, 2009. The decline in total revenues
for our brokerage operations was primarily due to decreases in brokerage revenues in fixed income and equity products, offset by increases in financial and commodity products resulting from the
factors described above under "Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009."
-
-
Total revenues for Clearing and Backed Trading increased $53.1 million primarily due to clearing services revenues
of $41.9 million. The remaining $11.2 million in revenues for this segment include equity in earnings of unconsolidated brokerage businesses, interest income and trading profits. All of
these revenues were generated by Kyte following the acquisition on July 1, 2010.
-
-
Total revenues for our All Other segment primarily consisted of revenues generated from sales of software, analytics and
market data. Total revenues from All Other decreased by $6.2 million, or 9.3%, to $60.6 million for the year ended December 31, 2010 from $66.8 million for the year ended
December 31, 2009. The decrease was primarily related to a net decrease of $10.5 million related to remeasurement of foreign currency transactions and balances. Foreign currency
remeasurement gains and losses result from the remeasurement of asset and liability balances that are denominated in currencies other than the functional currency of the business unit undertaking such
transactions. The decrease was partially offset by a $6.3 million increase in software, analytics and market data revenues.
79
Table of Contents
and
transaction-based fees for our Clearing and Backed Trading segment increased to $41.0 million for the year ended December 31, 2010 from zero the prior year. All of these expenses
were incurred by Kyte following the acquisition on July 1, 2010 and are primarily due to transaction fees on clearing services of $39.9 million. Further discussion of the factors driving
our interest and transaction-based fees are described above under "Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009."
Other Expenses
-
-
Other expenses for Americas Brokerage decreased $54.7 million, or 20.5%, to $212.2 million for the year
ended December 31, 2010 from $266.9 million for the year ended December 31, 2009. Other expenses for EMEA Brokerage increased $16.6 million, or 7.0%, to
$252.5 million for the year ended December 31, 2010 from $235.9 million for the year ended December 31, 2009. Other expenses for Asia Brokerage decreased
$3.3 million, or 5.3%, to $59.1 million for the year ended December 31, 2010 from $62.4 million for the year ended December 31, 2009. Total Other expenses for our
three brokerage segments decreased by $41.4 million, or 7.3%, to $523.8 million for the year ended December 31, 2010 from $565.2 million for the year ended
December 31, 2009. The decrease was primarily due to a decrease in compensation and employee benefits as well as other factors described above under "Year Ended December 31, 2010
Compared to the Year Ended December 31, 2009."
-
-
We record certain direct expenses, including compensation and employee benefits, to the operating segments; however, we do
not allocate certain expenses that are managed separately at the corporate level to our operating segments. The unallocated costs including rent and occupancy, depreciation and amortization,
professional fees, interest and other expenses are included in the expenses for All Other described below. Management does not believe that allocating these costs to our brokerage segments is optimal
for evaluating the performance of its brokerage segments.
-
-
Other expenses for Clearing and Backed Trading were $15.2 million due to compensation and benefits expense of
$5.1 million, communications and quotes expense of $3.4 million, depreciation and amortization of $2.3 million, interest on borrowings of $1.0 million and all other
expenses of $3.4 million. All of these expenses were incurred by Kyte following the acquisition on July 1, 2010.
-
-
Other expenses for our All Other segment increased by $23.0 million, or 11.4%, to $224.4 million for the
year ended December 31, 2010 from $201.4 million for the year ended December 31, 2009. The increase was primarily due to an increase in compensation and employee benefits, travel
and promotion, professional fees, depreciation and amortization and other expenses.
80
Table of Contents
Quarterly Results of Operations
The following table sets forth, by quarter, our unaudited Statement of Operations data for the period from January 1, 2010 to
December 31, 2011. Results of any period are not necessarily indicative of results for a full year and may, in certain periods, be affected by seasonal fluctuations in our business.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
December 31,
2011
|
|
September 30,
2011
|
|
June 30,
2011
|
|
March 31,
2011
|
|
December 31,
2010
|
|
September 30,
2010
|
|
June 30,
2010
|
|
March 31,
2010
|
|
|
|
(dollars in thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency commissions
|
|
$
|
125,584
|
|
$
|
151,446
|
|
$
|
136,513
|
|
$
|
147,483
|
|
$
|
127,774
|
|
$
|
125,011
|
|
$
|
137,624
|
|
$
|
143,830
|
|
Principal transactions
|
|
|
48,907
|
|
|
61,711
|
|
|
54,475
|
|
|
70,487
|
|
|
49,064
|
|
|
49,677
|
|
|
56,526
|
|
|
60,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total brokerage revenues
|
|
|
174,491
|
|
|
213,157
|
|
|
190,988
|
|
|
217,970
|
|
|
176,838
|
|
|
174,688
|
|
|
194,150
|
|
|
204,126
|
|
Clearing services revenues
|
|
|
25,513
|
|
|
31,872
|
|
|
27,680
|
|
|
27,670
|
|
|
20,325
|
|
|
21,553
|
|
|
|
|
|
|
|
Interest income from clearing services
|
|
|
682
|
|
|
606
|
|
|
670
|
|
|
342
|
|
|
439
|
|
|
232
|
|
|
|
|
|
|
|
Equity in net earnings (loss) of unconsolidated businesses(1)
|
|
|
523
|
|
|
4,260
|
|
|
4,757
|
|
|
926
|
|
|
2,088
|
|
|
1,875
|
|
|
(92
|
)
|
|
103
|
|
Software, analytics and market data
|
|
|
19,292
|
|
|
18,837
|
|
|
18,403
|
|
|
17,088
|
|
|
16,313
|
|
|
14,905
|
|
|
14,519
|
|
|
14,900
|
|
Other income (loss)(2)
|
|
|
13,829
|
|
|
7,230
|
|
|
1,233
|
|
|
(2,546
|
)
|
|
6,235
|
|
|
(3,263
|
)
|
|
919
|
|
|
1,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
234,330
|
|
|
275,962
|
|
|
243,731
|
|
|
261,450
|
|
|
222,238
|
|
|
209,990
|
|
|
209,496
|
|
|
220,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and transaction-based expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction fees on clearing services
|
|
|
24,074
|
|
|
30,388
|
|
|
26,752
|
|
|
27,069
|
|
|
19,189
|
|
|
20,729
|
|
|
|
|
|
|
|
Transaction fees on brokerage services
|
|
|
5,184
|
|
|
6,673
|
|
|
6,079
|
|
|
6,605
|
|
|
6,348
|
|
|
5,887
|
|
|
7,554
|
|
|
7,424
|
|
Interest expense from clearing services
|
|
|
496
|
|
|
439
|
|
|
617
|
|
|
326
|
|
|
289
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and transaction-based expenses
|
|
|
29,754
|
|
|
37,500
|
|
|
33,448
|
|
|
34,000
|
|
|
25,826
|
|
|
26,754
|
|
|
7,554
|
|
|
7,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest and transaction-based expenses
|
|
$
|
204,576
|
|
$
|
238,462
|
|
$
|
210,283
|
|
$
|
227,450
|
|
$
|
196,412
|
|
$
|
183,236
|
|
$
|
201,942
|
|
$
|
213,454
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
161,068
|
|
|
159,980
|
|
|
146,839
|
|
|
159,481
|
|
|
139,131
|
|
|
133,345
|
|
|
141,109
|
|
|
144,663
|
|
Communications and market data
|
|
|
15,364
|
|
|
15,187
|
|
|
15,106
|
|
|
15,071
|
|
|
13,210
|
|
|
13,788
|
|
|
10,695
|
|
|
11,886
|
|
Travel and promotion
|
|
|
9,887
|
|
|
9,723
|
|
|
10,198
|
|
|
10,203
|
|
|
10,618
|
|
|
8,665
|
|
|
9,341
|
|
|
8,893
|
|
Rent and occupancy
|
|
|
6,481
|
|
|
6,322
|
|
|
5,988
|
|
|
5,873
|
|
|
5,860
|
|
|
5,867
|
|
|
5,255
|
|
|
5,431
|
|
Depreciation and amortization
|
|
|
9,278
|
|
|
9,990
|
|
|
9,801
|
|
|
9,874
|
|
|
9,552
|
|
|
8,851
|
|
|
7,844
|
|
|
8,184
|
|
Professional fees
|
|
|
7,772
|
|
|
6,866
|
|
|
5,672
|
|
|
7,103
|
|
|
6,050
|
|
|
7,055
|
|
|
6,247
|
|
|
6,597
|
|
Interest on borrowings
|
|
|
7,512
|
|
|
12,035
|
|
|
3,276
|
|
|
2,936
|
|
|
2,692
|
|
|
3,066
|
|
|
2,730
|
|
|
2,575
|
|
Other expenses(1)
|
|
|
14,244
|
|
|
9,353
|
|
|
5,573
|
|
|
6,633
|
|
|
8,604
|
|
|
5,984
|
|
|
4,342
|
|
|
5,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
$
|
231,606
|
|
$
|
229,456
|
|
$
|
202,453
|
|
$
|
217,174
|
|
$
|
195,717
|
|
$
|
186,621
|
|
$
|
187,563
|
|
$
|
193,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before provision for (benefit from) income taxes
|
|
|
(27,030
|
)
|
|
9,006
|
|
|
7,830
|
|
|
10,276
|
|
|
695
|
|
|
(3,385
|
)
|
|
14,379
|
|
|
20,114
|
|
(Benefit from) provision for income taxes
|
|
|
(4,945
|
)
|
|
2,884
|
|
|
2,036
|
|
|
2,672
|
|
|
(3,759
|
)
|
|
(1,050
|
)
|
|
3,955
|
|
|
6,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before attribution to non-controlling stockholders
|
|
|
(22,085
|
)
|
|
6,122
|
|
|
5,794
|
|
|
7,604
|
|
|
4,454
|
|
|
(2,335
|
)
|
|
10,424
|
|
|
13,376
|
|
Less: Net income (loss) attributable to non-controlling interests
|
|
|
58
|
|
|
57
|
|
|
(357
|
)
|
|
858
|
|
|
153
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GFI's net (loss) income
|
|
$
|
(22,143
|
)
|
$
|
6,065
|
|
$
|
6,151
|
|
$
|
6,746
|
|
$
|
4,301
|
|
$
|
(2,486
|
)
|
$
|
10,424
|
|
$
|
13,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
Table of Contents
The following table sets forth our quarterly results of operations as a percentage of our Revenues, net of interest and transaction-based expenses, for the
indicated periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
December 31,
2011
|
|
September 30,
2011
|
|
June 30,
2011
|
|
March 31,
2011
|
|
December 31,
2010
|
|
September 30,
2010
|
|
June 30,
2010
|
|
March 31,
2010
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency commissions
|
|
|
61.4
|
%
|
|
63.5
|
%
|
|
64.9
|
%
|
|
64.8
|
%
|
|
65.1
|
%
|
|
68.2
|
%
|
|
68.1
|
%
|
|
67.4
|
%
|
Principal transactions
|
|
|
23.9
|
|
|
25.9
|
|
|
25.9
|
|
|
31.0
|
|
|
25.0
|
|
|
27.1
|
|
|
28.0
|
|
|
28.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total brokerage revenues
|
|
|
85.3
|
|
|
89.4
|
|
|
90.8
|
|
|
95.8
|
|
|
90.1
|
|
|
95.3
|
|
|
96.1
|
|
|
95.6
|
|
Clearing services revenues
|
|
|
12.5
|
|
|
13.4
|
|
|
13.2
|
|
|
12.2
|
|
|
10.4
|
|
|
11.8
|
|
|
|
|
|
|
|
Interest income from clearing services
|
|
|
0.3
|
|
|
0.3
|
|
|
0.3
|
|
|
0.1
|
|
|
0.2
|
|
|
0.1
|
|
|
|
|
|
|
|
Equity in net earnings (loss) of unconsolidated businesses(1)
|
|
|
0.3
|
|
|
1.8
|
|
|
2.3
|
|
|
0.4
|
|
|
1.0
|
|
|
1.0
|
|
|
(0.1
|
)
|
|
0.1
|
|
Software, analytics and market data
|
|
|
9.3
|
|
|
7.8
|
|
|
8.7
|
|
|
7.5
|
|
|
8.3
|
|
|
8.1
|
|
|
7.2
|
|
|
7.0
|
|
Other income (loss)(2)
|
|
|
6.8
|
|
|
3.0
|
|
|
0.6
|
|
|
(1.1
|
)
|
|
3.2
|
|
|
(1.7
|
)
|
|
0.5
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
114.5
|
|
|
115.7
|
|
|
115.9
|
|
|
114.9
|
|
|
113.2
|
|
|
114.6
|
|
|
103.7
|
|
|
103.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and transaction-based expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction fees on clearing services
|
|
|
11.8
|
|
|
12.7
|
|
|
12.7
|
|
|
11.9
|
|
|
9.8
|
|
|
11.3
|
|
|
|
|
|
|
|
Transaction fees on brokerage services
|
|
|
2.5
|
|
|
2.8
|
|
|
2.9
|
|
|
2.9
|
|
|
3.2
|
|
|
3.2
|
|
|
3.7
|
|
|
3.5
|
|
Interest expense from clearing services
|
|
|
0.2
|
|
|
0.2
|
|
|
0.3
|
|
|
0.1
|
|
|
0.2
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and transaction-based expenses
|
|
|
14.5
|
|
|
15.7
|
|
|
15.9
|
|
|
14.9
|
|
|
13.2
|
|
|
14.6
|
|
|
3.7
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest and transaction based expenses
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
78.7
|
|
|
67.1
|
|
|
69.8
|
|
|
70.1
|
|
|
70.9
|
|
|
72.8
|
|
|
69.9
|
|
|
67.8
|
|
Communications and market data
|
|
|
7.5
|
|
|
6.4
|
|
|
7.2
|
|
|
6.6
|
|
|
6.7
|
|
|
7.5
|
|
|
5.3
|
|
|
5.6
|
|
Travel and promotion
|
|
|
4.8
|
|
|
4.1
|
|
|
4.8
|
|
|
4.5
|
|
|
5.4
|
|
|
4.7
|
|
|
4.6
|
|
|
4.2
|
|
Rent and occupancy
|
|
|
3.2
|
|
|
2.7
|
|
|
2.8
|
|
|
2.6
|
|
|
3.0
|
|
|
3.2
|
|
|
2.6
|
|
|
2.5
|
|
Depreciation and amortization
|
|
|
4.5
|
|
|
4.2
|
|
|
4.7
|
|
|
4.4
|
|
|
4.9
|
|
|
4.8
|
|
|
3.9
|
|
|
3.8
|
|
Professional fees
|
|
|
3.8
|
|
|
2.9
|
|
|
2.7
|
|
|
3.1
|
|
|
3.1
|
|
|
3.8
|
|
|
3.1
|
|
|
3.1
|
|
Interest on borrowings
|
|
|
3.7
|
|
|
5.0
|
|
|
1.6
|
|
|
1.3
|
|
|
1.4
|
|
|
1.7
|
|
|
1.4
|
|
|
1.2
|
|
Other expenses(1)
|
|
|
7.0
|
|
|
3.9
|
|
|
2.7
|
|
|
2.9
|
|
|
4.2
|
|
|
3.3
|
|
|
2.1
|
|
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
113.2
|
%
|
|
96.3
|
%
|
|
96.3
|
%
|
|
95.5
|
%
|
|
99.6
|
%
|
|
101.8
|
%
|
|
92.9
|
%
|
|
90.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before provision for (benefit from) income taxes
|
|
|
(13.2
|
)
|
|
3.7
|
|
|
3.7
|
|
|
4.5
|
|
|
0.4
|
|
|
(1.8
|
)
|
|
7.1
|
|
|
9.4
|
|
(Benefit for) provision from income taxes
|
|
|
(2.4
|
)
|
|
1.2
|
|
|
1.0
|
|
|
1.2
|
|
|
(1.9
|
)
|
|
(0.5
|
)
|
|
2.0
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before attribution to non-controlling stockholders
|
|
|
(10.8
|
)
|
|
2.5
|
|
|
2.7
|
|
|
3.3
|
|
|
2.3
|
|
|
(1.3
|
)
|
|
5.1
|
|
|
6.3
|
|
Less: Net income (loss) attributable to non-controlling interests
|
|
|
0.0
|
|
|
0.0
|
|
|
(0.2
|
)
|
|
0.4
|
|
|
0.1
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GFI's net (loss) income
|
|
|
(10.8
|
)%
|
|
2.5
|
%
|
|
2.9
|
%
|
|
2.9
|
%
|
|
2.2
|
%
|
|
(1.4
|
)%
|
|
5.1
|
%
|
|
6.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Certain
amounts related to equity in net earnings (losses) of unconsolidated businesses totaling $(1,448), $235, $243, $(92) and $103 for the three months
ended March 31, 2011, December 31, 2010, September 30, 2010, June 30, 2010 and March 31, 2010, respectively, were previously presented in the "Other expenses" line
item in the Consolidated Statements of Operations. In order to enhance transparency in the presentation of the Consolidated Statements of Operations these amounts have been reclassified to the "Equity
in net earnings (losses) of unconsolidated businesses" line item.
-
(2)
-
Interest
income on short-term investments was previously presented in a line item called "Interest income" and has been combined into "Other
income (loss)" to conform with the presentation for the three month period ended December 31, 2010. The amounts that were combined for interest income for each period presented above were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2010
|
|
June 30,
2010
|
|
March 31,
2010
|
|
|
|
(dollars in thousands)
|
|
Interest income
|
|
$
|
682
|
|
$
|
77
|
|
$
|
240
|
|
82
Table of Contents
The tables below detail our brokerage revenues by product category in dollars and as a percentage of our total brokerage revenues for the
indicated periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
December 31,
2011
|
|
September 30,
2011
|
|
June 30,
2011
|
|
March 31,
2010
|
|
December 31,
2010
|
|
September 30,
2010
|
|
June 30,
2010
|
|
March 31,
2010
|
|
|
|
(dollars in thousands)
|
|
Brokerage revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income
|
|
$
|
47,222
|
|
$
|
62,585
|
|
$
|
53,184
|
|
$
|
71,507
|
|
$
|
52,412
|
|
$
|
52,975
|
|
$
|
60,810
|
|
$
|
71,484
|
|
Equity
|
|
|
36,715
|
|
|
45,785
|
|
|
44,205
|
|
|
48,157
|
|
|
42,194
|
|
|
37,172
|
|
|
46,587
|
|
|
47,566
|
|
Financial
|
|
|
41,016
|
|
|
52,571
|
|
|
49,597
|
|
|
48,505
|
|
|
38,981
|
|
|
39,731
|
|
|
39,123
|
|
|
38,110
|
|
Commodity
|
|
|
49,538
|
|
|
52,216
|
|
|
44,002
|
|
|
49,801
|
|
|
43,251
|
|
|
44,810
|
|
|
47,630
|
|
|
46,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total brokerage revenues
|
|
$
|
174,491
|
|
$
|
213,157
|
|
$
|
190,988
|
|
$
|
217,970
|
|
$
|
176,838
|
|
$
|
174,688
|
|
$
|
194,150
|
|
$
|
204,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income
|
|
|
27.1
|
%
|
|
29.4
|
%
|
|
27.9
|
%
|
|
32.8
|
%
|
|
29.6
|
%
|
|
30.3
|
%
|
|
31.3
|
%
|
|
35.0
|
%
|
Equity
|
|
|
21.0
|
|
|
21.5
|
|
|
23.1
|
|
|
22.1
|
|
|
23.9
|
|
|
21.3
|
|
|
24.0
|
|
|
23.3
|
|
Financial
|
|
|
23.5
|
|
|
24.6
|
|
|
26.0
|
|
|
22.3
|
|
|
22.0
|
|
|
22.7
|
|
|
20.2
|
|
|
18.7
|
|
Commodity
|
|
|
28.4
|
|
|
24.5
|
|
|
23.0
|
|
|
22.8
|
|
|
24.5
|
|
|
25.7
|
|
|
24.5
|
|
|
23.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total brokerage revenues
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
Cash and cash equivalents consist of cash and highly liquid investments with maturities, when purchased, of three months or less. At
December 31, 2011, we had $245.9 million of cash and cash equivalents compared to $313.9 million and $342.4 million at December 31, 2010 and 2009, respectively. Cash and cash equivalents
held by subsidiaries outside of the United States as of December 31, 2011 and 2010 totaled $187.1 million and $258.8 million, respectively. These amounts may be subject to additional income
taxes in the event such cash and cash equivalents related to foreign earnings are repatriated to the United States.
We
believe that, based on current levels of operations, our cash from operations, together with cash currently available and our ability to borrow additional funds under our Credit
Agreement, will be sufficient to fund our operations for at least the next twelve months. Poor financial results, unanticipated expenses or unanticipated acquisitions or strategic investments could
give rise to additional financing requirements sooner than we expect. There can be no assurance that equity or debt financing will be available when needed or, if available, that the financing will be
on terms satisfactory to us and not dilutive to our then-current stockholders.
Sources and Uses of Cash
The following table sets forth our cash flows from operating activities, investing activities and financing activities for the
indicated periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Cash provided by operating activities
|
|
$
|
4,579
|
|
$
|
96,106
|
|
$
|
113,801
|
|
Cash used in investing activities
|
|
|
(46,245
|
)
|
|
(58,774
|
)
|
|
(27,671
|
)
|
Cash used in financing activities
|
|
|
(26,423
|
)
|
|
(68,107
|
)
|
|
(87,986
|
)
|
Effects of exchange rate changes on cash and cash equivalents
|
|
|
93
|
|
|
2,271
|
|
|
1,860
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
$
|
(67,996
|
)
|
$
|
(28,504
|
)
|
$
|
4
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities for the year ended December 31, 2011 was $4.6 million, as compared to $96.1 million for the year ended December 31, 2010, a
decrease of $91.5 million. This
83
Table of Contents
decrease
was due, in part, to a $28.5 million decrease in net income before attribution to non-controlling stockholders from $25.9 million for the year ended December 31, 2010 to a
loss of $2.6 million for the year ended December 31, 2011. The decrease is also attributable to a $109.6 million increase in working capital employed in the business for the year ended
December 31, 2011 relative to the same period in 2010. The increase in working capital employed in the business was primarily due to a $102.4 million increase related to changes in net
receivables from brokers, dealers and clearing organizations, a net increase in the change in other assets and other liabilities of $26.5 million, largely attributable to an increase in
sign-on and retention bonuses paid of $12.5 million in 2011 as compared to 2010. These increases in working capital requirements were offset by a $10.8 million decrease related to accrued
compensation and accounts payable and a net decrease of $4.8 million related to decreases in each of segregated cash, deposits with clearing organizations and payables to clearing services customers.
Changes in working capital are often related to the timing of settlement of matched principal trades. While our net exposure to these trades is minimal (since we simultaneously agree to buy
instruments from one customer and sell them to another customer), there is sometimes a slight lag in the settlement of these offsetting trades that results in us maintaining a receivable or payable
positions for a short period of time, typically overnight. Substantially all fail to deliver and fail to receive balances at December 31, 2011 have subsequently settled at the contracted
amounts.
Offsetting
the decrease in net income and additional working capital employed in the business was a $46.1 million net change in items which reconcile net income to net cash used in
operating activities, such as depreciation and amortization, share-based compensation expense, amortization of sign-on and retention bonuses and benefit from deferred taxes, as compared to
the year ended December 31, 2010.
Net
cash provided by operating activities decreased to $96.1 million for the year ended December 31, 2010, compared with $113.8 million for 2009. The decrease is, in large part,
attributable to a decrease of $30.7 million in the items which reconcile net income to net cash provided by operating activities, such as amortization of sign-on bonuses and forgivable
loans, provision for doubtful accounts, depreciation and amortization, share-based compensation expense, provision for (benefit from) deferred taxes and other items. The decrease is offset by an
increase in net income before attribution to non-controlling stockholders of $9.6 million to $25.9 million for the year ended December 31, 2010, from $16.3 million for the year
ended December 31, 2009, as well as, a decrease in working capital employed in the business of $3.4 million for the year ended December 31, 2010 relative to the same period in 2009.
Net
cash used in investing activities for the year ended December 31, 2011 was $46.3 million compared to $58.8 million for 2010. The decrease in cash used for investing activities
was primarily attributable to a $25.4 million decrease in cash used in business acquisitions, net of cash acquired and purchases of intangible and other assets and a $13.3 million decrease in
purchases of cost and equity method investments. These decreases were slightly offset by an increase of $12.2 million in net payments due to the settlement of foreign exchange derivative hedge
contracts and an increase in purchases of property, equipment and leasehold improvements of $10.1 million.
Net
cash used in investing activities for the year ended December 31, 2010 was $58.8 million compared to $27.7 million for 2009. The increase in cash used for investing activities
was primarily attributable to $28.7 million in net cash used for businesses acquired during the year, including Kyte. See Note 5 to our Consolidated Financial Statements in
Part II-Item 8 for further details of acquisitions made during 2010. Additionally, the increase in cash used in investing activities was related to the purchase of certain
cost and equity method investments of $24.6 million offset by a change of $23.0 million in net proceeds due to the settlement of foreign exchange derivative hedge contracts.
Net
cash used in financing activities for the year ended December 31, 2011 was $26.4 million compared to $68.1 million in 2010. The decrease was due, in large part, to
(i) proceeds of $250.0 million aggregate principal related to the issuance of our 8.375% Senior Notes, net of $9.1 million in
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debt
issuance costs and (ii) decreases of $30.5 million in cash dividends paid. This decrease was offset by (i) the use of $195.0 million of the net proceeds from the offering to repay
all outstanding amounts under our Credit Agreement and all aggregate principle amounts outstanding under our 7.17% Senior Notes which were due in January 2013, (ii) net increases of $13.3
million in purchases of treasury stock and (iii) $2.4 million in cash paid for taxes on the vesting of RSUs. See Note 8 to our Consolidated Financial Statements in
Part II-Item 8 for further discussion of our short-term borrowings and long-term obligations.
Net
cash used in financing activities for the year ended December 31, 2010 was $68.1 million compared to $88.0 million in 2009. The decrease in cash used in financing activities
primarily related to net proceeds of $20.0 million under our Credit Agreement in 2010 as compared to repayments of $50.0 million in 2009, offset by increases of $31.1 million in cash dividends paid
and $18.2 million for repurchases of common stock.
Regulatory Requirements
Our liquidity and available cash resources are in part restricted by the regulatory requirements of certain of our material operating
subsidiaries, including GFI Securities LLC, GFI Securities Limited, GFI Brokers Limited, The Kyte Group Limited, Kyte Broking Limited, GFI (HK) Securities LLC, GFI (HK)
Brokers Ltd, GFI Group PTE Ltd and GFI Korea Money Brokerage Limited. These operating subsidiaries are subject to minimum capital requirements and/or licensing and financial requirements
imposed by their respective market regulators that are intended to ensure general financial soundness and liquidity based on certain minimum capital, licensing and financial requirements. U.S. and
U.K. regulations prohibit a registered broker-dealer from repaying borrowings of its parent or affiliates, paying cash dividends, making loans to its parent or affiliates or otherwise entering into
transactions that result in a significant reduction in its regulatory net capital position without prior notification or approval from its principal regulator. See Note 20 to the Consolidated
Financial Statements in Part II-Item 8 for further details on our regulatory requirements.
Funding
Our outstanding debt at December 31, 2011 consists of our 8.375% Senior Notes. During the year ended December 31, 2011,
we used $135.3 million and $67.8 million of the net proceeds from the issuance of the 8.375% Senior Notes to repay all outstanding amounts pursuant to the Credit Agreement and redeem all of the
outstanding principal and interest pursuant to the 7.17% Senior Notes, respectively, as well as all premiums and transaction expenses associated therewith. In addition, as a result of the issuance of
the 8.375% Senior Notes, the available borrowing capacity under the Credit Agreement decreased from $200 million to approximately $129.5 million. See Note 8 to the Consolidated Financial
Statements in Part II-Item 8 for further details on the Credit Agreement, our 8.375% Senior Notes and our 7.17% Senior Notes.
Credit Ratings
As of December 31, 2011, we maintained the following public long-term credit ratings and associated outlooks:
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|
|
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Rating
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Outlook
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Moody's Investor Services
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|
Ba2
|
|
Stable
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Standard & Poor's
|
|
BBB-
|
|
Stable
|
Fitch Ratings Inc.
|
|
BBB
|
|
Stable
|
Credit
ratings and outlooks can be revised at any time if such rating agency decides the circumstances warrant revision. A reduction in rating could adversely affect the availability of
debt
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financing.
If our credit rating were downgraded, our applicable per annum interest rate on our outstanding 8.375% Senior Notes could be increased by up to 200 basis points. In January 2012, we were
notified by Standard & Poor's ("S&P") that they were placing us on CreditWatch with negative implications.
Dividends Paid
Prior to 2008, we retained all earnings for investment in our business. In February 2008, our Board of Directors approved a policy of
paying quarterly dividends, subject to available cash flow from operations, other considerations and the determination of the amount by our Board of Directors. In December 2010, in addition to the
quarterly dividends declared by our Board of Directors, our Board also declared a special cash dividend of $0.25 per share. Cash dividends paid in 2011, 2010 and 2009 were approximately $24.2 million,
$54.7 million and $23.6 million, respectively.
Common Stock
It is our expectation that we may purchase additional shares of our common stock on the open market from time to time in accordance
with a stock repurchase program authorized by our Board of Directors. See Note 10 to our Consolidated Financial Statements in Part II-Item 8 for further discussion of
the stock repurchase program.
Contractual Obligations and Commitments
The following table summarizes certain of our contractual obligations as of December 31, 2011:
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|
|
|
|
|
|
|
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|
|
|
Payments Due by Period
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|
|
|
Total
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|
Less than
1 year
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|
1 - 3 years
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|
3 - 5 years
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|
More than
5 years
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|
|
|
(in thousands)
|
|
Contractual Obligations
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases(1)
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|
$
|
148,816
|
|
$
|
14,454
|
|
$
|
24,431
|
|
$
|
20,256
|
|
$
|
89,675
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|
Interest on Long-term obligations
|
|
|
146,563
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|
|
20,938
|
|
|
41,875
|
|
|
41,875
|
|
|
41,875
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|
Long-term obligations
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|
|
250,000
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|
|
|
|
|
|
|
|
|
|
|
250,000
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|
Purchase obligations(2)
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|
|
29,766
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|
|
20,800
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|
|
7,985
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|
|
981
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
575,145
|
|
$
|
56,192
|
|
$
|
74,291
|
|
$
|
63,112
|
|
$
|
381,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Amounts
listed under Operating leases include the future minimum rental commitments relating to a twenty-year lease that we entered into for our
current primary U.S. office space in June 2007. At December 31, 2011, the total minimum rental commitments under this lease totaled $77.9 million, with $4.1 million due in less than one year,
$9.0 million due within one to three years, $9.0 million due within three to five years and $56.0 million due in more than five years. See Note 13 to the Consolidated Financial Statements in
Part IIItem 8 for further details.
-
(2)
-
Amounts
listed under Purchase Obligations include agreements for quotes with various information service providers. Additionally, such amounts include
purchase commitments for capital expenditures. See Note 13 to our Consolidated Financial Statements in Part IIItem 8 for further discussion.
As
disclosed in Note 9 to the Consolidated Financial Statements in Part IIItem 8, we have unrecognized tax benefits (net of the federal benefit on state
positions) of approximately $11.2 million,
excluding interest of $0.8 million. Due to the uncertainty of the amounts to be ultimately paid as well as the timing of such payments, all liabilities for uncertain tax positions which have not been
paid are excluded from the Contractual Obligations and Commitments table.
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Off-Balance Sheet Arrangements
The Company did not have any off-balance sheet arrangements at December 31, 2011.
Critical Accounting Policies and Estimates
General
This Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial
statements which have been prepared in accordance with U.S. generally accepted accounting principles, which require us to make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other factors that
we believe are reasonable under the circumstances. We believe that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ materially from these
estimates under different assumptions or conditions.
An
accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is
made; if different estimates reasonably could have been used; or if changes in the estimate that are reasonably likely to occur periodically could materially impact the financial statements. We
believe the following critical accounting policies reflect the significant estimates and assumptions used in the preparation of our Consolidated Financial Statements.
Revenue Recognition
We provide brokerage services to our clients in the form of either agency or principal transactions. In agency transactions, we charge
commissions for executing transactions between buyers and sellers. We earn revenue from principal transactions on the spread between the buy and sell price of the security that is brokered. Brokerage
revenues and related expenses from agency and principal transactions are recognized on a trade date basis. We do not receive actual payment until the specific account receivable is collected in an
agency transaction or until we realize the net spread on the specific settlement date in a principal transaction.
We
evaluate the level of our allowance for doubtful accounts based on the length of time receivables are past due and our historical experience. Also, if we are aware of a client's
inability to meet its financial obligations, we record a specific provision for doubtful accounts in the amount of the estimated losses which will result from the inability of that client to meet its
financial obligation. The amount of the provision will be charged against the amounts due, reducing the receivable to the amount we reasonably believe will be collected. If the financial condition of
one of our clients were to deteriorate, resulting in an impairment of its ability to make payments, an additional provision could be required. Due to changing economic business and market conditions,
we review the provision monthly and make changes to the provision as appropriate. Our allowance for doubtful accounts at December 31, 2011 was $1.5 million.
Fair Value of Financial Instruments
Substantially all of our assets and liabilities are carried at fair value or contracted amounts that approximate fair value. Assets and
liabilities that are recorded at contracted amounts approximating fair value consist primarily of receivables from and payables to brokers, dealers and clearing organizations and payables to clearing
services customers. These receivables and payables to brokers, dealers and clearing organizations are short-term in nature, and substantially all have settled at the contracted amounts
following December 31, 2011. Our marketable equity securities are recorded at fair value based on their quoted market price. Our investments that are accounted for under the cost and
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equity
methods are investments in companies that are not publicly traded and for which no established market for their securities exists. The fair value of these investments is not estimated if there
are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. Our debt obligations are carried at historical amounts.
Our
financial assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with ASC 820-10. In accordance with ASC
820-10, we have categorized our financial assets and liabilities, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy as set forth
below.
Level 1
Financial assets and liabilities whose values are based on unadjusted quoted prices for identifiable assets or liabilities in
an active market that the company has the ability to access at the measurement date (examples include active exchange-traded equity securities, listed derivatives, and most U.S. Government and agency
securities).
Level 2
Financial assets and liabilities whose values are based on quoted prices in markets where trading occurs infrequently or
whose values are based on quoted prices of instruments with similar attributes in active markets. Level 2 inputs include the following:
-
-
Quoted prices for identifiable or similar assets or liabilities in non-active markets (examples include
corporate and municipal bonds which trade infrequently);
-
-
Inputs other than quoted prices that are observable for substantially the full term of the asset or liability (examples
include interest rate and currency swaps), and
Level 3
Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both
unobservable and significant to the overall fair value measurement. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or
liability.
Valuation Techniques
A description of the valuation techniques applied to our major categories of assets and liabilities measured at fair value on a
recurring basis are as follows:
U.S. Treasury Securities
U.S. Treasury securities are valued using quoted market prices. Valuation adjustments are not applied. Accordingly,
U.S. Treasury securities are generally categorized in Level 1 of the fair value hierarchy.
Equity Securities
Equity securities include mostly exchange-traded corporate equity securities and are valued based on quote market prices.
Accordingly, exchange-traded equity securities are generally categorized in Level 1 of the fair value hierarchy. Non-exchange traded equity securities are measured primarily using
broker quotations, pricing service data from external providers and prices observed for recently executed market transactions. Non-exchange traded equity securities are generally
categorized within Level 2 of the fair value hierarchy.
Corporate Bonds
Corporate bonds are measured primarily using broker quotations, pricing service data from external providers and prices
observed for recently executed market transactions. Corporate bonds are generally categorized in Level 2 of the fair value hierarchy.
Derivative Contracts
Derivative contracts include instruments such as foreign exchange, commodity, fixed income and equity derivative
contracts.
Listed Derivative Contracts
Listed derivatives that are actively traded are valued based on quoted prices from the exchange and are
categorized in Level 1 of the fair value hierarchy.
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OTC Derivative Contracts
OTC derivative contracts include forwards, swaps, and options contracts related to foreign currencies. Depending on
the product and the terms of the transaction, the fair value of OTC derivative products can be either observed or modeled using a series of techniques and model inputs from comparable benchmarks,
including closed-form analytic formulas, such as the Black-Scholes option-pricing model, and simulation models or a combination thereof. Many pricing models do not entail material
subjectivity because the methodologies employed do not necessitate significant judgment, and the pricing inputs are observed from actively quoted markets. In the case of more established derivative
products, the pricing models used by us are widely accepted by the financial services industry. OTC derivative products valued by us using pricing models generally fall into this category and are
categorized in Level 2 of the fair value hierarchy.
Equity warrants
Non-exchange traded equity warrants are classified within Level 3 of the fair value hierarchy and are
measured using the Black-Scholes model with key inputs impacting the valuation, including the underlying security price, implied volatility, dividend yield, interest rate curve, strike price and
maturity date.
Convertible debt security
As discussed in Note 7 the Consolidated Financial Statements in Part IIItem 8,
we exchanged our membership interest in a private company for a convertible senior secured promissory note in that company. This security is measured using valuation techniques involving quoted prices
of or market data for comparable companies' credit ratings, peer company ratios and discounted cash flow analyses. As several inputs are unobservable and significant to the valuation, this convertible
debt security is categorized within Level 3 of the fair value hierarchy.
Future Purchase Commitment
As the inputs used in the fair value future purchase commitment are both unobservable and significant to the
overall fair value measurement of this liability, the liability is generally categorized in Level 3 of the fair value hierarchy. In connection with the acquisition of 70% of the equity
ownership interests in Kyte, we agreed to purchase the residual 30% equity interest in Kyte for an additional cash payment in an amount to be determined pursuant to a formula based on Kyte's earnings,
such payment to be made following June 30, 2013. In applying the income approach, we assumed a 16.0% and 17.7% discount rate as of December 31, 2011 and 2010,
respectively, and used forecasted financial information for Kyte for the remaining period ended June 30, 2013.
Contingent Consideration
As the inputs used in the fair value of contingent consideration are both unobservable and significant to the
overall fair value measurement of this liability, the liability is generally categorized in Level 3 of the fair value hierarchy. The category consists primarily of contingent consideration
related to the acquisition of a retail energy brokerage business, completed on November 1, 2009. This contingent liability is remeasured at fair value and is based on estimated future
collections of accounts receivable of the business over approximately the next two years.
Software Development CapitalizationInternal-Use Software
We capitalize certain costs of software developed or obtained for internal use in accordance with ASC 350,
IntangiblesGoodwill and Other
. We capitalize software development costs when application development begins and it is probable that the
project will be completed and the software will be used as intended. Costs associated with preliminary project stage activities, maintenance and all other post implementation stage activities are
expensed as incurred. Our policy provides for the capitalization of certain payroll and payroll-related costs for employees who are directly associated with internal use computer software projects, as
well as external direct costs of materials and services associated with developing or obtaining internal use software. Capitalized personnel costs are limited to time directly
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spent
on such projects. Capitalized costs are ratably amortized, using the straight-line method, over the estimated useful lives, which are typically over three years. Our judgment as to
which costs to capitalize, when to begin capitalizing such costs and what period to amortize the costs over, may materially affect our results of operations. If management determines that the fair
value of the software is less than the carrying value, an impairment loss would be recognized in an amount equal to the difference between the fair value and the carrying value.
Goodwill and Intangible Assets
Under ASC 350,
IntangiblesGoodwill and Other,
management is required to
perform a detailed review, at least annually, of the carrying value of our intangible assets, which includes goodwill. In this process, management is required to make estimates and assumptions in
order to determine the fair value of our assets and liabilities and projected future earnings using various valuation techniques, including a discounted cash flow model. Management uses its best
judgment and information available to it at the time to perform this review. Because management's assumptions and estimates are used in projecting future earnings as part of the valuation, actual
results may differ. If management determines that the fair value of the intangible asset with an indefinite life is less than its carrying value, an impairment loss would be recognized in an amount
equal to the difference between the fair value and the carrying value.
Prior
to our annual goodwill impairment test, we early adopted Accounting Standards Update No. 2011-08 ("ASU 2011-08")
"IntangiblesGoodwill and Other (Topic 350),"
which provides us the option of
performing a qualitative assessment before calculating the
fair value of the reporting unit when testing goodwill for impairment. The qualitative assessment is based on reviewing the totality of several factors, including macroeconomic conditions, industry
and market considerations, cost factors, overall financial performance, other entity specific events (for example, changes in management) or other events such as selling or disposing of a reporting
unit. After assessing qualitative factors, if we determine that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, no further testing is
necessary. If we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying value, then a two-step goodwill impairment test, prescribed
by ASC 350, must be performed.
Based
on the results of the annual impairment tests, the Company determined that no impairment of goodwill existed as of November 1, 2011, November 1, 2010,
January 1, 2010 or January 1, 2009.
Contingencies
In the normal course of business, we have been named as defendants in various lawsuits and proceedings and have been involved in
certain regulatory examinations. Additional actions, investigations or proceedings may be brought from time to time in the future. We are subject to the possibility of losses from these various
contingencies. Considerable judgment is necessary to estimate the probability and amount of any loss from such contingencies. An accrual is made when it is probable that a liability has been incurred
or an asset has been impaired and the amount of loss can be reasonably estimated. We accrue a liability for the estimated costs of adjudication or settlement of asserted and unasserted claims existing
as of the balance sheet date. We have recorded reserves for certain contingencies to which we may have exposure, such as reserves for certain income tax and
litigation contingencies and contingencies related to the employer portion of National Insurance Contributions in the U.K. We disclose asserted claims when it is at least reasonably possible that an
asset had been impaired or a liability had been incurred as of the date of the financial statements and unasserted claims when it is considered probable that a claim will be asserted and there is a
reasonable possibility that the outcome will be unfavorable.
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Income Taxes
In accordance with ASC 740,
Income Taxes
, ("ASC 740") we provide for income taxes using
the asset and liability method under which deferred income taxes are recognized for the estimated future tax effects attributable to temporary differences and carryforwards that result from events
that have been recognized either in the financial statements or the income tax returns, but not both. The measurement of current and deferred income tax liabilities and assets is based on provisions
of enacted tax laws. Valuation allowances are recognized if, based on the weight of available evidence, it is more likely than not that some portion of the deferred tax assets will not be realized.
Our interpretation of complex tax law may impact our measurement of current and deferred income taxes.
We
are subject to regular examinations by the Internal Revenue Service, taxing authorities in foreign countries, and states in which we have significant business operations. We regularly
assess the likelihood of additional assessments in each taxing jurisdiction resulting from on-going and subsequent years' examinations. We record uncertain tax positions in accordance with
ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that a tax position will be sustained based on the technical merits of the
position, and (2) for those tax positions that are more likely than not to be sustained, we recognize the largest amount of tax benefit that has a greater than 50% likelihood of being realized
upon ultimate settlement with the relevant taxing authority.
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2009-13
("ASU 2009-13")
Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements
. ASU 2009-13 establishes the
accounting and reporting guidance for arrangements with multiple-revenue generating
activities. ASU 2009-13 addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting and provides a selling price
hierarchy for determining the selling price of a deliverable. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. Early adoption is permitted but must be
retrospectively applied to the beginning of the fiscal year of adoption. The adoption of ASU 2009-13 did not have a material impact on our Consolidated Financial Statements.
In
October 2009, the FASB issued Accounting Standards Update No. 2009-14 ("ASU 2009-14")
Software (Topic 985) Certain Revenue
Arrangements That Include Software Elements
. ASU 2009-14 provides guidance on how to allocate arrangement consideration to deliverables in an arrangement that
includes both tangible products and software. ASU 2009-14 also provides additional guidance on how to determine which software, if any, relating to the tangible product would be excluded
from software revenue recognition. ASU 2009-14 is effective for fiscal years beginning on or after June 15, 2010. Early adoption is permitted but must be retrospectively applied to
the beginning of the fiscal year of adoption. The adoption of ASU 2009-14 did not have a material impact on our Consolidated Financial Statements.
In
January 2010, the FASB issued Accounting Standards Update No. 2010-06 ("ASU 2010-06")
Fair Value Measurements and Disclosures
(Topic 820) Improving Disclosures about Fair Value Measurements.
ASU 2010-06 provides amendments to Subtopic 820-10 that require new disclosures,
including the amounts of and reasons for transfers in and out of Levels 1 and 2 fair value measurements and reporting activity in the reconciliation of Level 3 fair value measurements on
a gross basis. ASU 2010-06 provides amendments that clarify existing disclosures regarding the level of disaggregation for providing fair value measurement disclosures for each
class of assets and liabilities. In addition, it clarifies existing disclosures about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value
measurements that are required for either Level 2 or Level 3. ASU 2010-06 was effective for interim and annual reporting periods ending after December 15, 2009 except
for the disclosures about the roll forward of activity in Level 3 fair value measurements, which
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are
effective for fiscal years beginning after December 31, 2010 and for interim periods within those fiscal years. The adoption of ASU 2010-06 did not have a material impact on our
consolidated financial statements and the adoption of ASU 2010-06 with respect to disclosures of the roll forward of activity in Level 3 fair value measurements did not have a
material impact on our Consolidated Financial Statements.
In
July 2010, the FASB issued Accounting Standards Update No. 2010-20 ("ASU 2010-20")
Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses
. The main objective of ASU 2010-20 is to provide financial statement
users with greater transparency about an entity's allowance for credit losses and the credit quality of its financing receivables. ASU 2010-20 requires disclosure of additional information
to assist financial statement users in assessing an entity's credit risk exposures and evaluating the adequacy of its allowance for credit losses. This ASU is effective for all public companies for
interim and annual reporting periods ending on or after December 15, 2010, except for disclosures relating to loan modifications, which were subsequently extended to interim and annual filings
after June 15, 2011. The adoption of ASU 2010-20 did not have a material impact on our Consolidated Financial Statements.
In
May 2011, the FASB issued Accounting Standards Update No. 2011-04 ("ASU 2011-04")
Fair Value Measurement (Topic 820) Amendments
to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
. ASU 2011-04 amends current guidance to result in common fair
value measurement and disclosures between accounting principles generally accepted in the United States and International Financial Reporting Standards. The amendments result in a consistent
definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. The amendments in ASU 2011-04 are effective for
interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-04 to have a material impact on the Company's Consolidated
Financial Statements.
In
June 2011, the FASB issued Accounting Standards Update No. 2011-05 ("ASU 2011-05")
Comprehensive Income (Topic 220) Presentation
of Comprehensive Income
. The main objective of ASU 2011-05 is to improve the comparability, consistency, and transparency of financial reporting and increase
the prominence of items reported in other comprehensive income ("OCI") by eliminating the option to present components of OCI as part of the statement of changes in stockholders' equity. The
amendments in this standard requires entities to report the components of comprehensive income in either in (1) a single continuous statement of comprehensive income or (2) two separate
but consecutive statements. The amendments in this standard do not change the items that must be reported in OCI. The amendments in ASU 2011-05 are effective for interim and annual periods
beginning after December 15, 2011 and are to be applied retrospectively. The Company does not expect the adoption of ASU 2011-05 to have a material impact on the Company's
Consolidated Financial Statements.
In
September 2011, the FASB issued Accounting Standards Update No. 2011-08 ("ASU 2011-08")
"IntangiblesGoodwill and
Other (Topic 350)."
ASU 2011-08 amends current guidance to allow entities to first assess qualitative factors to determine whether it is more likely than not (a
likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. After assessing qualitative factors, if an entity determines that it is not more
likely than not that the fair value of the reporting unit is less than its carrying amount, no further testing is necessary. If an entity determines that it is more likely than not that the fair value
of the reporting unit is less than its carrying value, then the traditional two-step goodwill impairment test must be performed. The amendments in ASU 2011-08 are
effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company adopted
ASU 2011-08 effective the fourth quarter of 2011. The adoption of ASU 2011-08 did not have a material impact on the Company's Consolidated Financial Statements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISLOSURES ABOUT MARKET RISK
Risk Management
In the normal course of business, we are exposed to various risks, including foreign currency exposure risk, interest rate risk, credit
risk, market risk and operational risk. Top-level oversight of our risk management resides with the Risk Policy Committee of the Board of Directors. We also utilize several management
committees made up of key executives with responsibility for identifying and managing risk. Specialized risk functions, such as our credit risk, compliance, internal audit and Sarbanes-Oxley
compliance departments, perform regular monitoring and testing procedures to provide management with assurance regarding the design and operating effectiveness of risk control policies and procedures.
Finally, business managers play an integral role in risk management by maintaining the processes and control activities designed to identify, mitigate, and report risk.
The
various risks that may impact the Company, certain of our risk management procedures, and a sensitivity analysis estimating the effects of changes in fair values for exposures
relating to foreign currency and interest rate exposures are outlined below.
Foreign Currency Exposure Risk
We are exposed to risks associated with changes in foreign exchange rates related to our international operations. As foreign currency
exchange rates change, the U.S. Dollar equivalent of revenues and expenses denominated in foreign currencies change. Our U.K. operations
generate a large majority of their revenues in U.S. Dollars and Euros but pay a significant amount of their expenses in British Pounds. We enter into foreign exchange forward and foreign exchange
collar contracts ("Foreign Exchange Derivative Contracts") to mitigate our exposure to foreign currency exchange rate fluctuations. At December 31, 2011 and 2010, we had no Foreign Exchange
Derivative Contracts that were designated as foreign currency cash flow hedges. We do not use derivative contracts for speculative purposes.
We
are also exposed to counterparty credit risk for nonperformance of Foreign Exchange Derivative Contracts and in the event of nonperformance, to market risk for changes in currency
rates. The counterparties with whom we execute foreign exchange derivative contracts are major international financial institutions. We monitor our positions with, and the credit quality of, these
financial institutions and we do not anticipate nonperformance by the counterparties.
While
our international results of operations, as measured in U.S. Dollars, are subject to foreign exchange rate fluctuations, we do not consider the related risk to be material to our
results of operations. If the Euro strengthened against the U.S. Dollar by 10% and the British Pound Sterling weakened by 10% against the U.S. Dollar, the net impact to our net income would be a
reduction of approximately $6.2 million as of December 31, 2011.
Interest Rate Risk
We are exposed to changes in market interest rates that impact our variable-rate short-term borrowings that may
be outstanding under our Credit Agreement from time to time. As of December 31, 2011, we had no amounts outstanding under our Credit Agreement. As of December 31, 2011, the interest rate
on our entire $250 million long-term debt was comprised of a fixed-rate. Fluctuations in market interest rates will have no impact on the amount of interest we must pay
on these fixed-rate debt obligations.
Credit Risk
Credit risk arises from potential non-performance by counterparties of our matched principal business, as well as from
nonpayment of commissions by customers of our agency brokerage business.
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We
also have credit and counterparty risk in certain situations where we provide clearing and execution services. We provide agency clearing services though our relationships with general clearing
member firms and/or exchanges. In these instances, our accounts at such institutions are used, in our name, to provide access to clearing services for our customers. Credit risk arises from the
possibility that we may suffer losses due to the failure of our customers or other counterparties to satisfy their financial obligations to us or in a timely manner.
We
have established policies and procedures to manage our exposure to credit risk. We maintain a thorough credit approval process to limit our exposure to counterparty risk and employ
stringent monitoring to control the market and counterparty risk from our matched principal business. Our brokers may only execute transactions for clients that have been approved by our credit
committee following review by our credit department. Our credit approval process includes verification of key financial information and operating data and anti-money laundering
verification checks. Our credit review process may include consideration of independent credit agency reports and a visit to the entity's premises, if necessary. We have developed and utilize a
proprietary, electronic credit risk monitoring system.
Credit
approval is granted by our credit committee, which is comprised of senior management and representatives from our compliance, finance and legal departments. Credit approval is
granted subject to certain trading limits and may be subject to additional conditions, such as the receipt of collateral or other credit support. Our credit risk department assists the credit
committee in the review of any proposed counterparty by conducting diligence on such party and by continuing to review such counterparties for continued credit approval on at least an annual basis.
These results are reviewed by the credit committee. Maintenance procedures include reviewing current audited financial statements and publicly available information on the client, collecting data from
credit rating agencies where available and reviewing any changes in ownership, title or capital of the client. For our agency business, our approval process includes the requisite
anti-money laundering and know-your-customer verifications.
Market Risk
We are exposed to market risk associated with our principal transactions and, in certain instances, in the provision of clearing
services. Through our subsidiaries, we conduct both matched principal and principal trading businesses, primarily involving fixed income and equity securities, but increasingly, for certain foreign
exchange, commodities and listed derivative products.
In
matched principal transactions, we act as a "middleman" by serving as counterparty on one side of a customer trade and entering into an offsetting trade with another party relatively
quickly (often within minutes and generally on the same trading day). These transactions are then settled through a third-party clearing organization. Settlement typically occurs within one to three
business days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded. In a limited number of circumstances, we may settle
a principal transaction by physical delivery of the underlying instrument.
In
executing matched principal transactions, we are exposed to the risk that one of the counterparties to a transaction may fail to fulfill its obligations, either because it is not
matched immediately or, even if matched, one party fails to deliver the cash or securities it is obligated to deliver. Certain of the less liquid or OTC markets in which we provide our services
exacerbate this risk for us because transactions in these markets are less likely to settle on a timely basis. Adverse movements in the prices of securities that are the subject of these transactions
can increase our risk. In addition, widespread technological or communication failures, as well as actual or perceived credit difficulties or the insolvency of one or more large or visible market
participants, could cause market-wide credit difficulties or other market disruptions. These failures, difficulties or disruptions
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could
result in a large number of market participants not settling transactions or otherwise not performing their obligations.
We
are subject to financing risk in these circumstances because if a transaction does not settle on a timely basis, the resulting unmatched position may need to be financed, either
directly by us or through one of our clearing organizations at our expense. These charges may be recoverable from the failing counterparty, but sometimes are not. Finally, in instances where the
unmatched position or failure to deliver is prolonged or pervasive due to rapid or widespread declines in liquidity for an instrument, there may also be regulatory capital charges required to be taken
by us, which depending on their size and duration, could limit our business flexibility or even force the curtailment of those portions of our business requiring higher levels of capital. Credit or
settlement losses of this nature could adversely affect our financial condition or results of operations.
In
the process of executing matched principal transactions, miscommunications and other errors by us or our clients can arise whereby a transaction is not completed with one or more
counterparties to the transaction, leaving us with either a long or short unmatched position. These unmatched positions are referred to as "out trades," and they create a potential liability for us.
If an out trade is promptly discovered and there is a prompt disposition of the unmatched position, the risk to us is usually limited. If the discovery of an out trade is delayed, the risk is
heightened by the increased possibility of intervening market movements prior to disposition. Although out trades usually become known at the time of, or later on the day of, the trade, it is possible
that they may not be discovered until later in the settlement process. When out trades are discovered, our policy is generally to have the unmatched
position disposed of promptly (usually on the same day and generally within three days), whether or not this disposition would result in a loss to us. The occurrence of out trades generally rises with
increases in the volatility of the market and, depending on their number and amount, such out trades have the potential to have a material adverse effect on our financial condition and results of
operations.
Liability
for unmatched trades could adversely affect our results of operations and balance sheet. Although the significant majority of our principal trading is done on a "matched
principal" basis, we may take unmatched positions for our own account generally in response to customer demand, primarily to facilitate the execution of existing customer orders or in anticipation
that future customer orders will become available to fill the other side of the transaction. While we seek to minimize our exposure to market risk by entering into offsetting trades or a hedging
transaction relatively quickly (often within minutes and generally on the same trading day), we may not always enter into an offsetting trade on the same trading day and any hedging transaction we may
enter into may not fully offset our exposure. Therefore, although any unmatched positions are intended to be held short term, we may not entirely offset market risk and may be exposed to market risk
for several days or more or to a partial extent or both.
Additionally,
we have authorized a limited number of our desks to enter into principal investing transactions in which we commit our capital within predefined limits, either to
facilitate customer trading activities or to engage in principal trading for our own account. These principal positions may ultimately be matched against a customer order or through a market
intermediary, either in the short term (such as the same trading day) or we may hold these positions for several days or more. The number and size of these transactions may affect our results of
operations in a given period and we may also incur losses from these trading activities due to market fluctuations and volatility from quarter to quarter. We are currently subject to covenants in our
Credit Agreement, which generally limit the aggregate amount of securities which we may trade for our own account to five percent of our consolidated capital. To the extent that we own assets,
i.e., have long positions, in any of those markets, a downturn in the value of those assets or in those markets could result in losses from a decline in the value of those long positions.
Conversely, to the extent that we have sold assets we do not own, i.e., have short positions, in any of those markets, an upturn in those markets could expose us to
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significant
losses as we attempt to cover our short positions by acquiring assets in a rising market. To the extent these securities positions are not disposed of intra-day, we mark these
positions to market.
In
certain instances, we may provide credit for margin requirements to customers, secured by collateral in a customer's account. In such cases, we are exposed to the market risk that the
value of the collateral we hold could fall below the amount of a customer's indebtedness. This risk can be amplified in any situation where the market for the underlying security is rapidly declining.
Agreements with
customers that have margin accounts permit us to liquidate their securities in the event that the amount of margin collateral becomes insufficient. Despite those agreements and our risk management
policies with respect to margin, we may be unable to liquidate a customer's positions for various reasons, or at a price sufficient to cover any deficiency in a customer's account. If we were unable
to liquidate a position at a price sufficient to cover any deficiency or if a customer was unable to post additional margin, we may suffer a loss.
Adverse
movements in the securities underlying these positions or a downturn or disruption in the markets for these positions could result in a substantial loss. In addition, principal
gains and losses resulting from these positions could on occasion have a disproportionate effect, positive or negative, on our financial condition and results of operations for any particular
reporting period.
In
addition to entering into offsetting trades or a hedging transaction, we also monitor market risk exposure from our matched principal and principal trading business, including
regularly monitoring concentration of market risk to financial instruments, countries or counterparties and regularly monitoring trades that have not settled within prescribed settlement periods or
volume thresholds. Additionally, market risks are monitored and mitigated by the use of our proprietary, electronic risk monitoring system, which provides management with daily credit reports in each
of our geographic regions that analyze credit concentration and facilitates the regular monitoring of transactions against key risk indicators.
Operational Risk
Operational risk refers to the risk of financial or other loss, or potential damage to our reputation, resulting from inadequate or
failed internal processes, people, resources, systems or from external events. We may incur operational risk across the full scope of business activities and support functions. We have operational
risk polices that are designed to reduce the likelihood and impact of operational incidents as well as to mitigate legal, regulatory and reputational risk. Primary responsibility for the management of
operational risk resides with the business managers, risk and control functions, and various management committees through the use of processes and controls designed to identify, assess, manage,
mitigate and report operational risk. For additional discussions of our operational risks, see "Item 1ARisks Related to Our Operations."
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Table of Contents
97
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
GFI Group Inc.
New York, New York
We
have audited the accompanying consolidated statements of financial condition of GFI Group Inc. and subsidiaries (the "Company") as of December 31, 2011 and 2010, and the
related consolidated statements of operations, comprehensive (loss) income, cash flows and changes in stockholders' equity for each of the three years in the period ended December 31, 2011. Our
audits also included the financial statement schedule listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is
to express an opinion on the consolidated financial statements and the financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of GFI Group Inc. and subsidiaries as of
December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth therein.
We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of
December 31, 2011, based on the criteria established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 15, 2012 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/
Deloitte & Touche LLP
New York, New York
March 15, 2012
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GFI GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
2010
|
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
245,879
|
|
$
|
313,875
|
|
Cash segregated under federal and other regulations
|
|
|
12,756
|
|
|
24,927
|
|
Deposits with clearing organizations
|
|
|
33,885
|
|
|
26,845
|
|
Commissions receivable, net
|
|
|
94,971
|
|
|
103,010
|
|
Receivables from brokers, dealers and clearing organizations
|
|
|
217,909
|
|
|
243,811
|
|
Property, equipment and leasehold improvements, net
|
|
|
61,947
|
|
|
60,612
|
|
Goodwill
|
|
|
266,506
|
|
|
268,288
|
|
Intangible assets, net
|
|
|
58,027
|
|
|
66,816
|
|
Other assets
|
|
|
198,669
|
|
|
165,620
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,190,549
|
|
$
|
1,273,804
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Accrued compensation
|
|
$
|
127,089
|
|
$
|
112,535
|
|
Accounts payable and accrued expenses
|
|
|
56,547
|
|
|
64,672
|
|
Payables to brokers, dealers and clearing organizations
|
|
|
89,529
|
|
|
172,418
|
|
Payables to clearing services customers
|
|
|
120,909
|
|
|
125,968
|
|
Short-term borrowings, net
|
|
|
|
|
|
132,703
|
|
Long-term obligations
|
|
|
250,000
|
|
|
59,743
|
|
Other liabilities
|
|
|
97,563
|
|
|
110,543
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
741,637
|
|
|
778,582
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 13)
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 5,000,000 shares authorized, none outstanding at December 31, 2011 and 2010
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 400,000,000 shares authorized and 131,669,676 and 128,703,324 shares issued at December 31, 2011 and 2010,
respectively
|
|
|
1,317
|
|
|
1,287
|
|
Additional paid in capital
|
|
|
365,835
|
|
|
350,230
|
|
Retained earnings
|
|
|
160,934
|
|
|
188,295
|
|
Treasury stock, 14,145,038 and 6,577,833 common shares at cost at December 31, 2011 and 2010, respectively
|
|
|
(73,919
|
)
|
|
(43,433
|
)
|
Accumulated other comprehensive loss
|
|
|
(6,955
|
)
|
|
(2,268
|
)
|
|
|
|
|
|
|
Total Stockholders' Equity
|
|
|
447,212
|
|
|
494,111
|
|
Non-controlling interests
|
|
|
1,700
|
|
|
1,111
|
|
|
|
|
|
|
|
Total Equity
|
|
|
448,912
|
|
|
495,222
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
1,190,549
|
|
$
|
1,273,804
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
99
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GFI GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Agency commissions
|
|
$
|
561,026
|
|
$
|
534,239
|
|
$
|
481,326
|
|
Principal transactions
|
|
|
235,580
|
|
|
215,563
|
|
|
270,378
|
|
|
|
|
|
|
|
|
|
Total brokerage revenues
|
|
|
796,606
|
|
|
749,802
|
|
|
751,704
|
|
Clearing services revenues
|
|
|
112,735
|
|
|
41,878
|
|
|
|
|
Interest income from clearing services
|
|
|
2,300
|
|
|
671
|
|
|
|
|
Equity in net earnings of unconsolidated businesses(1)
|
|
|
10,466
|
|
|
3,974
|
|
|
1,574
|
|
Software, analytics and market data
|
|
|
73,620
|
|
|
60,637
|
|
|
54,347
|
|
Other income(1)
|
|
|
19,746
|
|
|
5,640
|
|
|
12,656
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,015,473
|
|
|
862,602
|
|
|
820,281
|
|
Interest and transaction-based expenses
|
|
|
|
|
|
|
|
|
|
|
Transaction fees on clearing services
|
|
|
108,283
|
|
|
39,918
|
|
|
|
|
Transaction fees on brokerage services
|
|
|
24,541
|
|
|
27,213
|
|
|
30,354
|
|
Interest expense from clearing services
|
|
|
1,878
|
|
|
427
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and transaction-based expenses
|
|
|
134,702
|
|
|
67,558
|
|
|
30,354
|
|
|
|
|
|
|
|
|
|
Revenues, net of interest and transaction-based expenses
|
|
|
880,771
|
|
|
795,044
|
|
|
789,927
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
627,368
|
|
|
558,248
|
|
|
583,315
|
|
Communications and market data
|
|
|
60,728
|
|
|
49,579
|
|
|
46,263
|
|
Travel and promotion
|
|
|
40,011
|
|
|
37,517
|
|
|
33,819
|
|
Rent and occupancy
|
|
|
24,664
|
|
|
22,413
|
|
|
20,325
|
|
Depreciation and amortization
|
|
|
38,943
|
|
|
34,431
|
|
|
31,493
|
|
Professional fees
|
|
|
27,413
|
|
|
25,949
|
|
|
18,402
|
|
Interest on borrowings
|
|
|
25,759
|
|
|
11,063
|
|
|
10,540
|
|
Other expenses(1)
|
|
|
35,803
|
|
|
24,041
|
|
|
22,500
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
880,689
|
|
|
763,241
|
|
|
766,657
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
82
|
|
|
31,803
|
|
|
23,270
|
|
Provision for income taxes
|
|
|
2,647
|
|
|
5,884
|
|
|
6,982
|
|
|
|
|
|
|
|
|
|
Net (loss) income before attribution to non-controlling stockholders
|
|
|
(2,565
|
)
|
|
25,919
|
|
|
16,288
|
|
Less: Net income attributable to non-controlling interests
|
|
|
616
|
|
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
GFI's net (loss) income
|
|
$
|
(3,181
|
)
|
$
|
25,615
|
|
$
|
16,288
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share available to common stockholders
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.03
|
)
|
$
|
0.21
|
|
$
|
0.14
|
|
Diluted
|
|
$
|
(0.03
|
)
|
$
|
0.20
|
|
$
|
0.13
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
118,334,995
|
|
|
120,275,918
|
|
|
118,178,493
|
|
Diluted
|
|
|
118,334,995
|
|
|
125,522,128
|
|
|
121,576,767
|
|
Dividends declared per share of common stock
|
|
$
|
0.20
|
|
$
|
0.45
|
|
$
|
0.20
|
|
-
(1)
-
Conformed
to the current year's presentationsee Note 2
See notes to consolidated financial statement
100
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Net (loss) income before attribution to non-controlling stockholders
|
|
$
|
(2,565
|
)
|
$
|
25,919
|
|
$
|
16,288
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(3,201
|
)
|
|
2,123
|
|
|
1,506
|
|
Unrealized (loss) gains on available-for-sale securities, net of tax(1)
|
|
|
(1,486
|
)
|
|
183
|
|
|
565
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
|
(7,252
|
)
|
|
28,225
|
|
|
18,359
|
|
Net income attributable to non-controlling interests
|
|
|
616
|
|
|
304
|
|
|
|
|
Other comprehensive (loss) income attributable to non-controlling interests
|
|
|
(151
|
)
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
GFI's comprehensive (loss) income
|
|
$
|
(7,717
|
)
|
$
|
27,851
|
|
$
|
18,359
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Amounts
are net of benefit from (provision for) income taxes of $547, $(71) and $(185) for the years ended December 31, 2011, 2010 and 2009,
respectively.
See notes to consolidated financial statements
101
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before attribution to non-controlling stockholders
|
|
$
|
(2,565
|
)
|
$
|
25,919
|
|
$
|
16,288
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
38,943
|
|
|
34,431
|
|
|
31,493
|
|
Amortization of loan fees
|
|
|
1,709
|
|
|
939
|
|
|
742
|
|
Amortization of prepaid bonuses and forgivable loans(1)
|
|
|
33,652
|
|
|
25,707
|
|
|
60,489
|
|
Provision for doubtful accounts
|
|
|
250
|
|
|
(829
|
)
|
|
3,617
|
|
Share-based compensation
|
|
|
32,772
|
|
|
26,674
|
|
|
25,820
|
|
Loss on disposal of fixed assets
|
|
|
590
|
|
|
121
|
|
|
8
|
|
Benefit from deferred taxes
|
|
|
(4,866
|
)
|
|
(22,632
|
)
|
|
(32,811
|
)
|
Losses (gains) on foreign exchange derivative contracts, net
|
|
|
415
|
|
|
(3,529
|
)
|
|
(3,519
|
)
|
(Gains) losses from equity method investments, net
|
|
|
(1,223
|
)
|
|
29
|
|
|
(1,552
|
)
|
Tax expense related to share-based compensation
|
|
|
1,764
|
|
|
2,042
|
|
|
5,577
|
|
Writedown of investments in unconsolidated businesses
|
|
|
8,829
|
|
|
|
|
|
|
|
Fair value mark-to-market on future purchase commitment(1)
|
|
|
(6,941
|
)
|
|
(200
|
)
|
|
|
|
Gain on remeasurement of previously held equity interest
|
|
|
|
|
|
(3,695
|
)
|
|
|
|
Other non-cash charges, net(1)
|
|
|
(617
|
)
|
|
(358
|
)
|
|
(462
|
)
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
Cash segregated under federal and other regulations
|
|
|
12,171
|
|
|
(16,841
|
)
|
|
|
|
Deposits with clearing organizations
|
|
|
(7,040
|
)
|
|
2,746
|
|
|
(2,573
|
)
|
Commissions receivable
|
|
|
7,847
|
|
|
4,222
|
|
|
20,912
|
|
Receivables from brokers, dealers and clearing organizations
|
|
|
25,902
|
|
|
(58,862
|
)
|
|
61,924
|
|
Other assets(1)
|
|
|
(44,956
|
)
|
|
(34,368
|
)
|
|
7,205
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation
|
|
|
14,554
|
|
|
6,069
|
|
|
(29,575
|
)
|
Accounts payable and accrued expenses
|
|
|
(8,125
|
)
|
|
(10,473
|
)
|
|
(2,612
|
)
|
Payables to brokers, dealers and clearing organizations
|
|
|
(82,889
|
)
|
|
104,287
|
|
|
(36,709
|
)
|
Payables to clearing services customers
|
|
|
(5,044
|
)
|
|
9,345
|
|
|
|
|
Other liabilities
|
|
|
(10,553
|
)
|
|
5,362
|
|
|
(10,461
|
)
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
4,579
|
|
|
96,106
|
|
|
113,801
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Business acquisitions, net of cash acquired, and purchases of intangible and other assets
|
|
|
(3,300
|
)
|
|
(28,655
|
)
|
|
|
|
Issuance of notes receivable
|
|
|
(4,953
|
)
|
|
(800
|
)
|
|
(1,000
|
)
|
Proceeds from notes receivable
|
|
|
882
|
|
|
1,000
|
|
|
|
|
Proceeds from other investments
|
|
|
1,062
|
|
|
662
|
|
|
4,808
|
|
Purchases of other investments
|
|
|
(11,300
|
)
|
|
(24,647
|
)
|
|
(2,158
|
)
|
Purchase of property, equipment and leasehold improvements
|
|
|
(23,357
|
)
|
|
(13,214
|
)
|
|
(13,240
|
)
|
Proceeds on foreign exchange derivative contracts
|
|
|
5,893
|
|
|
13,575
|
|
|
9,710
|
|
Payments on foreign exchange derivative contracts
|
|
|
(11,172
|
)
|
|
(6,695
|
)
|
|
(25,791
|
)
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(46,245
|
)
|
|
(58,774
|
)
|
|
(27,671
|
)
|
|
|
|
|
|
|
|
|
-
(1)
-
The
Company segregated the classification of Amortization of prepaid bonuses and forgivable loans and Fair value mark-to-market on future purchase
commitment from Other assets and Other non-cash charges, net, respectively.
See notes to consolidated financial statements
102
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Repayment of short-term borrowings
|
|
|
(190,000
|
)
|
|
(40,000
|
)
|
|
(50,000
|
)
|
Proceeds from short-term borrowings
|
|
|
55,000
|
|
|
60,000
|
|
|
|
|
Proceeds from long-term obligations
|
|
|
250,000
|
|
|
|
|
|
|
|
Repayment of long-term obligations
|
|
|
(60,000
|
)
|
|
|
|
|
|
|
Purchases of treasury stock
|
|
|
(35,868
|
)
|
|
(22,609
|
)
|
|
(4,425
|
)
|
Cash dividends paid
|
|
|
(24,180
|
)
|
|
(54,658
|
)
|
|
(23,583
|
)
|
Payment of debt issuance costs
|
|
|
(8,891
|
)
|
|
(2,719
|
)
|
|
(831
|
)
|
Proceeds from exercises of stock options
|
|
|
75
|
|
|
645
|
|
|
70
|
|
Cash paid for taxes on vested restricted stock units
|
|
|
(9,102
|
)
|
|
(6,724
|
)
|
|
(3,640
|
)
|
Payment of contingent consideration liabilities
|
|
|
(1,693
|
)
|
|
|
|
|
|
|
Tax expense related to share-based compensation
|
|
|
(1,764
|
)
|
|
(2,042
|
)
|
|
(5,577
|
)
|
|
|
|
|
|
|
|
|
Cash used in financing activities
|
|
|
(26,423
|
)
|
|
(68,107
|
)
|
|
(87,986
|
)
|
|
|
|
|
|
|
|
|
Effects of exchange rate changes on cash and cash equivalents
|
|
|
93
|
|
|
2,271
|
|
|
1,860
|
|
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(67,996
|
)
|
|
(28,504
|
)
|
|
4
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
313,875
|
|
|
342,379
|
|
|
342,375
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
245,879
|
|
$
|
313,875
|
|
$
|
342,379
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE:
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
17,525
|
|
$
|
11,391
|
|
$
|
9,532
|
|
Cash paid for income taxes
|
|
$
|
23,948
|
|
$
|
23,998
|
|
$
|
30,492
|
|
Cash received from income tax refunds
|
|
$
|
8,539
|
|
$
|
4,491
|
|
$
|
5,796
|
|
Non-Cash Investing and Financing Activities:
During
2011, the Company recorded a $1,084 debit to Additional paid in capital with respect to the cancellation of 276,625 shares of the Company's common stock
in connection with the exchange of the Company's membership interest in an equity method investment for a convertible senior secured promissory note. During 2010, in connection with the business
combinations described in Note 5, the Company recorded $20,604 within Other liabilities and recorded the following items within Stockholders' Equity: $20,088 related to the issuance of
3,492,095 shares of the Company's common stock and $15,558 related to 3,682,916 of contingently issuable shares of the Company's common stock. Additionally, the Company recorded $1,627 with respect to
the issuance of 414,938 shares of the Company's common stock in connection with an equity method investment during 2010. During 2009, the Company recorded a contingent liability of $2,400 within Other
liabilities in connection with a business combination.
See notes to consolidated financial statements
103
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Additional
Paid In
Capital
|
|
Treasury
Stock
|
|
Retained
Earnings
|
|
Accumulated
Other
Comp.
Income (loss)
|
|
Total
Stockholders'
Equity
|
|
Non-
Controlling
Interests
|
|
Total
Equity
|
|
Balance, December 31, 2008, as previously reported
|
|
$
|
1,195
|
|
$
|
279,656
|
|
$
|
(18,476
|
)
|
$
|
219,354
|
|
$
|
(4,766
|
)
|
$
|
476,963
|
|
$
|
|
|
$
|
476,963
|
|
Restatement adjustment (Note 2)
|
|
|
|
|
|
|
|
|
|
|
|
5,279
|
|
|
(1,879
|
)
|
|
3,400
|
|
|
|
|
|
3,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008, as restated
|
|
$
|
1,195
|
|
$
|
279,656
|
|
$
|
(18,476
|
)
|
$
|
224,633
|
|
$
|
(6,645
|
)
|
$
|
480,363
|
|
$
|
|
|
$
|
480,363
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
(4,425
|
)
|
|
|
|
|
|
|
|
(4,425
|
)
|
|
|
|
|
(4,425
|
)
|
Issuance of common stock for exercise of stock options and vesting of restricted stock units
|
|
|
14
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
84
|
|
Withholding of restricted stock units in satisfaction of tax requirements
|
|
|
|
|
|
(3,653
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,653
|
)
|
|
|
|
|
(3,653
|
)
|
Tax expense associated with share-based awards
|
|
|
|
|
|
(5,577
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,577
|
)
|
|
|
|
|
(5,577
|
)
|
Foreign currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,506
|
|
|
1,506
|
|
|
|
|
|
1,506
|
|
Unrealized gain on available-for-sale securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
565
|
|
|
565
|
|
|
|
|
|
565
|
|
Dividends to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
(23,583
|
)
|
|
|
|
|
(23,583
|
)
|
|
|
|
|
(23,583
|
)
|
Share-based compensation
|
|
|
|
|
|
25,934
|
|
|
|
|
|
|
|
|
|
|
|
25,934
|
|
|
|
|
|
25,934
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
16,288
|
|
|
|
|
|
16,288
|
|
|
|
|
|
16,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009, as restated
|
|
|
1,209
|
|
|
296,430
|
|
|
(22,901
|
)
|
|
217,338
|
|
|
(4,574
|
)
|
|
487,502
|
|
|
|
|
|
487,502
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
(22,609
|
)
|
|
|
|
|
|
|
|
(22,609
|
)
|
|
|
|
|
(22,609
|
)
|
Issuance of treasury stock
|
|
|
|
|
|
(2,077
|
)
|
|
2,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued and issuable for acquisitions
|
|
|
57
|
|
|
37,214
|
|
|
|
|
|
|
|
|
|
|
|
37,271
|
|
|
|
|
|
37,271
|
|
Issuance of common stock for exercise of stock options and vesting of restricted stock units
|
|
|
21
|
|
|
624
|
|
|
|
|
|
|
|
|
|
|
|
645
|
|
|
|
|
|
645
|
|
Withholding of restricted stock units in satisfaction of tax requirements
|
|
|
|
|
|
(6,724
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,724
|
)
|
|
|
|
|
(6,724
|
)
|
Tax expense associated with share-based awards
|
|
|
|
|
|
(2,042
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,042
|
)
|
|
|
|
|
(2,042
|
)
|
Foreign currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,123
|
|
|
2,123
|
|
|
70
|
|
|
2,193
|
|
Unrealized gain on available-for-sale securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183
|
|
|
183
|
|
|
|
|
|
183
|
|
Dividends to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
(54,658
|
)
|
|
|
|
|
(54,658
|
)
|
|
|
|
|
(54,658
|
)
|
Share-based compensation
|
|
|
|
|
|
26,805
|
|
|
|
|
|
|
|
|
|
|
|
26,805
|
|
|
|
|
|
26,805
|
|
Non-controlling interests from business acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
737
|
|
|
737
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
25,615
|
|
|
|
|
|
25,615
|
|
|
304
|
|
|
25,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010, as restated
|
|
|
1,287
|
|
|
350,230
|
|
|
(43,433
|
)
|
|
188,295
|
|
|
(2,268
|
)
|
|
494,111
|
|
|
1,111
|
|
|
495,222
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
(35,868
|
)
|
|
|
|
|
|
|
|
(35,868
|
)
|
|
|
|
|
(35,868
|
)
|
Issuance of treasury stock
|
|
|
|
|
|
(5,379
|
)
|
|
5,382
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
3
|
|
Common stock issued (cancelled) in connection with an investment
|
|
|
1
|
|
|
(1,084
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,083
|
)
|
|
|
|
|
(1,083
|
)
|
Issuance of common stock for exercise of stock options and vesting of restricted stock units
|
|
|
29
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
75
|
|
Withholding of restricted stock units in satisfaction of tax requirements
|
|
|
|
|
|
(9,102
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,102
|
)
|
|
|
|
|
(9,102
|
)
|
Tax expense associated with share-based awards
|
|
|
|
|
|
(1,764
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,764
|
)
|
|
|
|
|
(1,764
|
)
|
Foreign currency translation adjustment, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,201
|
)
|
|
(3,201
|
)
|
|
(27
|
)
|
|
(3,228
|
)
|
Unrealized loss on available-for-sale securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,486
|
)
|
|
(1,486
|
)
|
|
|
|
|
(1,486
|
)
|
Dividends to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
(24,180
|
)
|
|
|
|
|
(24,180
|
)
|
|
|
|
|
(24,180
|
)
|
Share-based compensation
|
|
|
|
|
|
32,888
|
|
|
|
|
|
|
|
|
|
|
|
32,888
|
|
|
|
|
|
32,888
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
(3,181
|
)
|
|
|
|
|
(3,181
|
)
|
|
616
|
|
|
(2,565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
$
|
1,317
|
|
$
|
365,835
|
|
$
|
(73,919
|
)
|
$
|
160,934
|
|
$
|
(6,955
|
)
|
$
|
447,212
|
|
$
|
1,700
|
|
$
|
448,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements
104
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. ORGANIZATION AND BUSINESS
The Consolidated Financial Statements include the accounts of GFI Group Inc. and its subsidiaries (collectively, "GFI" or the "Company"). The Company, through its subsidiaries,
provides brokerage services, clearing services, trading system software and market data and analytical software products to institutional clients in markets for a range of fixed income, financial,
equity and commodity instruments. The Company complements its brokerage capabilities with value-added services, such as market data and software systems and products for decision support, which it
licenses primarily to companies in the financial services industry. The Company's principal operating subsidiaries include: GFI Securities LLC, GFI Brokers LLC, GFI Group LLC, GFI
Securities Limited, GFI Brokers Limited, GFI (HK) Securities LLC, GFI (HK) Brokers Ltd., GFI Group Pte. Ltd., GFI Korea Money Brokerage Limited, GFI Securities Nyon Sarl, Amerex
Brokers LLC, Fenics Limited ("Fenics"), Trayport Limited ("Trayport"), and The Kyte Group Limited and Kyte Capital Management Limited (collectively "Kyte"). As of December 31, 2011,
Jersey Partners, Inc. ("JPI") owned approximately 41% of the Company's outstanding shares of common stock. The Company's chief executive officer, Michael Gooch, is the controlling shareholder
of JPI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company's Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in
the
United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of
contingencies in the Consolidated Financial Statements. Certain estimates and assumptions relate to the accounting for acquired goodwill and intangible assets, fair value measurements, compensation
accruals, tax liabilities and the potential outcome of litigation matters. Management believes that the estimates utilized in the preparation of the Consolidated Financial Statements are reasonable
and prudent. Actual results could differ materially from these estimates.
All
intercompany transactions and balances have been eliminated.
When
the Company acquired Kyte on July 1, 2010, it determined that a certain investment in an unconsolidated affiliate should be accounted for under the cost method. During the
second quarter of 2011, the Company concluded that this investment should have been accounted for under the equity method since the acquisition date. During the year ended December 31, 2011,
the Company recorded $521 of pre-tax income, representing the Company's cumulative share of equity in earnings of the investment from the third and fourth quarters of 2010. Additionally,
during the second quarter of 2011, the Company recorded an adjustment of $2,925 to its purchase price allocation for Kyte related to all pre-acquisition earnings in this investee not
previously recognized by Kyte. The Company adjusted residual goodwill accordingly. See Note 5 for discussion of the adjustment to goodwill.
Immaterial Restatement
During the fourth quarter of 2011, the Company completed an analysis of its tax assets and liabilities. As a result of that
analysis, the Company determined that it had overstated its Provision for income taxes in certain years prior to December 31, 2008. As a result of this error, the Company has recorded the
following corrections: (i) a $5,279 increase to beginning Retained earnings as of December 31, 2008, (ii) a $1,879 decrease to Foreign currency translation adjustment within
beginning Accumulated other comprehensive loss as of December 31, 2008, (iii) a $3,400 increase to beginning Total equity as of December 31, 2008, (iv) a $2,780 increase to
Deferred tax assets within Other assets as of December 31 2010, and (v) a $620 net decrease to Other liabilities as of
105
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
December 31,
2010 related primarily to Unrecognized tax benefits and Deferred tax liabilities. The Company has restated its Consolidated Statements of Changes in Stockholders' Equity as of
December 31, 2008, 2009 and 2010 and its Consolidated Statement of Financial Condition as of December 31, 2010 to reflect these corrections.
The
Company concluded that its compliance with debt covenants would not have been affected by these adjustments and that the error was not material to its previously filed Consolidated
Financial Statements.
Accordingly,
the Company has restated the accompanying Consolidated Financial Statements as of December 31, 2010 from amounts previously reported to correct the error by adjusting
its Other assets, Other liabilities, Retained earnings and Accumulated other comprehensive loss as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
As Previously
Reported
|
|
Adjustment
|
|
As Restated
|
|
Consolidated Statement of Financial Condition
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
162,840
|
|
$
|
2,780
|
|
$
|
165,620
|
|
Total Assets
|
|
|
1,271,024
|
|
|
2,780
|
|
|
1,273,804
|
|
Other liabilities
|
|
|
111,163
|
|
|
(620
|
)
|
|
110,543
|
|
Total Liabilities
|
|
|
779,202
|
|
|
(620
|
)
|
|
778,582
|
|
Retained earnings
|
|
|
183,016
|
|
|
5,279
|
|
|
188,295
|
|
Accumulated other comprehensive loss
|
|
|
(389
|
)
|
|
(1,879
|
)
|
|
(2,268
|
)
|
Total Stockholders' Equity
|
|
|
490,711
|
|
|
3,400
|
|
|
494,111
|
|
Total Equity
|
|
|
491,822
|
|
|
3,400
|
|
|
495,222
|
|
Total Liabilities and Stockholders' Equity
|
|
|
1,271,024
|
|
|
2,780
|
|
|
1,273,804
|
|
During
the second quarter of 2011, the Company changed the name of its income statement line item "Equity in earnings of unconsolidated brokerage businesses" to "Equity in net earnings
of unconsolidated businesses" in order to better describe the results included in this line item. In addition, certain amounts related to equity in net earnings of unconsolidated businesses totaling
$489 and $1,574 for the years ended December 31, 2010 and 2009, respectively, were previously presented in the "Other expenses" line item in the Consolidated Statements of Operation. In order
to enhance transparency in the presentation of the Consolidated Statements of Operations, these amounts have been reclassified to the "Equity in net earnings of unconsolidated businesses" line item.
Interest
income on short-term investments for the year ended December 31, 2009 totaling $1,043 was previously presented in a line item called "Interest income" and has been
combined into "Other income" to conform with the current year's presentation.
Consolidation Policies
The Consolidated Financial Statements include the accounts of the Company, its wholly-owned subsidiaries and subsidiaries
that
are treated as such and other entities in which the Company has a controlling financial interest. For consolidated subsidiaries that are less than wholly-owned, equity interests that are not owned by
the Company are referred to as non-controlling interests. The portion of net income attributable to non-controlling interests for such subsidiaries is presented as Net income
attributable to non-controlling interests on the Consolidated Statements of Operations, and the portion of the shareholders' equity of such subsidiaries is presented as
106
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Non-controlling
interests in the Consolidated Statements of Financial Condition and Consolidated Statements of Changes in Stockholders' Equity.
Variable Interest Entities
The Company determines whether the Company holds any interests in entities deemed to be a variable interest entity ("VIE").
A VIE is an entity that either (i) has equity investors that lack certain essential characteristics of a controlling financial interest or (ii) does not have sufficient equity to finance
its activities without additional subordinated financial support from other parties. If an entity has either of these characteristics, it is considered a VIE and must be consolidated by its primary
beneficiary. The primary beneficiary is the party that has both (i) the power to direct the activities of the VIE that most significantly impact the economic performance of the entity and
(ii) the obligation to absorb losses of the entity that could be potentially significant to the VIE or the right to receive benefits from the entity that could be potentially significant. As of
December 31, 2011, the Company holds variable interests in certain VIEs. One of these VIEs is consolidated as it is determined that the Company is the primary beneficiary. The remaining VIEs
are not consolidated as it is determined that the Company is not the primary beneficiary. See Note 18 for disclosures on Variable Interest Entities.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with maturities, when purchased, of three months
or
less.
Cash Segregated Under Federal and Other Regulations
The Company holds cash that belongs to customers as support for their trading activities. As a
result, certain of the Company's subsidiaries are required to segregate or set aside such cash to satisfy regulations designed to protect customer assets.
Deposits with Clearing Organizations
Deposits with clearing organizations consist of deposits of cash and cash equivalents or short-term
investments, recorded at fair value, at various clearing companies and organizations that perform clearing and custodial functions for the Company.
Commissions Receivable
Commissions receivable represents amounts due from brokers, dealers, banks and other financial and nonfinancial
institutions
for the execution of securities, commodities, foreign exchange and other derivative brokerage transactions. In estimating the allowance for doubtful accounts, management considers the length of time
receivables are past due and historical experience. In addition, if the Company is aware of a client's inability to meet its financial obligations, a specific provision for doubtful accounts is
recorded in the amount of the estimated losses that will result from the inability of that client to meet its financial obligation. Commissions receivable are presented net of allowance for doubtful
accounts of approximately $1,453 and $1,591 as of December 31, 2011 and 2010, respectively.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost, less accumulated depreciation
and
amortization. Depreciation and amortization are calculated using the straight-line method, generally over three to seven years. Property and equipment are depreciated over their estimated
useful lives. Leasehold improvements are amortized over the shorter of the remaining term of the respective lease to which they relate or the remaining useful life of the leasehold improvement.
Internal and external costs incurred in developing or obtaining computer software for internal use are capitalized in accordance with Accounting Standards Codification ("ASC") 350
IntangiblesGoodwill and
Other
("ASC 350"), and are amortized on a straight-line basis over the estimated useful life of the
software, generally three years. General and administrative costs related to developing or obtaining such software are expensed as incurred.
107
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price allocation over the fair value of tangible and identifiable
intangible net assets acquired. The goodwill associated with each business combination is allocated to the related reporting units, which are determined based on how the Company's businesses are
managed and how they are reviewed by the Company's chief operating decision maker. Other intangible assets are recorded at their fair value upon completion of a business combination or certain other
transactions.
In
accordance with ASC 350, goodwill and other indefinite lived intangible assets are not amortized, but instead are periodically tested for impairment. The Company reviews goodwill and
other indefinite lived intangible assets for impairment on an annual basis as of November 1 of each fiscal year or whenever an event occurs or circumstances change that could reduce the fair
value of a reporting unit below its carrying amount.
Prior
to the Company's annual goodwill impairment test, the Company early adopted Accounting Standards Update No. 2011-08 ("ASU 2011-08")
"IntangiblesGoodwill and Other (Topic 350)."
In accordance
with the amended guidance prescribed by ASU 2011-08, the Company
first assesses qualitative factors to determine whether it is more likely than not (a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying
amount. The qualitative assessment is based on reviewing the totality of several factors, including macroeconomic conditions, industry and market considerations, cost factors, overall financial
performance, other entity specific events (for example, changes in management) or other events such as selling or disposing of a reporting unit. After assessing qualitative factors, if the Company
determines that it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, no further testing is necessary. If the Company determines that it is more
likely than not that the fair value of the reporting unit is less than its carrying value, then a two-step goodwill impairment test, prescribed by ASC 350, must be performed, whereby
management first compares the fair value of each reporting unit with recorded goodwill to that reporting unit's book value. If management determines, as a result of this first step, that the fair
value of the reporting unit is less than its carrying value, a second step in the impairment test process would require that the recorded goodwill at that reporting unit be written down to the value
implied by the reporting unit's recent valuation and the estimated fair value of the assets and liabilities. Based on the Company's qualitative assessment for 2011, the Company performed a
quantitative analysis for EMEA Brokerage and Clearing and Backed Trading in accordance with ASC 350. Based on the results of the annual impairment tests, no goodwill impairment was recognized
during the years ended December 31, 2011 or 2010.
For
the reporting units where a quantitative analysis was performed, the primary valuation methods used by the Company to estimate the fair value of its reporting units are the income
and market approach. In applying the income approach, projected cash flows available for distribution and the terminal value are discounted to present value to derive an indication of fair value of
the business enterprise. The market approach compares the reporting unit to selected reasonably similar publicly-traded companies. Trading and transaction comparables are used as general indicators to
assess the general reasonableness of the estimated fair values.
Intangible
assets with definite lives are amortized on a straight-line basis over their estimated useful lives. See Note 6 for further information.
Prepaid Bonuses and Forgivable Employee Loans
Prepaid bonuses and forgivable loans to employees are stated at historical value net of amortization
when the agreement between the Company
108
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
and
the employee provides for the return of proportionate amounts of the bonus or loan outstanding if employment is terminated in certain circumstances prior to the end of the term of the agreement.
Amortization is calculated using the straight-line method over the term of the contract, which is generally two to four years, and is recorded in compensation and employee benefits. The
Company generally expects to recover the unamortized portion of prepaid bonuses and forgivable loans when employees voluntarily terminate their employment or if their employment is terminated for
cause prior to the end of the term of the agreement. The prepaid bonuses and forgivable loans are included in Other assets in the Consolidated Statements of Financial Condition. At December 31,
2011 and 2010, the Company had prepaid bonuses of $36,797 and $37,248, respectively. At December 31, 2011 and 2010, the Company had forgivable employee loans and advances to employees of
$23,909 and $8,690, respectively. Amortization of prepaid bonuses and forgivable employee loans for the years ended December 31, 2011, 2010 and 2009 was $33,652, $25,707 and $60,489,
respectively and is included within Compensation and employee benefits.
Investments
When the Company does not have a controlling financial interest in an entity but can exert significant influence over the entity's
operating and financial policies, the investment is accounted for under the equity method of accounting in accordance with ASC 323-10,
InvestmentsEquity Method and Joint Ventures
("ASC 323-10").
Significant influence generally exists when the Company owns 20% to
50% of the entity's common stock or in-substance common stock. The Company initially records the investment at cost and adjusts the carrying amount each period to recognize its share of
the earnings and losses of the investee based on the percentage of ownership. See Note 19 for further information. Investments for which the Company does not have the ability to exert
significant influence over operating and financial policies are generally accounted for using the cost method of accounting in accordance with ASC 325-10,
InvestmentsOther
("ASC 325-10"). At
December 31, 2011 and 2010, the Company had cost method investments of $4,059 and
$3,116, respectively, included within Other assets. The Company monitors its equity and cost method investments for indicators of impairment each reporting period.
The
Company accounts for its marketable equity securities and its debt securities in accordance with ASC 320-10,
InvestmentsDebt and
Equity Securities
. Investments designated as available-for-sale that are owned by the Company's non broker-dealer subsidiaries are recorded at fair
value with unrealized gains or losses reported as a separate component of other comprehensive income, net of tax. The fair value of the Company's available-for-sale securities
was $8,263 and $4,925 as of December 31, 2011 and 2010, respectively, included within Other assets.
Fair Value of Financial Instruments
In accordance with ASC 820-10,
Fair Value Measurements and
Disclosures
("ASC 820-10"), the Company estimates fair values
of financial instruments using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment in interpreting market data and,
accordingly, changes in assumptions or in market conditions could adversely affect the estimates. The Company also discloses the fair value of its financial instruments in accordance with the fair
value hierarchy as set forth by ASC 820-10.
Trading
securities are reported at fair value, with gains and losses resulting from changes in fair value recognized in Other income. See Note 16 for further information.
Derivative Financial Instruments
The Company enters into derivative transactions for a variety of reasons, including managing its exposure to risk
arising from changes in foreign currency, facilitating
109
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
customer
trading activities and, in certain instances, to engage in principal trading for the Company's own account. Derivative assets and liabilities are carried on the Consolidated Statements of
Financial Condition at fair value, with changes in the fair value recognized in the Consolidated Statements of Operations. Contracts entered into to manage risk arising from changes in foreign
currency are recognized in Other income and contracts entered into to facilitate customer transactions and principal trading are recognized in Principal transactions. Derivatives are reported on a
net-by-counterparty basis when management believes that a legal and enforceable right of offset exists under these agreements. See Note 17 for further information.
Payables to Clearing Services Customers
Payables to clearing services customers include amounts due on cash and margin transactions, including
futures
contracts transacted on behalf of customers.
Brokerage Transactions
The Company provides brokerage services to its clients in the form of either agency or principal transactions.
Agency Commissions
In agency transactions, the Company charges commissions for executing transactions between buyers and sellers. Agency commissions
revenues and related expenses are recognized on a trade date basis.
Principal Transactions
Principal transactions revenue is primarily derived from matched principal and principal trading transactions. Principal
transactions revenues and related expenses are recognized on a trade date basis. The Company earns revenue from principal transactions on the spread between the buy and sell price of the security that
is brokered. In matched principal transactions, the Company simultaneously agrees to buy instruments from one customer and sell them to another customer.
In
the normal course of its matched principal and principal trading businesses, the Company holds securities positions overnight. These positions are marked to market on a daily basis.
Clearing Services Revenues
The Company charges fees to customers for clearing services provided for cash and derivative transactions. Clearing
services revenues are recorded on a trade date basis as customer transactions occur and are presented net of any customer negotiated rebates.
Software, Analytics and Market Data Revenue Recognition
Software revenue consists primarily of fees charged for Trayport electronic trading
software,
which are typically billed on a subscription basis and is recognized ratably over the term of the subscription period, which ranges from one to five years. Analytics revenue consists primarily of
software license fees for Fenics pricing tools which are typically billed on a subscription basis, and is recognized ratably over the term of the subscription period, which is generally three years.
Market data revenue primarily consists of subscription fees and fees from customized one-time sales. Market data subscription fees are recognized on a straight-line basis over
the term of the subscription period, which ranges from one to two years. Market data revenue from customized one-time sales is recognized upon delivery of the data.
The
Company markets its software, analytics and market data products through its direct sales force and, in some cases, indirectly through resellers. In general, the Company's license
agreements for such products do not provide for a right of return.
Other Income
Included within Other income on the Company's Consolidated Statements of Operations are revaluations of foreign currency derivative
contracts, realized and unrealized transaction
110
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
gains
and losses on certain foreign currency denominated items and gains and losses on certain investments and interest income earned on short-term investments.
Compensation and Employee Benefits
The Company's compensation and employee benefits have both a fixed and variable component. Base salaries and
benefit costs are primarily fixed for all employees while bonuses constitute the variable portion of compensation and employee benefits. The Company may pay certain performance bonuses in restricted
stock units ("RSUs"). The Company also may grant sign-on and retention bonuses for certain newly-hired or existing employees who agree to long-term employment agreements. These
sign-on and retention bonuses are typically amortized using the straight-line method over the term of the respective agreements.
In
2011 and 2009, the Company recorded a charge of $19,443 and $34,400, respectively, to Compensation and Employee Benefits that primarily related to severance costs and the
restructuring of certain employment agreements. The Company experienced no similar charge in 2010.
Share-Based Compensation
The Company's share-based compensation consists of stock options and RSUs. The Company accounts for share-based
compensation
in accordance with ASC 718
CompensationStock Compensation
("ASC 718"). This accounting guidance requires measurement of compensation
expense for equity-based awards at fair value and recognition of compensation expense over the service period, net of estimated forfeitures. In all periods presented, the only share-based compensation
issued by the Company has been RSUs. The Company determines the fair value of RSUs based on the number of units granted and the grant date fair value of the Company's common stock, measured as of the
closing price on the date of grant. See Note 12 for further information.
Income Taxes
In accordance with ASC 740,
Income Taxes
, the Company provides for income taxes using
the
asset and liability method under which deferred income taxes are recognized for the estimated future tax effects attributable to temporary differences and carryforwards that result from events that
have been recognized either in the financial statements or the income tax returns, but not both. The measurement of current and deferred income tax assets and liabilities is based on provisions of
enacted tax laws. Valuation allowances are recognized if, based on the weight of available evidence, it is more likely than not that some portion of the deferred tax assets will not be realized.
Management applies the more likely than not criteria prior to recognizing a financial statement benefit for a tax position taken (or expected to be taken) in a tax return. The Company recognizes
interest and/or penalties related to income tax matters in interest expense and other expense, respectively. See Note 9 for further information.
Treasury Stock
The Company accounts for Treasury stock using the cost method. Treasury stock held by the Company may be reissued with respect to
vested RSUs in qualified jurisdictions. The Company's policy is to account for these shares as a reduction of Treasury stock on a first-in, first-out basis.
Foreign Currency Translation Adjustments and Transactions
Assets and liabilities of foreign subsidiaries having non-U.S. dollar functional
currencies are translated at the period end rates of exchange, and revenue and expenses are translated at the average rates of exchange for the period. Gains or losses resulting from translating
foreign currency financial statements are reflected in foreign currency translation adjustments and are reported as a separate component of comprehensive income and included in accumulated other
comprehensive loss in stockholders' equity. Net (losses) gains resulting from remeasurement of foreign currency transactions and balances for the years ended
111
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
December 31,
2011, 2010 and 2009 were $(220), $(6,770) and $3,767, respectively, and are included in Other income in the Consolidated Statement of Operations.
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update
No. 2009-13 ("ASU 2009-13")
Revenue Recognition (Topic 605) Multiple-Deliverable Revenue Arrangements
.
ASU 2009-13 establishes the accounting and reporting guidance for arrangements with multiple-revenue generating activities. ASU 2009-13 addresses how to separate
deliverables and how to measure and allocate arrangement consideration to one or more units
of accounting and provides a selling price hierarchy for determining the selling price of a deliverable. ASU 2009-13 was effective for fiscal years beginning on or after
June 15, 2010. The adoption of ASU 2009-13 did not have a material impact on the Company's Consolidated Financial Statements.
In
October 2009, the FASB issued Accounting Standards Update No. 2009-14 ("ASU 2009-14")
Software (Topic 985) Certain Revenue
Arrangements That Include Software Elements
. ASU 2009-14 provides guidance on how to allocate arrangement consideration to deliverables in an arrangement that
includes both tangible products and software. ASU 2009-14 also provides additional guidance on how to determine which software, if any, relating to the tangible product would be excluded
from software revenue recognition. ASU 2009-14 was effective for fiscal years beginning on or after June 15, 2010. The adoption of ASU 2009-14 did not have a material
impact on the Company's Consolidated Financial Statements.
In
January 2010, the FASB issued Accounting Standards Update No. 2010-06 ("ASU 2010-06")
Fair Value Measurements and
Disclosures (Topic 820) Improving Disclosures about Fair Value Measurements.
ASU 2010-06 provides amendments to Subtopic 820-10 that require new
disclosures, including the amounts of and reasons for transfers in and out of Levels 1 and 2 fair value measurements and reporting activity in the reconciliation of Level 3 fair value
measurements on a gross basis. ASU 2010-06 provides amendments that clarify existing disclosures regarding the level of disaggregation for providing fair value measurement
disclosures for each class of assets and liabilities. In addition, it clarifies existing disclosures about inputs and valuation techniques used to measure fair value for both recurring and
nonrecurring fair value measurements that are required for either Level 2 or Level 3. ASU 2010-06 was effective for interim and annual reporting periods ending after
December 15, 2009 except for the disclosures about the roll forward of activity in Level 3 fair value measurements, which was effective for fiscal years beginning after
December 31, 2010 and for interim periods within those fiscal years. The adoption of ASU 2010-06 did not have a material impact on the Company's Consolidated Financial
Statements.
In
July 2010, the FASB issued Accounting Standards Update No. 2010-20 ("ASU 2010-20")
Receivables (Topic 310) Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses
. The main objective of ASU 2010-20 is to provide financial statement users with greater
transparency about an entity's allowance for credit losses and the credit quality of its financing receivables. ASU 2010-20 requires disclosure of additional information to assist
financial statement users in assessing an entity's credit risk exposures and evaluating the adequacy of its allowance for credit losses. This ASU is effective for all public companies for interim and
annual reporting periods ending on or after December 15, 2010, except for disclosures relating to loan modifications, which were subsequently extended to interim and annual filings after
June 15, 2011. The adoption of ASU 2010-20 did not have a material impact on the Company's Consolidated Financial Statements.
112
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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In
May 2011, the FASB issued Accounting Standards Update No. 2011-04 ("ASU 2011-04")
Fair Value Measurement (Topic 820)
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs
. ASU 2011-04 amends current guidance to result
in common fair value measurement and disclosures between accounting principles generally accepted in the United States and International Financial Reporting Standards. The amendments result in a
consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. The amendments in ASU 2011-04 are
effective for interim and annual periods beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-04 to have a material impact on the Company's
Consolidated Financial Statements.
In
June 2011, the FASB issued Accounting Standards Update No. 2011-05 ("ASU 2011-05")
Comprehensive Income (Topic 220)
Presentation of Comprehensive Income
. The main objective of ASU 2011-05 is to improve the comparability, consistency, and transparency of financial reporting
and increase the prominence of items reported in other comprehensive income ("OCI") by eliminating the option to present components of OCI as part of the statement of changes in stockholders' equity.
The amendments in this standard requires entities to report the components of comprehensive income in either in (1) a single continuous statement of comprehensive income or (2) two
separate but consecutive statements. The amendments in this standard do not change the items that must be reported in OCI. The amendments in ASU 2011-05 are effective for interim
and annual periods beginning after December 15, 2011 and are to be applied retrospectively. The Company does not expect the adoption of ASU 2011-05 to have a material impact
on the Company's Consolidated Financial Statements.
In
September 2011, the FASB issued ASU 2011-08 which amends current guidance to allow entities to first assess qualitative factors to determine whether it is more likely than
not (a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. After assessing qualitative factors, if an entity determines that it is not
more likely than not that the fair value of the reporting unit is less than its carrying amount, no further testing is necessary. If an entity determines that it is more likely than not that the fair
value of the reporting unit is less than its carrying value, then the traditional two-step goodwill impairment test must be performed. The amendments in ASU 2011-08 are
effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company early adopted ASU
2011-08 effective the fourth quarter of 2011. The adoption of ASU 2011-08 did not have a material impact on the Company's Consolidated Financial Statements.
In
December 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-11,
Balance Sheet (Topic 210): Disclosures about Offsetting
Assets and Liabilities
. ASU 2011-11 requires additional disclosure about financial instruments and derivatives instruments that are subject to netting arrangements
to assist users of the financial statements in understanding the effect of those arrangements on its financial position. The new disclosures are required for reporting periods beginning on or after
January 1, 2013, including retrospectively for all comparative periods presented. The Company is evaluating the effect of this guidance and does not expect the adoption of ASU
2011-11 to have a material impact on the Company's Consolidated Financial Statements.
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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
3. RECEIVABLES FROM AND PAYABLES TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS
Amounts receivable from and payable to brokers, dealers and clearing organizations consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
2010
|
|
Receivables from brokers, dealers and clearing organizations:
|
|
|
|
|
|
|
|
Contract value of fails to deliver
|
|
$
|
86,097
|
|
$
|
138,534
|
|
Receivable from clearing organizations and financial institutions
|
|
|
131,418
|
|
|
105,277
|
|
Net pending trades
|
|
|
394
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
217,909
|
|
$
|
243,811
|
|
|
|
|
|
|
|
Payables to brokers, dealers and clearing organizations:
|
|
|
|
|
|
|
|
Contract value of fails to receive
|
|
$
|
87,254
|
|
$
|
156,989
|
|
Payable to clearing organizations and financial institutions
|
|
|
2,275
|
|
|
797
|
|
Net pending trades
|
|
|
|
|
|
14,632
|
|
|
|
|
|
|
|
Total
|
|
$
|
89,529
|
|
$
|
172,418
|
|
|
|
|
|
|
|
Substantially
all fails to deliver and fails to receive balances at December 31, 2011 and 2010 have subsequently settled at the contracted amounts.
In
addition to the balances above, the Company had Payables to clearing services customers of $120,909 and $125,968 at December 31, 2011 and 2010, respectively. These amounts
represent cash payable to the Company's clearing customers, which are held at the Company's third party clearing firms and are included within Receivables from brokers, dealers and clearing
organizations.
4. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
2010
|
|
Software, including software development costs
|
|
$
|
110,402
|
|
$
|
96,658
|
|
Computer equipment
|
|
|
34,314
|
|
|
30,058
|
|
Leasehold improvements
|
|
|
37,925
|
|
|
37,590
|
|
Communications equipment
|
|
|
19,528
|
|
|
17,756
|
|
Furniture and fixtures
|
|
|
9,911
|
|
|
8,535
|
|
Automobiles
|
|
|
717
|
|
|
494
|
|
|
|
|
|
|
|
Total
|
|
|
212,797
|
|
|
191,091
|
|
Accumulated depreciation and amortization
|
|
|
(150,850
|
)
|
|
(130,479
|
)
|
|
|
|
|
|
|
Property, equipment and leasehold improvements less accumulated depreciation and amortization
|
|
$
|
61,947
|
|
$
|
60,612
|
|
|
|
|
|
|
|
114
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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
4. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS (Continued)
Depreciation
and amortization expense on property, equipment and leasehold improvements for the years ended December 31, 2011, 2010 and 2009 was $21,476, $21,235 and $21,059,
respectively.
5. ACQUISITIONS
Mortgage-Backed Security Brokerage Business
On May 27, 2010, the Company completed the acquisition of a mortgage-backed security brokerage business for consideration of
$5,095. The purchase price was comprised of 681,433 shares of the Company's common stock with a fair value of $4,095 and contingent consideration estimated at $1,000, which was previously recorded as
a liability within Other liabilities. This contingent liability was remeasured to fair value at each reporting date until the targets for this contingent liability were achieved in the second quarter
of 2011, which resulted in a payment of $1,000. This acquisition was accounted for as a business combination under the acquisition method. Assets acquired were recorded at fair value and the results
of the acquired company have been included within the Consolidated Financial Statements since the acquisition. The purchase price was allocated among tangible and intangible assets as follows: fixed
assets of $15, customer relationships of $1,700 with an estimated useful life of 6 years, non-compete agreements of $340 with an estimated useful life of 3.3 years and
goodwill of $3,040. The weighted average amortization for the intangible assets is 5.6 years.
The Kyte Group Limited and Kyte Capital Management Limited
On July 1, 2010, the Company acquired a 70% equity ownership interest in each of The Kyte Group Limited and Kyte Capital
Management Limited (collectively "Kyte"). The Company will acquire the residual 30% equity interest in Kyte for an additional cash payment to be made in or about the third quarter of 2013 in an amount
to be determined pursuant to a formula based on Kyte's post-acquisition earnings. Kyte has been included in the Consolidated Financial Statements as a wholly-owned subsidiary since the
acquisition date, with a liability recorded for the future payment to be made in 2013. Included as part of the purchase price is £5,000 (or approximately $7,592) that was deposited into an
escrow account with a third-party escrow agent and 1,339,158 contingently issuable shares of the Company's common stock, all of which will be delivered to the selling shareholders of Kyte upon the
satisfaction of certain conditions related to one of Kyte's investments in a third party.
Kyte,
which is a member of several exchanges, including NYSE Euronext, NYSE LIFFE and Eurex, provides clearing, brokerage, settlement and back-office services to proprietary
traders, brokers, market makers and hedge funds. Kyte provides capital to select start-up trading groups, small hedge funds, market-makers and individual traders. As part of the purchase
agreement, over the period from initial acquisition to when the Company will acquire the residual 30% equity interest in Kyte, the Company agreed to make up to £20,000 available to Kyte
Capital Management Limited for investments in new trading entities subject to certain approvals. The Company acquired Kyte because of its expertise in listed derivative markets, its risk management
platforms and its unique clearing, broking
115
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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
5. ACQUISITIONS (Continued)
and
investment services business model. The cash portion of the purchase price of the transaction was financed from the Company's internal cash resources. The purchase price consisted of the
following:
|
|
|
|
|
Fair value of consideration transferred:
|
|
|
|
|
Cash paid at closing
|
|
$
|
33,996
|
|
Cash paid for surplus working capital
|
|
|
7,050
|
|
Common stock issued at closing (2,810,662 shares)
|
|
|
15,993
|
|
Contingently issuable shares (1,339,158 shares)
|
|
|
7,620
|
|
Estimated future purchase commitment
|
|
|
19,264
|
|
|
|
|
|
Total
|
|
$
|
83,923
|
|
|
|
|
|
The
fair value of the 4,149,820 common shares issued and issuable was determined based on the closing market price of the Company's common shares on July 1, 2010, the closing date
of the acquisition.
The
future purchase commitment requires the Company to pay an additional cash payment based on the performance of Kyte during the three year period ending June 30, 2013. The
Company elected the fair value option for this purchase commitment as of the date of acquisition and determined the fair value using the income approach. Subsequent changes in the fair value of the
future purchase commitment are recorded in Other income in the Consolidated Statements of Operations. The fair value of the future purchase commitment at the acquisition date was $19,264 which assumed
a 17.7% discount rate and was recorded as a liability within Other liabilities. In applying the income approach, the Company used forecasted financial information for Kyte for the remaining three year
period ending June 30, 2013.
The
fair value of the future purchase commitment and the discount rate used in its estimated fair value as of December 31, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
2010
|
|
Fair Value of Future Purchase Commitment (included within Other liabilities)
|
|
$
|
12,562
|
|
$
|
19,604
|
|
Discount Rate
|
|
|
16.0
|
%
|
|
17.7
|
%
|
The
amount of the future purchase commitment accrued in the Consolidated Statements of Financial Condition at December 31, 2011 decreased from December 31, 2010, primarily
due to differences between initial forecasts and actual results since the acquisition, as well as changes to the forecasted performance for Kyte for the remaining period ending June 30, 2013.
From the acquisition date on July 1, 2010 through December 31, 2010, the amount accrued in the Consolidated Statements of Financial Condition increased due to an increase in the net
present value of the liability due to the passage of time and foreign currency translation, offset by differences between initial forecasts and actual results since the acquisition, as well as changes
to the forecasted performance of Kyte for the remaining period ending June 30, 2013.
116
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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
5. ACQUISITIONS (Continued)
This
acquisition was accounted for as a business combination under the acquisition method. Assets acquired and liabilities assumed were recorded at their fair values as of July 1,
2010. Management determined the fair value of the identifiable intangible assets acquired utilizing an independent
valuation performed by a third-party specialist. The purchase price allocation, as presented below, was translated into U.S. dollars based on the foreign exchange rate on July 1, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,488
|
|
|
|
|
Cash segregated under federal and other regulations
|
|
|
8,086
|
|
|
|
|
Deposits with clearing organizations
|
|
|
16,734
|
|
|
|
|
Commissions receivable
|
|
|
19,035
|
|
|
|
|
Receivables from brokers, dealers and clearing organizations
|
|
|
94,849
|
|
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
14,485
|
|
|
6 Years
|
|
Trade name
|
|
|
1,020
|
|
|
10 Years
|
|
Internally developed software
|
|
|
3,170
|
|
|
3 Years
|
|
Non-compete agreements
|
|
|
211
|
|
|
5 Years
|
|
Goodwill(1)(2)
|
|
|
39,736
|
|
|
|
|
Other assets(1)(2)
|
|
|
21,152
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
239,966
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and non-controlling interests:
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
24,925
|
|
|
|
|
Payables to clearing services customers
|
|
|
116,623
|
|
|
|
|
Other liabilities(3)
|
|
|
13,758
|
|
|
|
|
Non-controlling interests
|
|
|
737
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and non-controlling interests assumed
|
|
|
156,043
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
83,923
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
During
the fourth quarter of 2010, the Company recorded an adjustment to its purchase price allocation for Kyte in the amount of $4,928 in Other assets for
a receivable related to one of Kyte's investments in a third party. The Company recognized this adjustment based on additional information which supported the collectability of the receivable with the
third party. The Company adjusted residual goodwill accordingly.
-
(2)
-
During
the second quarter of 2011, the Company recorded adjustments to its purchase price allocation for Kyte in the net amount of $1,546 in Other assets.
This adjustment included a $2,925 decrease to goodwill related to all pre-acquisition earnings in an unconsolidated affiliate not previously recognized by Kyte that should have been
accounted for under the equity method since the acquisition date, offset by a $1,379 increase to goodwill related to final tax adjustments for the Kyte acquisition. The Company adjusted residual
goodwill accordingly.
117
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GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
5. ACQUISITIONS (Continued)
-
(3)
-
During
the fourth quarter of 2010, the Company reclassified $1,219 from "Intangible assets, net" to "Other liabilities" in the Consolidated Statements of
Financial Condition. These amounts related to the fair value of contractual obligations that were deemed unfavorable and therefore recognized and valued as such as of the date of the acquisition as
part of the Company's purchase price allocation.
Total
intangible assets acquired in the Kyte transaction that are subject to amortization totaled $18,886 and have a weighted-average useful life of approximately 6 years.
All
of the goodwill acquired was assigned to the Clearing and Backed Trading segment. None of the goodwill is expected to be deductible for income tax purposes.
In
connection with the Kyte acquisition, the Company recognized $2,498 of acquisition related costs that are included in Professional fees and Other expenses in its Consolidated
Statements of Operations for the year ended December 31, 2010.
The
amounts of revenue and net loss of Kyte included in the Company's Consolidated Statement of Operations from the July 1, 2010 acquisition date to the period ending
December 31, 2010 were as follows:
|
|
|
|
|
Revenue
|
|
$
|
52,343
|
|
|
|
|
|
Net loss
|
|
$
|
(2,494
|
)
|
|
|
|
|
Fixed Income Brokerage Business
On November 1, 2010, the Company purchased the remaining 67% of the shares of an over-the-counter
brokerage business in the U.K. The business has been included in the Consolidated Financial Statements as a wholly-owned subsidiary since the acquisition date. The business primarily engages in
executing bond trades on a matched principal basis. The allocation of the purchase price to the net assets as of November 1, 2010 consisted of the following:
|
|
|
|
|
Cash paid at closing
|
|
$
|
11,229
|
|
Common stock issued at closing (2,343,758 shares)
|
|
|
7,938
|
|
Cash paid as additional consideration to selling shareholders
|
|
|
1,076
|
|
|
|
|
|
Total fair value of consideration transferred
|
|
$
|
20,243
|
|
Total fair value of previous equity interest
|
|
$
|
7,677
|
|
|
|
|
|
Total fair value
|
|
$
|
27,920
|
|
|
|
|
|
The
cash paid at closing and as additional consideration was financed from the Company's internal cash resources.
The
fair value of the 2,343,758 common shares issued was determined using the closing market price of the Company's common shares on November 1, 2010 and applying a discount to
that price due to certain restrictions on the issued shares over a 2.5 and 5 year period from the date of acquisition. The Company utilized a third party valuation firm to assist management in
the determination of an
118
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
5. ACQUISITIONS (Continued)
appropriate
discount rate based on the results of various quantitative methods under the assumption that there is a discount in the value of a company's stock that is and is not marketable. These
methods are commonly used valuation practices.
This
acquisition was accounted for as a business combination achieved in stages under the acquisition method. Prior to the acquisition date, the Company accounted for its 33% interest in
the business as an equity method investment. The acquisition date fair value of the previous equity interest was $7,677 and is included in the measurement of the total fair value of the business. The
Company recognized a gain of $3,695 as a result of remeasuring its prior equity interest in the business held before the business combination. The gain is included in the line item "Other income" in
the Company's Consolidated Statement of Operations for the year ended December 31, 2010.
The
following table summarizes the assets acquired and liabilities assumed at their acquisition date fair values. Management determined the fair value of the identifiable intangible
assets acquired based upon an independent valuation performed by a third-party specialist. The purchase price allocation, as presented below, was translated into U.S. dollars based on the foreign
exchange rate on November 1, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,800
|
|
|
|
|
Deposits with clearing organizations
|
|
|
1,792
|
|
|
|
|
Receivables from brokers, dealers and clearing organizations
|
|
|
2,377
|
|
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
13,474
|
|
|
6 Years
|
|
Trade name
|
|
|
160
|
|
|
5 Years
|
|
Goodwill
|
|
|
12,419
|
|
|
|
|
Other assets
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
34,334
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
1,555
|
|
|
|
|
Deferred tax liabilities
|
|
|
3,691
|
|
|
|
|
Other liabilities
|
|
|
1,168
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
6,414
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
27,920
|
|
|
|
|
|
|
|
|
|
|
|
Total
intangible assets acquired in the transaction that are subject to amortization totaled $13,634 and have a weighted-average useful life of approximately 6 years.
All
of the goodwill acquired was assigned to the EMEA Brokerage segment. None of the goodwill is expected to be deductible for income tax purposes.
In
connection with the acquisition, the Company recognized $299 of acquisition related costs that are included in Professional fees and Other expenses in its Consolidated Statement of
Operations for
119
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
5. ACQUISITIONS (Continued)
the
year ended December 31, 2010. The Company also recognized compensation expense of $1,597 related to the renegotiation of certain employment agreements in connection with the acquisition.
The expense is included in its Consolidated Statement of Operations for the year ended December 31, 2010 in Compensation and employee benefits.
The
amounts of revenue and net income of the business included in the Company's Consolidated Statement of Operations from the November 1, 2010 acquisition date to the period
ending December 31, 2010 are as follows:
|
|
|
|
|
Revenue
|
|
$
|
2,986
|
|
|
|
|
|
Net income(1)
|
|
$
|
442
|
|
|
|
|
|
-
(1)
-
Does
not include the one-time expense of $1,597 related to the renegotiation of certain employment agreements in connection with the
acquisition.
6. GOODWILL AND INTANGIBLE ASSETS
Goodwill
Changes in the carrying amount of the Company's goodwill for the years ended December 31, 2011 and 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2010
|
|
Goodwill
acquired
|
|
Adjustments(1)
|
|
Foreign currency
translation
|
|
December 31,
2011
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Brokerage
|
|
$
|
83,289
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
83,289
|
|
EMEA Brokerage
|
|
|
13,895
|
|
|
|
|
|
|
|
|
(44
|
)
|
|
13,851
|
|
Asia Brokerage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clearing and Backed Trading
|
|
|
42,413
|
|
|
|
|
|
(1,546
|
)
|
|
(192
|
)
|
|
40,675
|
|
All Other
|
|
|
128,691
|
|
|
|
|
|
|
|
|
|
|
|
128,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
268,288
|
|
$
|
|
|
$
|
(1,546
|
)
|
$
|
(236
|
)
|
$
|
266,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
During
the second quarter of 2011, the Company recorded adjustments to its purchase price allocation for Kyte in the net amount of $1,546.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2009
|
|
Goodwill
acquired
|
|
Adjustments
|
|
Foreign currency
translation
|
|
December 31,
2010
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas Brokerage
|
|
$
|
80,249
|
|
$
|
3,040
|
|
$
|
|
|
$
|
|
|
$
|
83,289
|
|
EMEA Brokerage
|
|
|
1,818
|
|
|
12,419
|
|
|
|
|
|
(342
|
)
|
|
13,895
|
|
Asia Brokerage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clearing and Backed Trading
|
|
|
|
|
|
41,282
|
|
|
|
|
|
1,131
|
|
|
42,413
|
|
All Other
|
|
|
128,691
|
|
|
|
|
|
|
|
|
|
|
|
128,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
210,758
|
|
$
|
56,741
|
|
$
|
|
|
$
|
789
|
|
$
|
268,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
6. GOODWILL AND INTANGIBLE ASSETS (Continued)
Goodwill is required to be tested for impairment at least annually and more frequently when indicators of impairment exist. All of the Company's goodwill is allocated to its reporting
units and the goodwill impairment tests are performed at the reporting unit level. As discussed in Note 2, based on the results of the annual impairment tests, no goodwill impairment was
recognized during the years ended December 31, 2011 or 2010.
Intangible Assets
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
December 31, 2010
|
|
|
|
Gross
amount
|
|
Accumulated
amortization
and foreign
currency
translation
|
|
Net
carrying
value
|
|
Gross
amount
|
|
Accumulated
amortization
and foreign
currency
translation
|
|
Net
carrying
value
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
77,151
|
|
$
|
27,606
|
|
$
|
49,545
|
|
$
|
76,951
|
|
$
|
18,165
|
|
$
|
58,786
|
|
Trade names
|
|
|
8,951
|
|
|
5,719
|
|
|
3,232
|
|
|
8,951
|
|
|
4,866
|
|
|
4,085
|
|
Core technology
|
|
|
6,400
|
|
|
4,777
|
|
|
1,623
|
|
|
6,400
|
|
|
3,686
|
|
|
2,714
|
|
Non compete agreements
|
|
|
3,874
|
|
|
3,463
|
|
|
411
|
|
|
3,874
|
|
|
3,048
|
|
|
826
|
|
Favorable lease agreements
|
|
|
620
|
|
|
420
|
|
|
200
|
|
|
620
|
|
|
340
|
|
|
280
|
|
Patents
|
|
|
3,131
|
|
|
225
|
|
|
2,906
|
|
|
31
|
|
|
16
|
|
|
15
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proprietary knowledge
|
|
|
110
|
|
|
|
|
|
110
|
|
|
110
|
|
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
100,237
|
|
|
42,210
|
|
$
|
58,027
|
|
$
|
96,937
|
|
$
|
30,121
|
|
$
|
66,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
July 2011, the Company completed an asset purchase of certain patents from a third party for consideration in the amount of $3,100. The patents have a weighted-average useful life of
approximately 6 years.
Amortization
expense for the years ending December 31, 2011, 2010 and 2009 was $12,190, $7,815 and $5,465, respectively.
At
December 31, 2011, expected amortization expense for the definite lived intangible assets is as follows:
|
|
|
|
|
2012
|
|
$
|
11,107
|
|
2013
|
|
|
9,123
|
|
2014
|
|
|
8,398
|
|
2015
|
|
|
8,303
|
|
2016
|
|
|
6,351
|
|
Thereafter
|
|
|
14,635
|
|
|
|
|
|
Total
|
|
$
|
57,917
|
|
|
|
|
|
121
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
7. OTHER ASSETS AND OTHER LIABILITIES
Other assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
2010
|
|
Prepaid bonuses
|
|
$
|
36,797
|
|
$
|
37,248
|
|
Deferred tax assets(1)
|
|
|
47,617
|
|
|
39,751
|
|
Investments accounted for under the cost method and equity method
|
|
|
35,960
|
|
|
38,097
|
|
Forgivable employee loans and advances to employees
|
|
|
23,909
|
|
|
8,690
|
|
Software inventory, net
|
|
|
6,909
|
|
|
10,662
|
|
Financial instruments owned
|
|
|
6,864
|
|
|
5,665
|
|
Deferred financing fees on 8.375% Senior Notes
|
|
|
8,552
|
|
|
|
|
Other(1)
|
|
|
32,061
|
|
|
25,507
|
|
|
|
|
|
|
|
Total Other assets(1)
|
|
$
|
198,669
|
|
$
|
165,620
|
|
|
|
|
|
|
|
-
(1)
-
Restated
to reflect immaterial restatement. See Note 2 for further information.
On
February 28, 2010, the Company purchased a 40% interest in the outstanding membership interests of an independent brokerage firm with a proprietary trading platform. The
aggregate purchase price was comprised of $10,000 in cash and 414,938 shares of the Company's common stock. The target retained $8,000 of the cash portion of the purchase price for working capital.
Additionally, the Company committed to purchase the remaining membership interests in increments of 20% by the third quarter of 2013, subject to customary closing conditions. The purchase price for
the remaining membership interests was to be paid in cash and established by a formula based on the target's future results of operations. On November 30, 2011, the purchase agreement was
amended and the Company exchanged its membership interests in the target for a convertible senior secured promissory note (the "Note") due in 2016 with a face value of $14,059. At the Company's
discretion, the Note may be converted into a 49% membership interest in the target. Upon the exchange of its membership interests, the Company recognized a loss of $4,094 for the difference between
the book value of the membership interests and the fair value of the Note. The Company accounted for the Note as an available-for-sale security. As of December 31, 2011,
the Note had a fair value of $5,362 recorded within Other assets in the Consolidated Statement of Financial Condition.
On
August 1, 2010, the Company purchased a 33% interest in the outstanding membership interests of an independent Commodity Futures Trading Commission ("CFTC") registered Futures
Commission Merchant for $11,000 in cash. The firm is also a Foreign Exchange Dealer member of the National Futures Association and provides direct market access in certain foreign exchange markets.
This investment is accounted for under the equity method. On October 28, 2011, the Company purchased an additional 5.5% interest in this entity for $1,100 in cash and continues to account for
the investment under the equity method.
122
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
7. OTHER ASSETS AND OTHER LIABILITIES (Continued)
Other
liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
2010
|
|
Deferred revenues
|
|
$
|
16,879
|
|
$
|
15,962
|
|
Payroll related liabilities
|
|
|
16,364
|
|
|
14,750
|
|
Future purchase commitment and contingent consideration liabilities
|
|
|
13,681
|
|
|
22,415
|
|
Deferred tax liabilities(1)
|
|
|
14,962
|
|
|
12,234
|
|
Unrecognized tax benefits(1)
|
|
|
11,187
|
|
|
11,850
|
|
Financial instruments sold, not yet purchased
|
|
|
976
|
|
|
6,769
|
|
Other(1)
|
|
|
23,514
|
|
|
26,563
|
|
|
|
|
|
|
|
Total Other liabilities(1)
|
|
$
|
97,563
|
|
$
|
110,543
|
|
|
|
|
|
|
|
-
(1)
-
Restated
to reflect immaterial restatement. See Note 2 for further information.
8. SHORT-TERM BORROWINGS AND LONG-TERM OBLIGATIONS
The Company had outstanding Long-term obligations as of December 31, 2011 and 2010 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
Maturity Date
|
|
2011
|
|
2010
|
|
Long-term obligations:
|
|
|
|
|
|
|
|
|
|
8.375% Senior Notes
|
|
July 2018
|
|
$
|
250,000
|
|
$
|
|
|
7.17% Senior Notes
|
|
January 2013
|
|
|
|
|
|
59,743
|
|
|
|
|
|
|
|
|
|
Total Long-term obligations
|
|
|
|
$
|
250,000
|
|
$
|
59,743
|
|
|
|
|
|
|
|
|
|
8.375% Senior Notes
In July 2011, the Company issued $250,000 in aggregate principal amount of 8.375% Senior Notes (the "8.375% Senior Notes") due 2018 in
a private offering (the "Offering") to qualified institutional buyers pursuant to Rule 144A and to certain persons in offshore transactions pursuant to Regulation S, each under the
Securities Act of 1933, as amended (the "Securities Act").
The notes were priced to investors at 100% of their principal amount, and mature in July 2018. Interest on these notes accrues at a rate of 8.375% per annum and is payable, commencing in January 2012,
semi-annually in arrears on the 19
th
of January and July. Transaction costs of approximately $9,100 related to the 8.375% Senior Notes will be deferred and amortized
over the term of the notes. On December 21, 2011, the Company completed an exchange offer for the 8.375% Senior Notes whereby it exchanged $250,000 in aggregate principal amount of the 8.375%
Senior Notes for 8.375% Senior Notes that are registered under the Securities Act. At December 31, 2011, unamortized deferred financing fees related to the 8.375% Senior Notes of $8,552 were
recorded within Other assets and the Company was in compliance with all applicable covenants.
123
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
8. SHORT-TERM BORROWINGS AND LONG-TERM OBLIGATIONS (Continued)
7.17% Senior Notes
In January 2008, pursuant to a note purchase agreement with certain institutional investors (the "2008 Note Purchase Agreement"), the
Company issued $60,000 in aggregate principal amount of senior secured notes due in January 2013 (the "7.17% Senior Notes") in a private placement. In July 2011, the Company used $67,797 of the net
proceeds from the Offering of the 8.375% Senior Notes to redeem all of its existing 7.17% Senior Notes due 2013, including all accrued and unpaid interest thereunder, and to pay all premiums and
transaction expenses associated therewith. Prior to redemption, interest on the 7.17% Senior Notes accrued at a rate of 7.17% per annum and was payable semi-annually in arrears on the
30
th
of January and July and the Company's obligations under the 7.17% Senior Notes were secured by substantially all of the assets of the Company and certain assets of the
Company's subsidiaries. The 2008 Note Purchase Agreement contained covenants with which the Company was required to comply, including among others, maintenance of certain financial ratios and
restrictions on additional indebtedness, liens and dispositions. At December 31, 2010, the 7.17% Senior Notes were recorded net of unamortized deferred financing fees of $257 and the Company
was in compliance with all applicable covenants.
Credit Agreement
In December 2010, the Company entered into a second amended and restated credit agreement (as amended and restated, the "Credit
Agreement") with Bank of America, N.A. and certain other lenders. The Credit Agreement matures on December 20, 2013 and provides for maximum borrowings of up to $129,500, which includes up to
$50,000 for letters of credit. Revolving loans may be either base rate loans or Eurocurrency rate loans. Eurocurrency rate loans bear interest at the annualized rate of one-month LIBOR
plus the application margin, letter of credit
fees per annum are equal to the applicable margin times the outstanding amount drawn under such letter of credit and base rate loans bear interest at a rate per annum equal to a prime rate plus the
applicable margin in effect for that interest period. As long as no default has occurred under the Credit Agreement, the applicable margin for both the base rate and Eurocurrency rate loans is based
on a matrix that varies with a ratio of outstanding debt to EBITDA, as defined in the Credit Agreement.
In
July 2011, the Company used $135,319 of the net proceeds from the Offering of the 8.375% Senior Notes to repay all then outstanding amounts under the Credit Agreement, including
accrued and unpaid interest.
As
a result of the Offering, the available borrowing capacity under the Credit Agreement decreased from $200,000 to approximately $129,500. Pursuant to the terms of the Credit Agreement,
following the redemption of the 7.17% Senior Notes, the lenders released all of the security supporting the Credit Agreement and the Company is no longer required to secure amounts outstanding under
the Credit Agreement with any of its assets or the assets of the Company's subsidiaries.
124
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
8. SHORT-TERM BORROWINGS AND LONG-TERM OBLIGATIONS (Continued)
The Company had outstanding borrowings under its Credit Agreement as of December 31, 2011 and 2010 as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
2010
|
|
Loans Available(1)
|
|
$
|
129,500
|
|
$
|
200,000
|
|
Loans Outstanding
|
|
$
|
|
|
$
|
135,000
|
|
-
(1)
-
Amounts
available include up to $50,000 for letters of credit as of December 31, 2011 and December 31, 2010.
The
Company's commitments for outstanding letters of credit relate to potential collateral requirements associated with its matched principal business. Since commitments associated with
these outstanding letters of credit may expire unused, the amounts shown above do not necessarily reflect actual future cash funding requirements.
The
weighted average interest rate of outstanding loans under the Credit Agreement was 3.06% for the year ended December 31, 2010. At December 31, 2011 and 2010,
unamortized deferred financing fees related to the Credit Agreement were $1,738 and $2,297, respectively.
The
Credit Agreement contains certain financial and other covenants. The Company was in compliance with all applicable covenants at December 31, 2011 and 2010.
9. INCOME TAXES
The provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Current provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(7,001
|
)
|
$
|
5,501
|
|
$
|
5,505
|
|
Foreign
|
|
|
13,935
|
|
|
22,256
|
|
|
27,592
|
|
State and local
|
|
|
579
|
|
|
759
|
|
|
6,696
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
7,513
|
|
|
28,516
|
|
|
39,793
|
|
Deferred (benefit) provision:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(3,681
|
)
|
|
(20,505
|
)
|
|
(18,400
|
)
|
Foreign
|
|
|
(1,749
|
)
|
|
1,987
|
|
|
(3,480
|
)
|
State and local
|
|
|
564
|
|
|
(4,114
|
)
|
|
(10,931
|
)
|
|
|
|
|
|
|
|
|
Total deferred (benefit)
|
|
|
(4,866
|
)
|
|
(22,632
|
)
|
|
(32,811
|
)
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
2,647
|
|
$
|
5,884
|
|
$
|
6,982
|
|
|
|
|
|
|
|
|
|
The
Company had pre-tax income from foreign operations of $37,589, $81,768 and $70,990 for the years ended December 31, 2011, 2010 and 2009, respectively.
Pre-tax (loss) from domestic operations
125
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
9. INCOME TAXES (Continued)
was
$(37,507), $(49,965) and ($47,718) for the years ended December 31, 2011, 2010 and 2009, respectively.
Deferred
income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when such differences are expected to reverse. Significant components of the Company's gross deferred tax assets and liabilities are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
2011
|
|
As of
December 31,
2010
|
|
|
|
|
|
As Previously
Reported
|
|
Adjustment
|
|
As
Restated
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
$
|
19,246
|
|
$
|
11,431
|
|
$
|
|
|
$
|
11,431
|
|
Net operating loss carryforwards
|
|
|
40,391
|
|
|
31,287
|
|
|
2,870
|
|
|
34,157
|
|
Foreign deferred items
|
|
|
3,398
|
|
|
5,218
|
|
|
4,573
|
|
|
9,791
|
|
Unrealized loss on currency hedging
|
|
|
|
|
|
806
|
|
|
(806
|
)
|
|
|
|
Foreign tax credits
|
|
|
1,192
|
|
|
1,192
|
|
|
|
|
|
1,192
|
|
General business credit
|
|
|
3,020
|
|
|
2,724
|
|
|
|
|
|
2,724
|
|
Liability reserves
|
|
|
5,274
|
|
|
4,964
|
|
|
|
|
|
4,964
|
|
Prepaid expenses
|
|
|
4,076
|
|
|
8,677
|
|
|
|
|
|
8,677
|
|
Other, net
|
|
|
2,994
|
|
|
2,043
|
|
|
646
|
|
|
2,689
|
|
Valuation allowance
|
|
|
(15,677
|
)
|
|
(7,424
|
)
|
|
(2,878
|
)
|
|
(10,302
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
63,914
|
|
$
|
60,918
|
|
$
|
4,405
|
|
$
|
65,323
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
$
|
(10,009
|
)
|
$
|
(15,851
|
)
|
$
|
1,902
|
|
$
|
(13,949
|
)
|
Intangible amortization
|
|
|
(20,940
|
)
|
|
(22,016
|
)
|
|
(671
|
)
|
|
(22,687
|
)
|
Prepaid bonuses
|
|
|
(310
|
)
|
|
(781
|
)
|
|
(389
|
)
|
|
(1,170
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
(31,259
|
)
|
$
|
(38,648
|
)
|
$
|
842
|
|
$
|
(37,806
|
)
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
32,655
|
|
$
|
22,270
|
|
$
|
5,247
|
|
$
|
27,517
|
|
|
|
|
|
|
|
|
|
|
|
As
a result of certain realization requirements of ASC 718, the table of deferred tax assets and liabilities shown above does not include certain deferred tax assets as of
December 31, 2011 and 2010 that arose directly from tax deductions related to equity compensation in excess of compensation expense recognized for financial reporting purposes. Stockholders'
Equity will be increased by $1,102 when such deferred tax assets are ultimately realized. The Company uses tax law ordering when determining when excess tax benefits have been realized.
During
the fourth quarter of 2011, the Company completed an analysis of its tax assets and liabilities. As a result of that analysis, the Company determined that it had overstated its
provision for income taxes in certain prior years, and has restated those balances accordingly. See Note 2 for additional information.
126
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
9. INCOME TAXES (Continued)
Cumulative
undistributed earnings of foreign subsidiaries were approximately $311,056 at December 31, 2011. U.S. income and foreign withholding taxes have not been recognized on
the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. This amount becomes taxable upon a repatriation
of assets from the subsidiary or a sale or liquidation of the subsidiary. However, we consider the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested and, accordingly, no
U.S. income taxes have been provided thereon. Determination of the amount of any unrecognized deferred income tax liability is not practicable because of the complexities of the hypothetical
calculation. We have not, nor do we anticipate the need to, repatriate funds to the U.S. to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs
associated with our domestic debt service requirements.
The
deferred tax assets relating to foreign deferred items listed above consist primarily of depreciation and amortization, deferred compensation and unpaid intra-group royalties and
interest. The valuation allowance relates primarily to the inability to utilize net operating losses and foreign tax credits in various tax jurisdictions. At December 31, 2011, the Company
established a valuation allowance for the current year's state and local net operating loss, to the extent that it is more likely than not unrealizable. The Company had U.S. federal net operating loss
carryforwards of $57,337, U.S. state and local net operating loss carryforwards of $101,072 and foreign net operating loss carryforwards of $48,051. The U.S. amounts are subject to annual limitations
on utilization and will begin to expire in 2018. The foreign amounts are subject to annual limitations on utilization and will generally begin to expire in 2012. Further, the Company has $1,192 of
foreign tax credit carryforwards at December 31, 2011 that will begin to expire in 2012. The Company continues to monitor the realizability of these losses and believes it is more likely than
not that the tax benefits associated with these losses will be realized to the extent a valuation allowance has not been established. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized and, when necessary, a valuation allowance is established. The ultimate realization of
the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. Management considers the following possible
sources of taxable income when assessing the realization of deferred tax assets:
-
-
future reversals of existing taxable temporary differences;
-
-
future taxable income exclusive of reversing temporary differences and carryforwards;
-
-
taxable income in prior carryback years; and
-
-
tax-planning strategies.
The
assessment regarding whether a valuation allowance is required or should be adjusted also considers all available positive and negative evidence, including, but not limited to, the
following:
-
-
the nature, frequency, and severity of any recent losses;
-
-
the duration of statutory carryforward periods;
-
-
historical experience with tax attributes expiring unused; and
127
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
9. INCOME TAXES (Continued)
-
-
the Company's estimated near- and medium-term financial outlook.
In
making the determination of the realizability of these deferred tax assets we have identified certain prudent and feasible tax planning strategies that we will implement unless the
need to do so is eliminated in the future. However, this determination is a judgment and could be impacted by further market fluctuations.
The
corporate statutory U.S. federal tax rate was 35.0% for the three years presented. A reconciliation of the Company's provision for income tax and the statutory tax rate is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Federal income tax provision (benefit) at statutory rate
|
|
$
|
29
|
|
$
|
11,131
|
|
$
|
8,145
|
|
U.S. state and local income taxes, net of federal tax benefit
|
|
|
(1,951
|
)
|
|
(2,353
|
)
|
|
(2,738
|
)
|
U.S. state and local valuation allowance
|
|
|
3,094
|
|
|
|
|
|
|
|
Foreign operations
|
|
|
(992
|
)
|
|
(5,436
|
)
|
|
(856
|
)
|
Non-deductible expenses
|
|
|
1,991
|
|
|
2,045
|
|
|
1,776
|
|
General business credit
|
|
|
(464
|
)
|
|
(402
|
)
|
|
(490
|
)
|
(Decreases) increases in unrecognized tax benefits, net
|
|
|
(663
|
)
|
|
1,077
|
|
|
1,190
|
|
Net adjustment related to the reconciliation of income tax provision (benefit) accruals to tax returns
|
|
|
1,428
|
|
|
(357
|
)
|
|
|
|
Tax-Exempt Income
|
|
|
|
|
|
(7
|
)
|
|
(45
|
)
|
Other
|
|
|
175
|
|
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
2,647
|
|
$
|
5,884
|
|
$
|
6,982
|
|
|
|
|
|
|
|
|
|
Income
tax expense of approximately $1,764, $2,042 and $5,577 from the exercise of stock options and the vesting of RSUs was recorded directly to additional paid-in capital
in 2011, 2010 and 2009, respectively.
Total
unrecognized tax benefits (net of the federal benefit on state tax positions) as of December 31, 2011 were approximately $12,021, including interest of $834, all of which
could affect the effective income tax rate in future periods. A liability for an unrecognized tax benefit of $2,493 relating to years prior to 2009 had been classified as taxes payable and was
previously omitted from the
128
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
9. INCOME TAXES (Continued)
reconciliation
below. The reclassification of this amount did not cause the balance sheet to be restated. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as
follows:
|
|
|
|
|
|
|
Liability for
Unrecognized Tax
Benefits
|
|
Unrecognized tax benefits balance at December 31, 2008, as previously reported
|
|
$
|
7,156
|
|
Unrecognized tax benefits balance, as previously reported in taxes payable
|
|
|
2,493
|
|
|
|
|
|
Unrecognized tax benefits balance at December 31, 2008
|
|
$
|
9,649
|
|
Gross increasescurrent period tax positions
|
|
|
2,077
|
|
Lapse of statute of limitations
|
|
|
(953
|
)
|
|
|
|
|
Unrecognized tax benefits balance at December 31, 2009
|
|
$
|
10,773
|
|
Gross increasescurrent period tax positions
|
|
|
1,076
|
|
Lapse of statute of limitations
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits balance at December 31, 2010
|
|
$
|
11,849
|
|
Gross increasescurrent period tax positions
|
|
|
|
|
Lapse of statute of limitations
|
|
|
(662
|
)
|
|
|
|
|
Unrecognized tax benefits balance at December 31, 2011
|
|
$
|
11,187
|
|
|
|
|
|
The
Company is under continuous examination by the Internal Revenue Service (the "IRS") and other tax authorities in certain countries, such as the U.K., and states in which the Company
has significant business operations, such as New York. The Company is currently under examination by the IRS as a result of net operating loss carryback covering tax years
2004 - 2009. Also, the Company is currently at various levels of field examination with respect to audits with the New York State and New York City, for tax years
2006 - 2008. The Company has substantially concluded all U.S. federal, state and local income tax matters for years prior to 2004.
In
the U.K., the Company is in discussion with tax authorities regarding whether certain compensation expenses were deductible by the Company in prior years. A portion of the
compensation payment is held by a trustee and the Company may request but not compel the trustee to use the money to offset the cost to the Company of the potential tax liability, if any, arising from
the disallowance of the deduction.
The
Company believes that the resolution of tax matters will not have a material effect on the consolidated statements of financial condition of the Company, although a resolution could
have a material impact on the Company's consolidated statements of income for a particular future period and on the Company's effective income tax rate for any period in which such resolution occurs.
The Company has established a liability for unrecognized tax benefits that the Company believes is adequate in relation to the potential for additional assessments. Once established, the Company
adjusts unrecognized tax benefits only when more information is available or when an event occurs necessitating a change.
129
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
9. INCOME TAXES (Continued)
The
Company recognizes interest and penalties related to income tax matters in interest expense and other expense, respectively. As of December 31, 2011 and 2010, the Company had
approximately $834 and $153 of accrued interest related to uncertain tax positions, respectively.
10. STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
Shares of
Common Stock
|
|
Authorized (at December 31, 2011)
|
|
|
400,000,000
|
|
Outstanding:
|
|
|
|
|
December 31, 2009
|
|
|
118,426,573
|
|
December 31, 2010
|
|
|
122,125,491
|
|
December 31, 2011
|
|
|
117,524,638
|
|
Par value per share
|
|
$
|
0.01
|
|
Share Issuance
During 2011 and 2010, the Company issued 3,142,758 and 2,125,632 shares of common stock, respectively, in connection with the exercise
of stock options and vesting of RSUs. The Company received total cash proceeds of $75 and $645 in 2011 and 2010, respectively, in connection with the exercise of stock options. In 2011, in connection
with an investment, the Company issued 138,313 shares of common stock as part of the purchase price. In 2010, in connection with various acquisitions, the Company issued 5,835,853 shares of common
stock in the aggregate as part of the purchase price of such acquisitions. See Note 5 to the Consolidated Financial Statements for further information related to these acquisitions.
Common Stock
Each holder of the Company's common stock is entitled to one vote per share on all matters submitted to a vote of stockholders. Subject
to the rights of holders of the
Company's preferred stock, if any, the holders of shares of the Company's common stock are entitled to receive dividends when, as and if declared by the Company's Board of Directors.
On
each of March 31, May 31, August 31 and November 30, 2011, the Company paid a cash dividend of $0.05 per share, which, based upon the number of shares
outstanding on the record date for such dividends, totaled $6,100, $6,205, $5,955 and $5,920, respectively. On December 30, 2010, the Company paid a special cash dividend of $0.25 per share,
which, based on the number of shares outstanding on the record date for such dividend, totaled $30,488. On each of March 29, May 28, August 31, and November 30, 2010, the
Company paid a cash dividend of $0.05 per share, which, based upon the number of shares outstanding on the record date for such dividends, totaled $5,928, $5,956, $6,088 and $6,198, respectively.
Preferred Stock
As of December 31, 2011 and 2010, the Company had one class of preferred stock with 5,000,000 shares authorized and none issued.
130
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
10. STOCKHOLDERS' EQUITY (Continued)
Treasury Stock
In August 2007, the Company's Board of Directors authorized the Company to implement a stock repurchase program to repurchase a limited
number of shares of the Company's common stock. Under the repurchase plan, the Board of Directors authorized the Company to repurchase shares of the Company's common stock on the open market in such
amounts as determined by the Company's management, provided, however, such amounts are not to exceed, during any calendar year, the number of shares issued upon the exercise of stock options plus the
number of shares underlying grants of RSUs that are granted or which management reasonably anticipates will be granted in such calendar year. During the year ended December 31, 2011, the
Company repurchased 5,650,000 shares of its common stock on the open market at an average price of $4.55 per share and for a total cost of $25,868, including sales commissions. During the year ended
December 31, 2010, the Company repurchased 3,062,567 shares of its common stock on the open market at an average price of $5.39 per share and for a total cost of $16,609, including sales
commissions. These repurchased shares were recorded at cost as treasury stock in the Consolidated Statements of Financial Condition.
On
November 15, 2011, the Company entered into a stock purchase agreement with Michael Gooch and JPI pursuant to which the Company purchased 1,053,746 and 1,163,548 shares of the
Company's common stock held by Michael Gooch and JPI, respectively, for an aggregate purchase price of $10,000. The purchase price was calculated based on the $4.51 per share closing price of the
Company's common stock on the New York Stock Exchange Euronext on November 15, 2011. On December 9, 2010, the Company and JPI entered into a stock purchase agreement pursuant to which
GFI purchased 1,200,000 shares of the Company's common stock held by JPI for an aggregate purchase price of $6,000. The purchase price was calculated based on the $5.00 per share closing price of the
Company's common stock on the New York Stock Exchange Euronext on December 8, 2010. The review and approval of these stock purchase agreements was delegated by the Company's Board of Directors
to its Audit Committee, comprised of solely independent directors, which approved such stock purchase agreements. These repurchased shares were recorded at cost as treasury stock in the Consolidated
Statements of Financial Condition.
11. (LOSS) EARNINGS PER SHARE
Basic (loss) earnings per share for common stock is calculated by dividing net (loss) income available to common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted (loss) earnings per share is calculated by dividing net (loss) income by the sum of: (i) the weighted average number of shares outstanding,
(ii) outstanding stock options and RSUs (using the "treasury stock" method when the impact of such options and RSUs would be dilutive), and (iii) any contingently issuable shares when
dilutive.
131
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
11. (LOSS) EARNINGS PER SHARE (Continued)
Basic and diluted (loss) earnings per share for the years ended December 31, 2011, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Basic (loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
GFI's net (loss) income
|
|
$
|
(3,181
|
)
|
$
|
25,615
|
|
$
|
16,288
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
118,334,995
|
|
|
120,275,918
|
|
|
118,178,493
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(0.03
|
)
|
$
|
0.21
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
GFI's net (loss) income
|
|
$
|
(3,181
|
)
|
$
|
25,615
|
|
$
|
16,288
|
|
Weighted average common shares outstanding
|
|
|
118,334,995
|
|
|
120,275,918
|
|
|
118,178,493
|
|
Effect of dilutive options, RSUs, restricted stock, and other contingently issuable shares(1)
|
|
|
|
|
|
5,246,210
|
|
|
3,398,274
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding and common stock equivalents
|
|
|
118,334,995
|
|
|
125,522,128
|
|
|
121,576,767
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.03
|
)
|
$
|
0.20
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Potential
common shares related to 4,191,049 RSUs, 146,257 options, and 3,936,047 contingently issuable shares were excluded from the computation of diluted
loss per share for the year ended December 31, 2011 as a result of the net loss for the respective period.
Excluded
from the computation of diluted (loss) earnings per share because their effect would be anti-dilutive were the following: 2,437,984 RSUs and 96,752 options for the
year ended December 31, 2011; 1,643,217 RSUs and 56,033 options for the year ended December 31, 2010; and 2,065,724 RSUs and 59,033 options for the year ended December 31, 2009.
12. SHARE-BASED COMPENSATION
The Company issues RSUs to its employees under the GFI Group Inc. 2008 Equity Incentive Plan, which was approved by the Company's stockholders on June 11, 2008 (as amended,
the "2008 Equity Incentive Plan"). The 2008 Equity Incentive Plan was subsequently amended at each of the Company's annual stockholders meetings since the Plan was initially approved in order to
increase the number of shares of common stock available for grant under the Plan. Prior to June 11, 2008, the Company issued RSUs under the GFI Group Inc. 2004 Equity Incentive Plan (the
"2004 Equity Incentive Plan").
The
2008 Equity Incentive Plan permits the grant of non-qualified stock options, stock appreciation rights, shares of restricted stock, RSUs and performance units to
employees, non-employee directors or consultants. The Company issues shares from authorized but unissued shares, which are reserved for issuance upon the vesting of RSUs granted pursuant
to the 2008 Equity Incentive Plan. As of December 31, 2011, there were 9,539,374 shares of common stock available for future grants of awards under this plan, which amount, pursuant to the
terms of the 2008 Equity Incentive Plan, may be increased for the number of shares subject to awards under the 2004 Equity
132
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
12. SHARE-BASED COMPENSATION (Continued)
Incentive
Plan that are ultimately not delivered to employees. The fair value of RSUs is based on the closing price of the Company's common stock on the date of grant and is recorded as compensation
expense over the service period, net of estimated forfeitures.
The
following is a summary of RSU transactions under both the 2008 Equity Incentive Plan and the 2004 Equity Incentive Plan:
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
Weighted-Average
Grant Date
Fair Value
|
|
Outstanding December 31, 2008
|
|
|
3,961,310
|
|
$
|
12.95
|
|
Granted
|
|
|
8,423,013
|
|
|
4.04
|
|
Vested
|
|
|
(1,934,751
|
)
|
|
13.09
|
|
Cancelled
|
|
|
(241,387
|
)
|
|
13.00
|
|
|
|
|
|
|
|
Outstanding December 31, 2009
|
|
|
10,208,185
|
|
|
5.57
|
|
Granted
|
|
|
8,128,286
|
|
|
5.50
|
|
Vested
|
|
|
(3,075,790
|
)
|
|
7.46
|
|
Cancelled
|
|
|
(715,544
|
)
|
|
5.50
|
|
|
|
|
|
|
|
Outstanding December 31, 2010
|
|
|
14,545,137
|
|
|
5.14
|
|
Granted
|
|
|
9,250,544
|
|
|
4.74
|
|
Vested
|
|
|
(5,095,883
|
)
|
|
5.38
|
|
Cancelled
|
|
|
(742,072
|
)
|
|
5.69
|
|
|
|
|
|
|
|
Outstanding December 31, 2011
|
|
|
17,957,726
|
|
$
|
4.84
|
|
|
|
|
|
|
|
The
weighted average fair value of RSUs granted during 2011 was $4.74 per unit, compared with $5.50 per unit for the same period in the prior year. Total compensation expense and related
income tax benefits recognized in relation to RSUs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Compensation expense
|
|
$
|
32,772
|
|
$
|
26,674
|
|
$
|
25,820
|
|
Income tax benefits
|
|
$
|
11,011
|
|
$
|
4,926
|
|
$
|
7,746
|
|
The
Company has modified the vesting terms of RSU grants for certain employees in connection with the execution of new employment agreements or the termination of employment. As a result
of these modifications, the Company recorded incremental compensation expense totaling $2,210, $66 and $708 during 2011, 2010, and 2009, respectively.
At
December 31, 2011, total unrecognized compensation cost related to the RSUs prior to the consideration of expected forfeitures was approximately $61,905 and is expected to be
recognized over a weighted-average period of 1.92 years. The total fair value of RSUs that vested during the years ended December 31, 2011, 2010 and 2009 was $27,407, $22,950 and
$25,326, respectively.
As
of December 31, 2011, the Company had stock options outstanding under two plans: the GFI Group 2002 Stock Option Plan (the "GFI Group 2002 Plan") and the GFInet Inc.
2000 Stock Option
133
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
12. SHARE-BASED COMPENSATION (Continued)
Plan
(the "GFInet 2000 Plan"). No additional grants will be made under these plans. Under each plan: options were granted to employees, non-employee directors or consultants to the
Company; both incentive and non-qualified stock options were available for grant; options were issued with terms up to ten years from date of grant; and options were generally issued with
an exercise price equal to or greater than the fair market value at the time the option was granted. In addition to these terms, both the GFI Group 2002 Plan and the GFInet 2000 Plan contained events
that had to occur prior to any options becoming exercisable. Under both plans, the options became exercisable upon the completion of the Company's initial public offering, which occurred in January
2005. Options outstanding under both plans are exercisable for shares of the Company's common stock. The Company issues shares from the authorized but unissued shares reserved for issuance under the
GFI Group 2002 Plan or the GFInet 2000 Plan, respectively, upon the exercise of option grants under such plans.
A
summary of stock option transactions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GFI Group 2002
Plan
|
|
|
|
GFInet 2000 Plan
|
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Contractual
Term
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Contractual
Term
|
|
Outstanding December 31, 2008
|
|
|
651,648
|
|
$
|
3.32
|
|
|
|
|
|
324,408
|
|
$
|
3.17
|
|
|
|
|
Exercised
|
|
|
(10,212
|
)
|
|
4.31
|
|
|
|
|
|
(10,836
|
)
|
|
2.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2009
|
|
|
641,436
|
|
|
3.31
|
|
|
|
|
|
313,572
|
|
|
3.19
|
|
|
|
|
Exercised
|
|
|
(30,420
|
)
|
|
2.97
|
|
|
|
|
|
(205,960
|
)
|
|
2.69
|
|
|
|
|
Cancelled
|
|
|
(4,212
|
)
|
|
2.97
|
|
|
|
|
|
(11,364
|
)
|
|
5.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2010
|
|
|
606,804
|
|
|
3.33
|
|
|
|
|
|
96,248
|
|
|
3.95
|
|
|
|
|
Exercised
|
|
|
(4,212
|
)
|
|
2.97
|
|
|
|
|
|
(23,884
|
)
|
|
2.62
|
|
|
|
|
Cancelled
|
|
|
(16,844
|
)
|
|
5.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
(55,520
|
)
|
|
4.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2011
|
|
|
585,748
|
|
$
|
3.28
|
|
|
2.13
|
|
|
16,844
|
|
$
|
2.97
|
|
|
1.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2011
|
|
|
585,748
|
|
$
|
3.28
|
|
|
2.13
|
|
|
16,844
|
|
$
|
2.97
|
|
|
1.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2011, 2010, and 2009, there was no unrecognized compensation cost related to stock options.
The
total intrinsic value of options exercised for the years ended December 31, 2011, 2010 and 2009 was $52, $661 and $58, respectively. Additionally, the total intrinsic value of
options outstanding and exercisable at December 31, 2011 was $604.
134
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
13. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company has non-cancelable operating leases, principally for office space, that expire on various dates through 2027.
At December 31, 2011, the future minimum rental commitments under such leases are as follows:
|
|
|
|
|
2012
|
|
$
|
14,454
|
|
2013
|
|
|
13,171
|
|
2014
|
|
|
11,260
|
|
2015
|
|
|
10,633
|
|
2016
|
|
|
9,623
|
|
Thereafter
|
|
|
89,675
|
|
|
|
|
|
Total
|
|
$
|
148,816
|
|
|
|
|
|
Many
of the leases for office space contain escalation clauses that require payment of additional rent to the extent of increases in certain operating and other costs. In addition,
certain of the Company's leases grant a free rent period, which is amortized over the lease term. The accompanying Consolidated Statements of Operations reflect all rent expense on a
straight-line basis over the term of the leases. Rent expense under the leases for the years ended December 31, 2011, 2010 and 2009 was $15,252, $13,797 and $13,114, respectively.
In
connection with moving the Company's headquarters in 2008, the Company terminated a portion of the former facility lease with respect to approximately 51,000 square feet, effective
June 30, 2008. The Company remains liable for all of the obligations under the lease for the remaining approximately 37,000 square feet. In January 2009, the Company entered into a sublease for
approximately 23,000 square feet of the remaining leased space. The Company will receive monthly payments of $55 until the sublease expires in September 2013.
Purchase Obligations
The Company has various unconditional purchase obligations.
These obligations are for the purchase of market data from a number of information service providers during the normal course of business. As of December 31, 2011, the Company had total
purchase commitments for market data of approximately $25,445, with $19,118 due within the next twelve months and $6,327 due between one to three years. Additionally, the Company has purchase
commitments for capital expenditures of $3,225 primarily related to network implementations in the U.S. and U.K., and $1,096 primarily related to hosting and software license agreements. Of these
purchase commitments, capital expenditures of approximately $998 and fees for hosting and software licensing agreements of approximately $684 are due within the next twelve months.
In
connection with the acquisition of 70% of the equity ownership interests in Kyte, the Company agreed to purchase the residual 30% equity interest in Kyte for an additional cash
payment in an amount to be determined pursuant to a formula based on Kyte's earnings, such payment to be made following June 30, 2013. See Note 5 to the Consolidated Financial Statements
for further information.
Contingencies
In the normal course of business, the Company and certain subsidiaries included in the consolidated financial statements are, and
have
been in the past, named as defendants in various lawsuits and proceedings and are, and have been in the past, involved in certain regulatory examinations. Additional actions, investigations or
proceedings may be brought from time to time in
135
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
13. COMMITMENTS AND CONTINGENCIES (Continued)
the
future. The Company is subject to the possibility of losses from these various contingencies. Considerable judgment is necessary to estimate the probability and amount of any loss from such
contingencies. An accrual is made when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. The Company accrues a
liability for the estimated costs of adjudication or settlement of asserted and unasserted claims existing as of the reporting period.
The
Company is subject to regular examinations by various tax authorities in jurisdictions in which the Company has significant business operations. The Company regularly assesses the
likelihood of additional tax assessments that may result from these examinations in each of the tax jurisdictions. A tax accrual has been established, which the Company believes to be adequate in
relation to the potential for additional tax assessments. Once established, the accrual may be adjusted based on new information or events. The imposition of additional tax assessments, penalties or
fines by a tax authority could have a material impact on the Company's effective tax rate.
Additionally,
the Company has recorded reserves for certain contingencies to which it may have exposure, such as reserves for certain litigation contingencies and contingencies related
to the employer portion of National Insurance Contributions in the U.K.
In
October 2010, the staff of the Market Regulation Department of the Financial Industry Regulatory Authority Inc. ("FINRA") (the "Staff") commenced a disciplinary proceeding by
filing a complaint against GFI Securities LLC and four of its former employees in connection with allegedly improper communications in 2005 and 2006 between certain of these former employees
and those at other interdealer brokerage firms. All of the former employees of GFI Securities LLC who were named in the complaint resigned in April 2008 to become employed by affiliates of
Compagnie Financiere Tradition. None of the Company's current employees were named in the complaint. In February 2012, GFI Securities LLC reached an agreement with FINRA to settle this matter
pursuant to which GFI Securities LLC will be censured and will pay a fine for violations of FINRA rule 2110, interpretive material 2110-5 and FINRA rule 3010. The
amount of the fine will not have a material adverse impact on the Company's financial position or results of operations.
Based
on currently available information, the outcome of the Company's outstanding matters are not expected to have a material adverse impact on the Company's financial position.
However, the outcome of any such matters may be material to the Company's results of operations or cash flows in a given period. It is not presently possible to determine the Company's ultimate
exposure to these matters and there is no assurance that the resolution of the Company's outstanding matters will not significantly exceed any reserves accrued by the Company.
Risks and Uncertainties
The Company primarily generates its revenues by executing and facilitating transactions for counterparties. Revenues for
these
services are transaction based. As a result, the Company's revenues could vary based upon the transaction volume of securities, commodities, foreign exchange and derivative markets.
Guarantees
The Company, through its subsidiaries, is a member of certain exchanges and clearing houses. Under the membership agreements, members
are
generally required to guarantee certain obligations. To mitigate the performance risks of its members, the exchanges and clearing houses may,
136
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
13. COMMITMENTS AND CONTINGENCIES (Continued)
from
time to time, require members to post collateral, as well as meet certain minimum financial standards. The Company's maximum potential liability under these arrangements cannot be quantified.
However, management believes that the potential for the Company to be required to make payments under these arrangements is unlikely. Accordingly, no contingent liability is recorded in the
Consolidated Statements of Financial Condition for these arrangements.
14. RETIREMENT PLANS
In the United States, the Company has established the GFI Group 401(k) plan, pursuant to the applicable laws of the Internal Revenue Code. It is available to all eligible U.S. employees
as stated in the plan document and is subject to the provisions of the Employee Retirement Income Security Act of 1974. Employees may voluntarily contribute a portion of their compensation, not to
exceed the statutory limit. The Company did not make any contributions to the plan for the years ended December 31, 2011, 2010 or 2009.
In
the U.K. the Company has established two defined contribution plans pursuant to the applicable laws in the U.K. Employees of the Company's U.K. subsidiaries may voluntarily designate
a portion of their monthly compensation to be contributed, which the Company matches up to a certain percentage. The GFI Group Personal Pension Plans are open to all U.K. employees after the
completion of three months of employment. The Company has made aggregate contributions of $1,461, $1,316 and $1,215 in 2011, 2010 and 2009, respectively, for the GFI Group Personal Pension Plans
recorded in compensation and employee benefits.
15. MARKET AND CREDIT RISKS
Market Risk
The Company, through its subsidiaries, operates as a wholesale broker. The Company provides brokerage services to its customers through
agency or principal transactions. Agency brokerage transactions facilitated by the Company are settled between the counterparties on a give-up basis. In matched principal transactions, the
Company is interposed between buyers and sellers and the transactions are cleared through various clearing organizations. In the event of counterparty nonperformance, the Company may be required to
purchase or sell financial instruments at unfavorable market prices, which may result in a loss to the Company. The Company does not anticipate nonperformance by counterparties. The Company monitors
its credit risk daily and has a policy of regularly reviewing the credit standing of counterparties with which it conducts business. The Company may also enter into principal investing transactions in
which the Company commits its capital within predefined limits, either to facilitate customer trading activities or to engage in principal trading for the Company's own account. To the extent that the
Company owns assets (i.e. has long positions) in fluctuating markets, a downturn in the value of those assets or in those markets could result in losses from a decline in the value of those
long positions. Conversely, to the extent that the Company has sold assets that the Company does not own (i.e. has short positions) in any of those markets, an upturn in those markets could
expose the Company to significant losses as the Company attempts to cover short positions in a rising market.
137
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
15. MARKET AND CREDIT RISKS (Continued)
Unsettled transactions (i.e., securities failed-to-receive and securities failed-to-deliver) are attributable to matched principal
transactions executed by subsidiaries and are recorded at contract value. Cash settlement is achieved upon receipt or delivery of the security. In the event of nonperformance, the Company may purchase
or sell the security in the market and seek reimbursement for losses from the contracted counterparty.
In
certain instances, the Company may provide credit for margin requirements to customers, secured by collateral in a customer's account. In such cases, the Company is exposed to the
market risk that the value of the collateral the Company holds could fall below the amount of a customer's indebtedness. This risk can be amplified in any situation where the market for the underlying
instrument is rapidly declining. Agreements with customers that have margin accounts permit the Company to liquidate their positions in the event that the amount of margin collateral becomes
insufficient. Despite those agreements and the Company's risk management policies with respect to margin, the Company may be unable to liquidate a customer's positions for various reasons, or at a
price sufficient to cover any deficiency in a customer's account. If the Company were unable to liquidate a position at a price sufficient to cover any deficiency or if a customer was unable to post
additional margin, the Company may suffer a loss.
Credit Risk
Credit risk arises from potential non-performance by counterparties of our matched principal business, as well as from
nonpayment of commissions by customers of our agency brokerage business. The Company also has credit and counterparty risk in certain situations where it provides clearing and execution services. The
Company provides agency clearing services through its relationships with general clearing member firms and/or exchanges. In these instances, the Company's accounts at such institutions are used, in
its name, to provide access to clearing services for its customers. Credit risk arises from the possibility that the Company may suffer
losses due to the failure of its customers or other counterparties to satisfy their financial obligations to the Company or in a timely manner.
The
Company has established policies and procedures to manage its exposure to credit risk. The Company maintains a thorough credit approval process to limit its exposure to counterparty
risk and employ stringent monitoring to control the market and counterparty risk from its matched principal business. The Company's brokers may only execute transactions for clients that have been
approved by the Company's credit committee following review by the Company's credit department. The Company's credit approval process includes verification of key financial information and operating
data and anti-money laundering verification checks. The Company's credit review process may include consideration of independent credit agency reports and a visit to the entity's premises,
if necessary. The Company has developed and utilizes a proprietary, electronic credit risk monitoring system.
Credit
approval is granted by the Company's credit committee, which is comprised of senior management and representatives from its compliance, finance and legal departments. Credit
approval is granted subject to certain trading limits and may be subject to additional conditions, such as the receipt of collateral or other credit support. The Company's credit risk department
assists the credit committee in the review of any proposed counterparty by conducting diligence on such party and by continuing to review such counterparties for continued credit approval on at least
an annual basis. These results are reviewed by the credit committee. Maintenance procedures include reviewing current audited financial
138
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
15. MARKET AND CREDIT RISKS (Continued)
statements
and publicly available information on the client, collecting data from credit rating agencies where available and reviewing any changes in ownership, title or capital of the client. For the
Company's agency business, the approval process includes the requisite anti-money laundering and know-your-customer verifications.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Certain of the Company's assets and liabilities are carried at fair value or contracted amounts that approximate fair value. Assets and liabilities that are recorded at contracted
amounts approximating fair value consist primarily of receivables from and payables to brokers, dealers and clearing organizations and payables to clearing services customers. These receivables and
payables to brokers, dealers and clearing organizations are short-term in nature, and following December 31, 2011, substantially all have settled at the contracted amounts. The
Company's marketable equity securities are recorded at fair value based on their quoted market price. The Company's investments that are accounted for under the cost and equity methods are investments
in companies that are not publicly traded and for which no established market for their securities exists. The fair value of these investments is only estimated if there are identified events or
changes in circumstances that may have a significant adverse effect on the carrying value of the investment. The Company's debt obligations are carried at historical amounts. The fair value of the
Company's Short-term borrowings outstanding under the Credit Agreement approximated the carrying value at December 31, 2010. No such borrowings were outstanding at
December 31, 2011.
The
fair value of the Company's Long-term obligations was estimated using market rates of interest available to the Company for debt obligations of similar types as of
December 31, 2011 and 2010 as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
2010
|
|
Long-term obligations, at estimated fair value:
|
|
|
|
|
|
|
|
8.375% Senior Notes
|
|
$
|
231,250
|
|
$
|
|
|
7.17% Senior Notes
|
|
|
|
|
|
65,842
|
|
The
Company's financial assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with ASC 820-10. In accordance
with ASC 820-10, the Company has categorized its financial assets and liabilities, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy
as set forth below.
Level 1
Financial assets and liabilities whose values are based on unadjusted quoted prices for identifiable assets or liabilities in
an active market that the company has the ability to access at the measurement date (examples include active exchange-traded equity securities, listed derivatives, and most U.S. Government and agency
securities).
139
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Level 2
Financial assets and liabilities whose values are based on quoted prices in markets where trading occurs infrequently or
whose values are based on quoted prices of instruments with similar attributes in active markets. Level 2 inputs include the following:
-
-
Quoted prices for identifiable or similar assets or liabilities in non-active markets (examples include
corporate and municipal bonds which trade infrequently);
-
-
Inputs other than quoted prices that are observable for substantially the full term of the asset or liability (examples
include interest rate and currency swaps), and
Level 3
Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both
unobservable and significant to the overall fair value measurement. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or
liability.
Valuation Techniques
A description of the valuation techniques applied to the Company's major categories of assets and liabilities measured at fair value on
a recurring basis are as follows:
U.S. Treasury Securities
U.S. Treasury securities are valued using quoted market prices. Valuation adjustments are not applied. Accordingly,
U.S. Treasury securities are generally categorized in Level 1 of the fair value hierarchy.
Equity Securities
Equity securities include mostly exchange-traded corporate equity securities and are valued based on quoted market prices.
Accordingly, exchange-traded equity securities are generally categorized in Level 1 of the fair value hierarchy. Non-exchange traded equity securities are measured primarily using
broker quotations, pricing service data from external providers and prices observed for recently executed market transactions. Non-exchange traded equity securities are generally
categorized within Level 2 of the fair value hierarchy.
Corporate Bonds
Corporate bonds are measured primarily using broker quotations, pricing service data from external providers and prices
observed for recently executed market transactions. Corporate bonds are generally categorized in Level 2 of the fair value hierarchy.
Derivative Contracts
Derivative contracts include instruments such as foreign exchange, commodity, fixed income and equity derivative
contracts.
Listed Derivative Contracts
Listed derivatives that are actively traded are valued based on quoted prices from the exchange and are
categorized in Level 1 of the fair value hierarchy.
OTC Derivative Contracts
OTC derivative contracts include forwards, swaps, and options contracts related to foreign currencies. Depending on
the product and the terms of the transaction, the fair value of OTC derivative products can be either observed or modeled using a series of techniques and model inputs from comparable benchmarks,
including closed-form analytic formulas, such as the Black-Scholes option-pricing model, and simulation models or a combination thereof. Many pricing models do not entail material
subjectivity because the methodologies employed do not necessitate significant judgment, and the pricing inputs are observed from actively quoted markets. In the case of more established derivative
140
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
products,
the pricing models used by the Company are widely accepted by the financial services industry. OTC derivative products valued by the Company using pricing models generally fall into this
category and are categorized in Level 2 of the fair value hierarchy.
Equity warrants
Non-exchange traded equity warrants are classified within Level 3 of the fair value hierarchy and are
measured using the Black-Scholes model with key inputs impacting the valuation including the underlying security price, implied volatility, dividend yield, interest rate curve, strike price and
maturity date.
Convertible debt security
As discussed in Note 7, the Company exchanged its membership interest in a private company for a
convertible senior secured promissory note in that company. This security is measured using valuation techniques involving quoted prices of or market data for comparable companies' credit ratings,
peer company ratios and discounted cash flow analyses. As several inputs are unobservable and significant to the valuation, this convertible debt security is categorized within Level 3 of the
fair value hierarchy.
Future Purchase Commitment
As the inputs used in the fair value future purchase commitment are both unobservable and significant to the
overall fair value measurement of this liability, the liability is categorized in Level 3 of the fair value hierarchy. In connection with the acquisition of 70% of the equity ownership
interests in Kyte, the Company agreed to purchase the residual 30% equity interest in Kyte for an additional cash payment in an amount to be determined pursuant to a formula based on Kyte's earnings,
such payment to be made following June 30, 2013. In applying the income approach, the Company assumed a 16.0% and 17.7% discount rate as of December 31, 2011 and 2010, respectively, and
used forecasted financial information for Kyte for the remaining period ended June 30, 2013.
Contingent Consideration
As the inputs used in the fair value of contingent consideration are both unobservable and significant to the
overall fair value measurement of this liability, the liability is generally categorized in Level 3 of the fair value hierarchy. The category consists primarily of contingent consideration
related to the acquisition of a retail energy brokerage business, completed on November 1, 2009. This contingent liability is remeasured at fair value and is based on estimated future
collections of accounts receivable of the business over approximately the next two years.
In
the years ended December 31, 2011 and 2010, the Company did not have any transfers amongst Level 1, Level 2, and Level 3.
141
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Financial
Assets and Liabilities measured at fair value on a recurring basis as of December 31, 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Balance at
December 31,
2011
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with clearing organizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
500
|
|
$
|
|
|
$
|
|
|
$
|
500
|
|
Other assets: Financial instruments owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
480
|
|
$
|
208
|
|
$
|
|
|
$
|
688
|
|
Derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange derivative contracts
|
|
$
|
16
|
|
$
|
185,933
|
|
$
|
|
|
$
|
185,949
|
|
Fixed income derivative contracts
|
|
|
1,628
|
|
|
|
|
|
|
|
|
1,628
|
|
Equity derivative contracts
|
|
|
1,453
|
|
|
|
|
|
1,937
|
|
|
3,390
|
|
Netting(1)
|
|
|
(1,210
|
)
|
|
(183,581
|
)
|
|
|
|
|
(184,791
|
)
|
|
|
|
|
|
|
|
|
|
|
Total derivative contracts
|
|
$
|
1,887
|
|
$
|
2,352
|
|
$
|
1,937
|
|
$
|
6,176
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments owned
|
|
$
|
2,367
|
|
$
|
2,560
|
|
$
|
1,937
|
|
$
|
6,864
|
|
Other assets: Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity security, available-for-sale
|
|
$
|
2,901
|
|
$
|
|
|
$
|
|
|
$
|
2,901
|
|
Debt security, available-for-sale
|
|
$
|
|
|
$
|
|
|
$
|
5,362
|
|
$
|
5,362
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,768
|
|
$
|
2,560
|
|
$
|
7,299
|
|
$
|
15,627
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities: Financial instruments sold, not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
129
|
|
$
|
22
|
|
$
|
|
|
$
|
151
|
|
Derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange derivative contracts
|
|
$
|
7
|
|
$
|
184,354
|
|
$
|
|
|
$
|
184,361
|
|
Fixed income derivative contracts
|
|
|
384
|
|
|
|
|
|
|
|
|
384
|
|
Equity derivative contracts
|
|
|
819
|
|
|
|
|
|
|
|
|
819
|
|
Netting(1)
|
|
|
(1,210
|
)
|
|
(183,529
|
)
|
|
|
|
|
(184,739
|
)
|
|
|
|
|
|
|
|
|
|
|
Total derivative contracts
|
|
$
|
|
|
$
|
825
|
|
$
|
|
|
$
|
825
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments sold, not yet purchased
|
|
$
|
129
|
|
$
|
847
|
|
$
|
|
|
$
|
976
|
|
Other liabilities: Future purchase commitment and contingent consideration liabilities
|
|
$
|
|
|
$
|
|
|
$
|
13,681
|
|
$
|
13,681
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
129
|
|
$
|
847
|
|
$
|
13,681
|
|
$
|
14,657
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Represents
the impact of netting on a net-by-counterparty basis.
Excluded
from the table above is variation margin on long and short derivative contracts related to exchange traded futures and options on futures in the amount of $1,125
which are included within Receivables from brokers, dealers and clearing organizations.
142
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Financial
Assets and Liabilities measured at fair value on a recurring basis as of December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Balance at
December 31,
2010
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with clearing organizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
500
|
|
$
|
|
|
$
|
|
|
$
|
500
|
|
Other assets: Financial instruments owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
549
|
|
$
|
161
|
|
$
|
|
|
$
|
710
|
|
Derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange derivative contracts
|
|
$
|
|
|
$
|
76,057
|
|
$
|
|
|
$
|
76,057
|
|
Fixed income derivative contracts
|
|
|
89
|
|
|
|
|
|
|
|
|
89
|
|
Equity derivative contracts
|
|
|
3,849
|
|
|
|
|
|
|
|
|
3,849
|
|
Netting(1)
|
|
|
|
|
|
(74,934
|
)
|
|
|
|
|
(74,934
|
)
|
|
|
|
|
|
|
|
|
|
|
Total derivative contracts
|
|
$
|
3,938
|
|
$
|
1,123
|
|
$
|
|
|
$
|
5,061
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments owned
|
|
$
|
4,487
|
|
$
|
1,284
|
|
$
|
|
|
$
|
5,771
|
|
Other assets: Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity security, available-for-sale
|
|
$
|
4,925
|
|
$
|
|
|
$
|
|
|
$
|
4,925
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,912
|
|
$
|
1,284
|
|
$
|
|
|
$
|
11,196
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities: Financial instruments sold, not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange derivative contracts
|
|
$
|
|
|
$
|
79,368
|
|
$
|
|
|
$
|
79,368
|
|
Fixed income derivative contracts
|
|
|
87
|
|
|
|
|
|
|
|
|
87
|
|
Equity derivative contracts
|
|
|
2,286
|
|
|
|
|
|
|
|
|
2,286
|
|
Netting(1)
|
|
|
|
|
|
(74,908
|
)
|
|
|
|
|
(74,908
|
)
|
|
|
|
|
|
|
|
|
|
|
Total derivative contracts
|
|
$
|
2,373
|
|
$
|
4,460
|
|
$
|
|
|
$
|
6,833
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments sold, not yet purchased
|
|
$
|
2,373
|
|
$
|
4,460
|
|
$
|
|
|
$
|
6,833
|
|
Other liabilities: Future purchase commitment and contingent consideration liabilities
|
|
$
|
|
|
$
|
|
|
$
|
22,415
|
|
$
|
22,415
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,373
|
|
$
|
4,460
|
|
$
|
22,415
|
|
$
|
29,248
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Represents
the impact of netting on a net-by-counterparty basis.
Excluded
from the table above is variation margin on long and short derivative contracts related to exchange traded futures and options in the amount of $18 and $206
which are included within Receivables from brokers, dealers and clearing organizations and Payables to brokers, dealers and clearing organizations, respectively.
143
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Changes in Level 3 Financial Assets and Liabilities measured at fair value on a recurring basis for the year ended December 31, 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
Total
realized and
unrealized
(gains)
losses
included in
Income(1)
|
|
Unrealized
gains (losses)
included in
Other
comprehensive
(income) loss
|
|
Purchases
|
|
Issuances
|
|
Sales
|
|
Settlements
|
|
Ending
Balance at
December 31,
2011
|
|
Unrealized
gains (losses)
for Level 3
Assets /
Liabilities
Outstanding at
December 31,
2011
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Instruments owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Derivative Contracts
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
1,937
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
1,937
|
|
$
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Receivable, available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
5,362
|
|
|
|
|
|
|
|
|
|
|
|
5,362
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future purchase commitment and contingent consideration liabilities:
|
|
$
|
22,415
|
|
$
|
(6,941
|
)
|
$
|
(100
|
)
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
(1,693
|
)
|
$
|
13,681
|
|
$
|
(6,941
|
)
|
-
(1)
-
Realized
and unrealized gains (losses) are reported in Other income in the Consolidated Statements of Operations.
Changes in Level 3 Financial Assets and Liabilities measured at fair value on a recurring basis for the year ended December 31, 2010
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
Total
realized and
unrealized
(gains)
losses
included in
Income(1)
|
|
Unrealized
gains (losses)
included in
Other
comprehensive
(income) loss
|
|
Purchases
|
|
Issuances
|
|
Sales
|
|
Settlements
|
|
Ending
Balance at
December 31,
2010
|
|
Unrealized
gains (losses)
for Level 3
Assets /
Liabilities
Outstanding at
December 31,
2010
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future purchase commitment and contingent consideration liabilities:
|
|
$
|
|
|
$
|
(1,009
|
)
|
$
|
1,349
|
|
$
|
22,664
|
|
$
|
|
|
$
|
|
|
$
|
(589
|
)
|
$
|
22,415
|
|
$
|
(1,009
|
)
|
-
(1)
-
Realized
and unrealized gains (losses) are reported in Other income in the Consolidated Statements of Operations.
The Company has cost and equity method investments which are monitored for indicators of impairment each reporting period. If the
Company determines that an other-than-temporary impairment has occurred, the investment will be written down to its estimated fair value. For the year ended December 31,
2011, in accordance with the provisions of ASC 323-10, the Company determined that certain equity method investments were other-than-temporarily impaired and were
written down to their estimated fair value. The Company primarily utilized the income approach by assuming an
144
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
estimated
discount rate and forecasted financial information to determine its estimated fair value. The Company measured this equity method investment at fair value on a non-recurring
basis and it is not included in the tables above.
The
following table presents the balance of the equity method investments at December 31, 2011 that have been measured at fair value on a non-recurring basis, using
the process described above, and the impairment charges recorded during the year ended December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31,
2011
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Total Losses for
the Year Ended,
2011
|
|
Other Assets: Investments(1)
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
(4,717
|
)
|
-
(1)
-
Impairment
losses are recorded within Other expenses in the Consolidated Statements of Operations for the year ended December 31, 2011.
There
were no liabilities measured at fair value on a non-recurring basis at December 31, 2011. There were no assets or liabilities measured at fair value on a
non-recurring basis at December 31, 2010.
17. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses foreign exchange derivative contracts, including forward contracts and foreign currency swaps, to reduce the effects of fluctuations in certain assets and liabilities
denominated in foreign currencies. The Company also hedges a portion of its foreign currency exposures on anticipated foreign currency denominated revenues and expenses by entering into forward
foreign exchange contracts. For the years ended December 31, 2011 and 2010, none of these contracts were designated as foreign currency cash flow hedges under ASC 815-10,
Derivatives and Hedging
("ASC 815-10").
The
Company provides brokerage services to its customers for exchange-traded and over-the-counter derivative products, which include futures, forwards and options
contracts. The Company may enter into principal transactions for exchange-traded and over-the-counter derivative products to facilitate customer trading activities or to engage
in principal trading for the Company's own account.
The
Company monitors market risk exposure from its matched principal business and principal trading business by regularly monitoring its concentration of market risk to financial
instruments, countries or
counterparties and regularly monitoring trades that have not settled within prescribed settlement periods or volume thresholds. Additionally, market risks are monitored and mitigated by the use of the
Company's proprietary, electronic risk monitoring system, which provides daily credit reports in each of the Company's geographic regions that analyze credit concentration and facilitates the regular
monitoring of transactions against key risk indicators.
For
certain derivative contracts, the Company has entered into agreements with counterparties that allow for netting. The Company reports these derivative contracts on a
net-by-counterparty basis when management believes that a legal and enforceable right of offset exists under these agreements.
145
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
17. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
Fair
values of derivative contracts on a gross basis as of December 31, 2011 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
December 31, 2010
|
|
Derivatives not designated as hedging instruments under ASC 815-10
|
|
Derivative
Assets(1)
|
|
Derivative
Liabilities(2)
|
|
Derivative
Assets(1)
|
|
Derivative
Liabilities(2)
|
|
Foreign exchange derivative contracts
|
|
$
|
185,984
|
|
$
|
184,387
|
|
$
|
76,057
|
|
$
|
79,368
|
|
Commodity derivative contracts
|
|
|
13,178
|
|
|
12,190
|
|
|
3,955
|
|
|
4,143
|
|
Fixed income derivative contracts
|
|
|
4,113
|
|
|
2,904
|
|
|
89
|
|
|
87
|
|
Equity derivative contracts
|
|
|
3,600
|
|
|
866
|
|
|
3,849
|
|
|
2,286
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value of derivative contracts
|
|
$
|
206,875
|
|
$
|
200,347
|
|
$
|
83,950
|
|
$
|
85,884
|
|
Counterparty netting
|
|
|
(199,574
|
)
|
|
(199,522
|
)
|
|
(78,871
|
)
|
|
(78,845
|
)
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
$
|
7,301
|
|
$
|
825
|
|
$
|
5,079
|
|
$
|
7,039
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Reflects
futures and options on futures contracts within Receivables from brokers, dealers and clearing organizations and options and forwards contracts
within Other assets.
-
(2)
-
Reflects
futures and options on futures contracts within Payables to brokers, dealers and clearing organizations and options and forwards contracts within
Other liabilities.
As
of December 31, 2011 and 2010, the Company had outstanding forward foreign exchange contracts with a combined notional value of $128,197 and $149,350, respectively.
Approximately $32,743 and $53,480 of these forward foreign exchange contracts represents a hedge of euro-denominated balance sheet positions at December 31, 2011 and 2010,
respectively. The remaining contracts are hedges of anticipated future cash flows.
In
addition to the Company's outstanding forward foreign exchange contracts, the following table includes the outstanding long and short notional amounts on a gross basis of derivative
financial instruments as of December 31, 2011 and December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
December 31, 2010
|
|
|
|
Long
|
|
Short
|
|
Long
|
|
Short
|
|
Foreign exchange derivative contracts
|
|
$
|
9,967,442
|
|
$
|
9,976,475
|
|
$
|
5,682,858
|
|
$
|
5,681,923
|
|
Commodity derivative contracts
|
|
|
512,233
|
|
|
513,245
|
|
|
501,953
|
|
|
803,357
|
|
Fixed income derivative contracts
|
|
|
3,119,363
|
|
|
3,195,903
|
|
|
18,346
|
|
|
18,399
|
|
Equity derivative contracts
|
|
|
31,959
|
|
|
6,605
|
|
|
40,040
|
|
|
92,840
|
|
146
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
17. DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
The following is a summary of the effect of derivative contracts on the Consolidated Statements of Operations for the years ended December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in
Income on Derivatives
|
|
Derivatives not designated as hedging instruments under ASC 815-10
|
|
Location of Gain (Loss)
Recognized in Income on
Derivatives
|
|
For the Year Ended
December 31, 2011
|
|
For the Year Ended
December 31, 2010
|
|
Foreign exchange derivative contracts
|
|
(1)
|
|
$
|
4,090
|
|
$
|
8,977
|
|
Commodity derivative contracts
|
|
Principal transactions
|
|
|
14,388
|
|
|
6,476
|
|
Fixed income derivative contracts
|
|
Principal transactions
|
|
|
10,636
|
|
|
1,506
|
|
Equity derivative contracts
|
|
Principal transactions
|
|
|
4,885
|
|
|
999
|
|
-
(1)
-
For
the year ended December 31, 2011, approximately $415 of losses on foreign exchange derivative contracts were included within Other (loss) income
and approximately $4,505 of gains on foreign currency options were included within Principal transactions. For the year ended December 31, 2010, approximately $3,529 of gains on foreign
exchange derivative contracts were included within Other (loss) income and approximately $5,448 of gains on foreign currency options were included within Principal transactions.
18. VARIABLE INTEREST ENTITIES
Consolidated Variable Interest Entities
In December 2010, Kyte entered into an investment with a limited liability partnership ("LLP"), which is focused on developing a
proprietary trading business. The LLP is a VIE and it was determined that the Company is the primary beneficiary of the LLP because Kyte is the provider of the majority of
the LLP's start-up capital and has the power to direct the activities of the VIE that most significantly impact the economic performance of the entity.
Non-consolidated Variable Interest Entities
The Company holds interests in certain variable interest entities ("VIEs") which it does not consolidate as it determined that the
Company is not the primary beneficiary. The Company's involvement with such entities is in the form of direct equity interests and a convertible note. The entities include an independent brokerage
firm with a proprietary trading platform, trading entities in which the Company has provided initial capital to fund trading activities, a commodity pool operator and an investment fund manager. As of
December 31, 2011 and 2010, assets recognized in the Consolidated Statements of Financial Condition related to the Company's interests in these non-consolidated VIEs were $10,640
and $15,247, respectively, and are reflected in Other assets. The Company has not recorded any liabilities with respect to VIEs not consolidated. The Company's maximum exposure to loss relating to
non-consolidated VIEs as of December 31, 2011 and December 31, 2010 was $10,640 and $18,047, respectively. As of December 31, 2011, the maximum exposure to loss
represented assets recognized by the Company in the form of equity method investments and a convertible note. As of December 31, 2010, the maximum exposure to loss represented (i) assets
recognized by the Company in the form of equity method investments and notes receivable on loans made to VIEs in which the Company holds a variable interest and (ii) a future
147
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
18. VARIABLE INTEREST ENTITIES (Continued)
commitment
to purchase the remaining membership interests in an independent brokerage platform with a proprietary trading platform in increments of 20% by the third quarter of 2013, subject to
customary closing conditions.
19. EQUITY METHOD INVESTMENTS
The Company has investments accounted for under the equity method (see Note 2) with an aggregate carrying value of $28,997 and $30,057, at December 31, 2011 and 2010,
respectively, and which are included in Other assets. Included within Equity in net earnings of unconsolidated businesses was $10,466, $3,974 and $1,574 in 2011, 2010 and 2009, respectively, related
to these investments.
The
Company reviews investments accounted for under the equity method for decline in value that may be other than temporary. During the year ended December 31, 2011, the Company
recorded write-downs of $4,717 related to equity method investments that were determined to be impaired on an other-than-temporary basis. The value of the Company's ownership
interest in these entities was evaluated in light of recent and projected operating losses of these investees. A decline in current and projected cash flows resulted in the value of the Company's
ownership interests being less than the carrying amount of these investments. These write-downs are included in Other expenses in the Consolidated Statements of Operations.
Investments
accounted for under the equity method included the following:
-
-
Investments in unconsolidated UK brokerage and trading operations acquired in the July 1, 2010 acquisition of Kyte
or made by Kyte subsequent to the Company's acquisition.
-
-
Investments in U.S. based brokerage, trading and investment firms.
These
investments accounted for an aggregate investment balance of $12,506 and $13,593 at December 31, 2011 and 2010, respectively. The Company's share of net earnings for these
investments was $8,093 and $1,627 in 2011 and 2010, respectively. The Company did not have any net earnings related to these investments in 2009.
During
the year ended December 31, 2011, the Company recorded a $1,863 loss related to the accounting impact of an increased ownership stake in an equity method investment
previously accounted for under the cost method.
During
the year ended December 31, 2011, the Company recorded $521 of pre-tax income representing the Company's share of equity in prior period earnings of an
equity-method investee.
20. REGULATORY REQUIREMENTS
The following material operating subsidiaries of the Company are required to maintain minimum levels of regulatory capital pursuant to applicable regulations:
GFI
Securities LLC is a registered broker-dealer with the SEC and FINRA. GFI Securities LLC is also a registered introducing broker with the National Futures Association
and the Commodity Futures Trading Commission. Accordingly, GFI Securities LLC is subject to the net capital rules under the Exchange Act and the Commodity Exchange Act. Under these rules, GFI
Securities LLC is required to
148
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
20. REGULATORY REQUIREMENTS (Continued)
maintain
minimum Net Capital, as defined by applicable regulations, of not less than the greater of $250 or 2% of aggregate debits, as defined by applicable regulations.
GFI
Brokers Limited, GFI Securities Limited, The Kyte Group Limited and Kyte Broking Limited are subject to the capital requirements of the Financial Services Authority in the United
Kingdom ("FSA"). In addition, GFI Securities Limited and The Kyte Group Limited are subject to the FSA consolidated capital requirements.
GFI
(HK) Securities LLC is subject to the capital requirements of the Securities and Futures Commission in Hong Kong (the "SFC").
The
following table sets forth information about the minimum regulatory capital that certain of the Company's subsidiaries were required to maintain as of December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GFI
Securities
LLC
|
|
GFI
Brokers
Limited
|
|
GFI
Securities
Limited
|
|
The Kyte
Group
Limited
|
|
Kyte
Broking
Limited
|
|
GFI (HK)
Securities
LLC
|
|
Regulatory capital
|
|
$
|
12,736
|
|
$
|
47,427
|
|
$
|
63,760
|
|
$
|
14,636
|
|
$
|
5,581
|
|
$
|
1,420
|
|
Minimum regulatory capital required
|
|
|
250
|
|
|
25,793
|
|
|
33,119
|
|
|
8,206
|
|
|
2,661
|
|
|
386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess regulatory capital
|
|
$
|
12,486
|
|
$
|
21,634
|
|
$
|
30,641
|
|
$
|
6,430
|
|
$
|
2,920
|
|
$
|
1,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain
of the Company's material operating subsidiaries are subject to other financial requirements as set forth below:
GFI
Securities Limited's Japanese branch is subject to certain licensing requirements established by the Financial Instruments and Exchange Law (the "FIEL") in Japan. As
part of the licensing requirements, GFI Securities Limited's Japanese branch is required to maintain minimum "brought-in" capital and stockholders' equity of 50,000 Japanese Yen each
(approximately $650). GFI Securities Limited's Japanese branch is also subject to the FIEL's net capital rule. At December 31, 2011, GFI Securities Limited's Japanese branch was
in compliance with these capital requirements.
GFI
(HK) Brokers Ltd. is registered with and regulated by the Hong Kong Monetary Authority. As part of this registration, GFI (HK) Brokers Ltd. is required to maintain
stockholders' equity of 5,000 Hong Kong dollars (or approximately $644). At December 31, 2011, GFI (HK) Brokers Ltd. had stockholders' equity of 25,382 Hong Kong dollars (or
approximately $3,269), which exceeded the minimum requirement by 20,382 Hong Kong dollars (or approximately $2,625).
GFI
Group Pte. Ltd. is subject to the compliance requirements of the Monetary Authority of Singapore, which requires that GFI Group Pte. Ltd, among other things, maintain
stockholders' equity of 3,000 Singapore dollars (or approximately $2,318). At December 31, 2011, GFI Group Pte. Ltd. exceeded the minimum requirement by approximately 19,216 Singapore
dollars (or approximately $14,850).
GFI
Korea Money Brokerage Limited is licensed and regulated by the Ministry of Finance and Economy to engage in foreign exchange brokerage business, and is subject to certain regulatory
requirements under the Foreign Exchange Transaction Act. As a licensed foreign exchange brokerage company, GFI Korea Money Brokerage Limited is required to maintain minimum paid-in capital
of
149
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
20. REGULATORY REQUIREMENTS (Continued)
5,000,000
Korean Won (or approximately $4,308). At December 31, 2011, GFI Korea Money Brokerage Limited exceeded the minimum requirement for paid-in-capital by
approximately 6,508,075 Korean Won (or approximately $5,607).
These
regulatory rules may restrict the Company's ability to withdraw capital from its regulated subsidiaries. In addition to the requirements set forth above, certain of the Company's
other subsidiaries are subject to minimum net capital, minimum stockholders' equity or similar requirements of the jurisdictions in which they operate. The Company believes it is in compliance with
all of these requirements at December 31, 2011 and December 31, 2010 with the exception of The Kyte Group Limited's U.K. consolidated group capital requirement which had fallen below the
required minimum amount on December 31, 2010. Subsequent to December 31, 2010, the Company has re-organized its investments in certain Kyte entities and has provided
additional capital to the regulated group to comply with applicable group capital requirements.
21. SEGMENT AND GEOGRAPHIC INFORMATION
In accordance with ASC 280-10,
Segment Reporting
("ASC 280-10") and based on the nature of the Company's
operations, products and services in each geographic region, the Company determined that it has four operating segments: (i) Americas Brokerage, (ii) Europe, Middle East and Africa
("EMEA") Brokerage, (iii) Asia Brokerage, and (iv) Clearing and Backed Trading. The Company's brokerage operations provide brokerage services in four broad product categories: fixed
income, financial, equity and commodity. Additionally, in accordance with criteria in ASC 280-10, the Company presents its operating segments as five reportable segments: the four
operating segments described above and "All Other." The All Other segment captures costs that are not directly assignable to one of the operating segments, primarily consisting of the Company's
corporate business activities and operations from software, analytics and market data.
The
accounting policies of the segments are the same as those described above in Note 2Summary of Significant Accounting Policies. The Company evaluates performance
of the operating segments based on income (loss) before income taxes, which it defines as revenues less direct expenses. Revenues within each brokerage segment include revenues that are directly
related to providing brokerage services along with interest and other income directly attributable to the operating segment. Revenues within the Clearing and Backed Trading segment primarily include
revenues that are directly related to providing clearing services along with the Company's share of profit (loss) on trading activity from capital investments. Direct expenses of the operating
segments are those expenses that are directly related to providing the brokerage or clearing services and trading activities of the operating segments and include compensation expense related to the
segment management and staff, communication and market data, travel and promotion, and certain professional fees and other expenses that are directly incurred by the operating segments. However, the
Company does not allocate to its operating segments certain expenses which it manages separately at the corporate level. The unallocated costs include rent and occupancy, depreciation and
amortization, professional fees, interest on borrowings and other expenses and are included in the results below under "All Other" in the reconciliation of operating results. Management generally does
not consider the unallocated costs in its measurement of the four
150
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
21. SEGMENT AND GEOGRAPHIC INFORMATION (Continued)
operating
segments' performance. Selected financial information for the Company's reportable segments is presented below for periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2011
|
|
|
|
Americas
Brokerage
|
|
EMEA
Brokerage
|
|
Asia
Brokerage
|
|
Clearing
and Backed
Trading
|
|
All
Other
|
|
Total
|
|
Total revenues
|
|
$
|
313,483
|
|
$
|
386,012
|
|
$
|
82,903
|
|
$
|
164,882
|
|
$
|
68,193
|
|
$
|
1,015,473
|
|
Revenues, net of interest and transaction-based expenses
|
|
|
299,590
|
|
|
374,802
|
|
|
82,839
|
|
|
54,104
|
|
|
69,436
|
|
|
880,771
|
|
Income (loss) before income taxes
|
|
|
81,308
|
|
|
88,122
|
|
|
15,533
|
|
|
9,196
|
|
|
(194,077
|
)
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2010
|
|
|
|
Americas
Brokerage
|
|
EMEA
Brokerage
|
|
Asia
Brokerage
|
|
Clearing
and Backed
Trading
|
|
All Other
|
|
Total
|
|
Total revenues
|
|
$
|
294,910
|
|
$
|
379,033
|
|
$
|
74,945
|
|
$
|
53,129
|
|
$
|
60,585
|
|
$
|
862,602
|
|
Revenues, net of interest and transaction-based expenses
|
|
|
278,553
|
|
|
367,494
|
|
|
74,875
|
|
|
12,140
|
|
|
61,982
|
|
|
795,044
|
|
Income (loss) before income taxes
|
|
|
66,399
|
|
|
115,037
|
|
|
15,814
|
|
|
(3,041
|
)
|
|
(162,406
|
)
|
|
31,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31, 2009
|
|
|
|
Americas
Brokerage
|
|
EMEA
Brokerage
|
|
Asia
Brokerage
|
|
Clearing
and Backed
Trading
|
|
All
Other
|
|
Total
|
|
Total revenues
|
|
$
|
327,127
|
|
$
|
364,761
|
|
$
|
61,603
|
|
$
|
|
|
$
|
66,790
|
|
$
|
820,281
|
|
Revenues, net of interest and transaction-based expenses
|
|
|
309,245
|
|
|
350,869
|
|
|
61,573
|
|
|
|
|
|
68,240
|
|
|
789,927
|
|
Income (loss) before income taxes
|
|
|
42,305
|
|
|
114,960
|
|
|
(871
|
)
|
|
|
|
|
(133,124
|
)
|
|
23,270
|
|
In
addition, with the exception for goodwill, the Company does not identify or allocate asset by operating segment, nor does its chief operating decision maker evaluate operating
segments using discrete asset information. See Note 6 for goodwill by reportable segment.
For
the years ended December 31, 2011, 2010, and 2009, the U.K. is the only individual foreign country that accounts for 10% or more of the total sales and total
long-lived assets. Information regarding revenue for the years ended December 31, 2011, 2010, and 2009, and information regarding
151
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
21. SEGMENT AND GEOGRAPHIC INFORMATION (Continued)
long-lived
assets (defined as property, equipment, leasehold improvements and software inventory) in geographic areas as of December 31, 2011 and 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
303,508
|
|
$
|
290,053
|
|
$
|
308,846
|
|
United Kingdom
|
|
|
492,204
|
|
|
398,020
|
|
|
354,934
|
|
Other
|
|
|
219,761
|
|
|
174,529
|
|
|
156,501
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,015,473
|
|
$
|
862,602
|
|
$
|
820,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Revenues, net of interest and transaction-based expenses:
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
295,212
|
|
$
|
278,686
|
|
$
|
306,911
|
|
United Kingdom
|
|
|
376,809
|
|
|
348,895
|
|
|
335,258
|
|
Other
|
|
|
208,750
|
|
|
167,463
|
|
|
147,758
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
880,771
|
|
$
|
795,044
|
|
$
|
789,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2011
|
|
2010
|
|
Long-lived Assets, as defined:
|
|
|
|
|
|
|
|
United States
|
|
$
|
50,993
|
|
$
|
52,649
|
|
United Kingdom
|
|
|
12,018
|
|
|
14,132
|
|
Other
|
|
|
5,846
|
|
|
4,493
|
|
|
|
|
|
|
|
Total
|
|
$
|
68,857
|
|
$
|
71,274
|
|
|
|
|
|
|
|
Revenues
are attributed to geographic areas based on the location of the Company's relevant subsidiaries.
152
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
22. PARENT COMPANY INFORMATION
The following presents the Parent company only's Condensed Statements of Financial condition, Operations and comprehensive (loss) income and Cash flows:
Parent Company Only
Condensed Statements of Financial Condition
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
2010
|
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
127
|
|
$
|
752
|
|
Investments in subsidiaries, equity basis
|
|
|
414,021
|
|
|
372,004
|
|
Advances to subsidiaries
|
|
|
258,951
|
|
|
302,079
|
|
Other assets
|
|
|
33,857
|
|
|
15,783
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
706,956
|
|
$
|
690,618
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Short-term borrowings, net
|
|
$
|
|
|
$
|
132,703
|
|
Long-term obligations
|
|
|
250,000
|
|
|
59,743
|
|
Other liabilities
|
|
|
9,744
|
|
|
4,061
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
259,744
|
|
|
196,507
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 5,000,000 shares authorized, none outstanding at December 31, 2011 and 2010
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 400,000,000 shares authorized and 131,669,676 and 128,703,324 shares issued at December 31, 2011 and 2010,
respectively
|
|
|
1,317
|
|
|
1,287
|
|
Additional paid in capital
|
|
|
365,835
|
|
|
350,230
|
|
Retained earnings
|
|
|
160,934
|
|
|
188,295
|
|
Treasury stock, 14,145,038 and 6,577,833 common shares at cost at December 31, 2011 and 2010, respectively
|
|
|
(73,919
|
)
|
|
(43,433
|
)
|
Accumulated other comprehensive loss
|
|
|
(6,955
|
)
|
|
(2,268
|
)
|
|
|
|
|
|
|
Total Stockholders' Equity
|
|
|
447,212
|
|
|
494,111
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
706,956
|
|
$
|
690,618
|
|
|
|
|
|
|
|
153
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
22. PARENT COMPANY INFORMATION (Continued)
Parent Company Only
Condensed Statements of Operations and Comprehensive (Loss) Income
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
110
|
|
$
|
4
|
|
$
|
5
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
22,618
|
|
|
9,210
|
|
|
9,567
|
|
Other expenses
|
|
|
996
|
|
|
1,028
|
|
|
1,359
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
23,614
|
|
|
10,238
|
|
|
10,926
|
|
|
|
|
|
|
|
|
|
Loss before benefit from income taxes and equity in earnings of subsidiaries
|
|
|
(23,504
|
)
|
|
(10,234
|
)
|
|
(10,921
|
)
|
Benefit from income taxes
|
|
|
8,226
|
|
|
1,892
|
|
|
3,276
|
|
|
|
|
|
|
|
|
|
Loss before equity in earnings of subsidiaries
|
|
|
(15,278
|
)
|
|
(8,342
|
)
|
|
(7,645
|
)
|
Equity in earnings of subsidiaries, net of tax
|
|
|
12,097
|
|
|
33,957
|
|
|
23,933
|
|
|
|
|
|
|
|
|
|
GFI's net (loss) income
|
|
$
|
(3,181
|
)
|
$
|
25,615
|
|
$
|
16,288
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
$
|
(3,050
|
)
|
$
|
2,054
|
|
$
|
1,506
|
|
Unrealized (loss) gain on available-for-sale securities, net of tax
|
|
|
(1,486
|
)
|
|
182
|
|
|
565
|
|
|
|
|
|
|
|
|
|
GFI's comprehensive (loss) income
|
|
$
|
(7,717
|
)
|
$
|
27,851
|
|
$
|
18,359
|
|
|
|
|
|
|
|
|
|
154
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
22. PARENT COMPANY INFORMATION (Continued)
Parent Company Only
Condensed Statements of Cash Flows
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
GFI'S net (loss) income
|
|
$
|
(3,181
|
)
|
$
|
25,615
|
|
$
|
16,288
|
|
Adjustments to reconcile net (loss) income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
Income from equity method investments
|
|
|
(12,097
|
)
|
|
(33,957
|
)
|
|
(23,933
|
)
|
Amortization of loan fees
|
|
|
1,709
|
|
|
939
|
|
|
742
|
|
Share-based compensation
|
|
|
449
|
|
|
315
|
|
|
408
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
(8,338
|
)
|
|
(1,880
|
)
|
|
(3,276
|
)
|
Other liabilities
|
|
|
5,683
|
|
|
201
|
|
|
272
|
|
|
|
|
|
|
|
|
|
Cash used in operating activities
|
|
|
(15,775
|
)
|
|
(8,767
|
)
|
|
(9,499
|
)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Investments in subsidiaries
|
|
|
138
|
|
|
963
|
|
|
1,996
|
|
Receipts from subsidiaries
|
|
|
28,876
|
|
|
59,745
|
|
|
94,292
|
|
|
|
|
|
|
|
|
|
Cash provided by investing activities
|
|
|
29,014
|
|
|
60,708
|
|
|
96,288
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Repayments of short-term borrowings
|
|
|
(190,000
|
)
|
|
(40,000
|
)
|
|
(50,000
|
)
|
Proceeds from short-term borrowings
|
|
|
55,000
|
|
|
60,000
|
|
|
|
|
Proceeds from long-term obligations
|
|
|
250,000
|
|
|
|
|
|
|
|
Repayments of long-term obligations
|
|
|
(60,000
|
)
|
|
|
|
|
|
|
Purchases of treasury stock
|
|
|
(35,868
|
)
|
|
(22,609
|
)
|
|
(4,425
|
)
|
Cash dividends paid
|
|
|
(24,180
|
)
|
|
(54,658
|
)
|
|
(23,583
|
)
|
Payment of loan fees
|
|
|
(8,891
|
)
|
|
(2,720
|
)
|
|
(831
|
)
|
Proceeds from exercise of stock options
|
|
|
75
|
|
|
645
|
|
|
70
|
|
|
|
|
|
|
|
|
|
Cash used in financing activities
|
|
|
(13,864
|
)
|
|
(59,342
|
)
|
|
(78,769
|
)
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(625
|
)
|
|
(7,401
|
)
|
|
8,020
|
|
Cash and cash equivalents, beginning of year
|
|
|
752
|
|
|
8,153
|
|
|
133
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
127
|
|
$
|
752
|
|
$
|
8,153
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE:
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
12,614
|
|
$
|
8,778
|
|
$
|
8,874
|
|
Guarantees
From time to time, the Company provides guarantees, on behalf of its subsidiaries, to clients for the purpose of providing credit
enhancement for such clients. Such guarantees generally provide that
155
Table of Contents
GFI GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share amounts)
22. PARENT COMPANY INFORMATION (Continued)
the
Company will guarantee the performance of all liabilities, obligations and undertakings owed by such subsidiary with respect to matched principal transactions entered into by such subsidiary with
the relevant client. These guarantees are generally terminable on less than 30 days' notice. The Company has not recorded any contingent liability in the condensed financial statements for
these guarantees and believes that the occurrence of any events that would trigger payments under these guarantees is remote.
Advances to Subsidiaries
As of December 31, 2011, 2010 and 2009, the Parent company had receivables from subsidiaries of $258,951, $302,079 and $344,099,
respectively, related primarily to the allocation of funds received, from notes payable and the issuance of equity securities to subsidiaries to fund working capital.
23. SUBSEQUENT EVENTS
In February 2012, the Board of Directors declared a quarterly cash dividend of $0.05 per share payable on March 30, 2012 to shareholders of record on March 15, 2012.
Subsequent
events have been evaluated for disclosure in the notes to the Consolidated Financial Statements through the filing date of this Form 10-K.
156
Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls
As of the end of the period covered by this report, the Company's management carried out an evaluation, under the supervision and with
the participation of our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Exchange Act). Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this Form 10-K.
Management's Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Internal control over financial reporting is a process designed under the supervision
of the Company's principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial
statements for external purposes in accordance with generally accepted accounting principles.
The
Company\'s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of
management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets
that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The
Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2011. In making this assessment, the Company's
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on its assessment and the COSO
criteria,
management believes that, as of December 31, 2011, the Company maintained effective internal control over financial reporting.
The
Company's independent registered public accounting firm has audited and issued their auditor's report on the effectiveness of the Company's internal control over financial reporting
as of December 31, 2011. That report appears on Page 158 of this Form 10-K.
157
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of
GFI Group Inc.
New York, New York
We
have audited the internal control over financial reporting of GFI Group Inc. and subsidiaries (the "Company") as of December 31, 2011, based on criteria established in
Internal ControlIntegrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management's Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because
of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material
misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to
future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on the criteria established in
Internal ControlIntegrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
158
Table of Contents
We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2011 of the Company and our report dated March 15, 2012 expressed an unqualified opinion on those financial statements and financial
statement schedule.
/s/
Deloitte & Touche LLP
New York, New York
March 15, 2012
159
Table of Contents
Change in Internal Controls
Upon analyzing the events that precipitated the restatement described in Note 2 to the Consolidated Financial Statements,
management identified deficiencies in the Company's income tax controls. During the fourth quarter of 2011, the Company implemented new procedures related to such deficiencies in order to mitigate the
risk of ineffective internal controls and to strengthen the Company's internal control over financial reporting. The Company enhanced the design, documentation and validation around the reporting and
review of information for its tax provision estimation process, including the relationships between the financial statement and tax bases of assets and liabilities. The Company believes these changes
have remediated the deficiencies that were identified by management, and that our internal control over financial reporting was effective at December 31, 2011.
Other
than noted above, there were no other changes in internal control over financial reporting identified in connection with management's evaluation that occurred during the three
months ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
160
Table of Contents
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required to be furnished pursuant to this item will be set forth under the captions "Election of Directors" and
"Executive Officers" in the registrant's proxy statement (the "Proxy Statement") to be furnished to stockholders in connection with the 2012 Annual Meeting of Stockholders which we expect will be held
on June 7, 2012, and is incorporated herein by reference.
The
information required to be furnished pursuant to this item with respect to compliance with Section 16(a) of the Exchange Act will be set forth under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement, and is incorporated herein by reference.
We
have adopted a Code of Business Conduct and Ethics that applies to all directors, officers and employees. We have also adopted a Code of Business Conduct and Ethics that is applicable
to the
Company's senior financial and accounting officers (including the chief executive officer, chief financial officer and corporate controller). A copy of these codes are posted on the Company's website,
www.gfigroup.com
, under the section "Investor RelationsCorporate Governance." In the event the Company substantively amends or waives a
provision of its Codes of Business Conduct and Ethics, the Company intends to disclose the amendment or waiver on the Company's website as well.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be furnished pursuant to this item will be set forth under the caption "Executive Compensation" in the
Proxy Statement, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required to be furnished pursuant to this item will be set forth under the captions "Security Ownership of Certain
Beneficial Owners," "Security Ownership of Directors and Executive Officers" and "Equity Compensation Plan Information" in the Proxy Statement, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required to be furnished pursuant to this item will be set forth under the caption "Certain Relationships and Related
Party Transactions and Director Independence" in the Proxy Statement, and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required to be furnished pursuant to this item will be set forth under the caption "Fees Paid to Independent Auditors"
in the Proxy Statement, and is incorporated herein by reference.
161
Table of Contents
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements.
See Index to Financial Statements on page 98.
(a)(2) Financial Statement Schedules.
We have included Schedule IIValuation and Qualifying Accounts on page 166. All
other
schedules are omitted as they are not applicable, or the information required is included in the Financial Statements or notes thereto.
(a)(3) Exhibits.
The following Exhibits are filed as part of this Report as required by Regulation S-K. Exhibits 10.2
through 10.08 and 10.11 to 10.17 are management contracts or compensatory plans or arrangements.
|
|
|
|
Number
|
|
Description
|
|
3.1*
|
|
Second Amended and Restated Certificate of Incorporation of the Registrant. (Filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K filed on March 31, 2005, File No. 000-51103).
|
|
3.1.1*
|
|
Certificate of Amendment to Certificate of Incorporation (Filed as Exhibit 3.1.1 to the Company's Annual Report on Form 10-K filed on February 29, 2008, File No. 000-51103)
|
|
3.2*
|
|
Second Amended and Restated Bylaws of the Registrant. (Filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K filed on March 31, 2005, File No. 000-51103)
|
|
4.1*
|
|
See Exhibits 3.1, 3.1.1 and 3.2 for provisions of the Second Amended and Restated Certificate of Incorporation and Second Amended and Restated Bylaws of the Registrant defining the rights of holders of Common
Stock of the Registrant.
|
|
4.2*
|
|
Specimen Stock Certificate. (Filed as Exhibit 4.2 to Amendment No. 5 to the Company's Registration Statement on Form S-1 filed on January 24, 2005, File No. 333-116517)
|
|
4.3*
|
|
Indenture, dated as of July 19, 2011, by and between GFI Group Inc., as Issuer, and The Bank of New York Mellon Trust Company, N. A., as Trustee, relating to the 8.375% Senior Notes due 2018 of GFI Group,
Inc. (Filed as Exhibit 4.2 to the Company's Current Report on Form 8-K filed on July 22, 2011, File No.001-34897)
|
|
4.4*
|
|
Registration Rights Agreement, dated as of July 19, 2011, by and between GFI Group Inc. and Jefferies & Company, Inc., relating to the GFI Group Inc.'s 8.375% Senior Notes due 2018. (Filed
as Exhibit 4.3 to the Company's Current Report on Form 8-K filed on July 22, 2011).
|
|
4.5*
|
|
Form of Exchange 8.375% Senior Note due 2018 (Filed as Exhibit 4.4 to Amendment No. 1 to the Company's Registration Statement on Form S-4 filed on November 14, 2011, File No. 333-177459)
|
|
10.1*
|
|
Second Amended and Restated Credit Agreement, dated December 20, 2010, among the Registrant and GFI Holdings Limited, as borrowers, subsidiaries of the Registrant named therein, as guarantors, Bank of America,
N.A., as administrative agent, Barclays Bank Plc and The Royal Bank of Scotland PLC, as co-syndication agents, the other lenders party thereto and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Barclays Bank PLC, as
joint lead arrangers and joint book running managers. (Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 22, 2010, File No. 000-51103)
|
162
Table of Contents
|
|
|
|
Number
|
|
Description
|
|
10.2*
|
|
Disability Agreement, dated as of December 30, 2004, between the Registrant and Michael A. Gooch. (Filed as Exhibit 10.4 to Amendment No. 5 to the Company's Registration Statement on Form S-1 filed on
January 24, 2005, File No. 333-116517)
|
|
10.3*
|
|
Employment Agreement, dated as of November 18, 2002, between the Registrant and James A. Peers. (Filed as Exhibit 10.6 to Amendment No. 2 to the Company's Registration Statement on Form S-1 filed
on September 17, 2004, File No. 333-116517)
|
|
10.4*
|
|
Guardian Trust of GFI Brokers Limited. (Filed as Exhibit 10.10 to Amendment No. 2 to the Company's Registration Statement on Form S-1 file don September 17, 2004, File No. 333-116517)
|
|
10.5*
|
|
Employment Agreement, dated as of August 20, 2008, between GFI Group Inc. and Ronald Daniel Levi. (Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 22, 2008,
File No. 000-51103)
|
|
10.6*
|
|
Employment Agreement, dated March 26, 2007, between GFI Group Inc. and Scott Pintoff (Filed as Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q filed on May 10, 2007, File
No. 000-51103)
|
|
10.7*
|
|
Employment Agreement, dated March 26, 2007, between GFI Group Inc. and J. Christopher Giancarlo (Filed as Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q filed on May 10,
2007, File No. 000-51103)
|
|
10.8*
|
|
Employment Agreement, dated April 30, 2007, between GFI Group Inc. and Colin Heffron (Filed as Exhibit 10.1 to the Company's current report on Form 8-K filed on May 2, 2007, File
No. 000-51103)
|
|
10.9*
|
|
GFI Group Inc. 2008 Equity Incentive Plan (Filed as Exhibit 10.22 to the Company's Quarterly Report on Form 10-Q filed on August 8, 2008, File No. 000-51103)
|
|
10.10*
|
|
GFI Group Inc. 2008 Senior Annual Bonus Plan (Filed as Exhibit 10.23 to the Company's Quarterly Report on Form 10-Q filed on August 8, 2008, File No. 000-51103)
|
|
10.11*
|
|
Amendment No. 1 to Disability Agreement, dated December 31, 2008, between GFI Group Inc. and Michael Gooch. (Filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K filed on
March 2, 2009, File No. 000-51103).
|
|
10.12*
|
|
Amendment No. 1 to Employment Agreement, dated December 24, 2008, between GFI Group Inc. and James Peers. (Filed as Exhibit 10.26 to the Company's Annual Report on Form 10-K filed on
March 2, 2009, File No. 000-51103).
|
|
10.13*
|
|
Amendment No. 1 to Employment Agreement, dated December 31, 2008, between GFI Group Inc. and Colin Heffron. (Filed as Exhibit 10.27 to the Company's Annual Report on Form 10-K filed on
March 2, 2009, File No. 000-51103).
|
|
10.14*
|
|
Amendment No. 1 to Employment Agreement, dated December 31, 2008, between GFI Group Inc. and Ronald Levi. (Filed as Exhibit 10.28 to the Company's Annual Report on Form 10-K filed on
March 2, 2009, File No. 000-51103).
|
|
10.15*
|
|
Amendment No. 1 to Employment Agreement, dated December 31, 2008, between GFI Group Inc. and Scott Pintoff. (Filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K filed on
March 2, 2009, File No. 000-51103).
|
|
10.16*
|
|
Amendment No. 1 to Employment Agreement, dated December 5, 2008, between GFI Group Inc. and J. Christopher Giancarlo. (Filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K filed
on March 2, 2009, File No. 000-51103).
|
163
Table of Contents
|
|
|
|
Number
|
|
Description
|
|
10.17*
|
|
Amendment No. 2 to Employment Agreement, dated March 30, 2009, between GFI Group Inc. and Ronald Levi (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed May 11, 2009,
File No. 000-51103)
|
|
10.18*
|
|
First Amendment to the GFI Group Inc. 2008 Equity Incentive Plan (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on August 10, 2009, File No. 000-51103)
|
|
10.19*
|
|
Second Amendment to the GFI Group Inc. 2008 Equity Incentive Plan (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on August 9, 2010, File No. 000-51103)
|
|
10.20
|
|
Third Amendment to the GFI Group Inc. 2008 Equity Incentive Plan.
|
|
12
|
|
Computation of Ratio of Earnings to Fixed Charges
|
|
21.1
|
|
List of subsidiaries of the Registrant
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm.
|
|
31.1
|
|
Certification of Principal Executive Officer.
|
|
31.2
|
|
Certification of Principal Financial Officer.
|
|
32.1
|
|
Written Statement of Chief Executive Officer Pursuant to Section 9.06 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
|
|
32.2
|
|
Written Statement of Chief Financial Officer Pursuant to Section 9.06 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
|
|
101.INS**
|
|
XBRL Instance Document
|
|
101.SCH**
|
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL**
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF**
|
|
XBRL Taxonomy Extension Definition Linkbase
|
|
101.LAB**
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
101.PRE**
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
-
(*)
-
Previously
filed.
-
(**)
-
Furnished
with this Annual Report on Form 10-K and included in Exhibit 101 to this report are the following documents formatted
in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition as of December 31, 2011 and December 31, 2010, (ii) the
Consolidated Statements of Operations for the years ended December 31, 2011, 2010, and 2009 (iii) the Consolidated Statements of Comprehensive Income for the years ended
December 31, 2011, 2010, and 2009, (iv) the Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010 and 2009 and (v) Notes to Consolidated
Financial Statements, tagged as blocks of text. As provided in Rule 406T of Regulation S-T, this information is "furnished" and not "filed" for purposes of Sections 11
and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities
Act of 1933 or the Securities Exchange Act of 1934 unless GFI Group, Inc. specifically incorporates it by reference.
164
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
Annual Report on Form 10-K for the fiscal year ended December 31, 2011 to be signed on its behalf by the undersigned, thereunto duly authorized, on the 15th day of
March, 2012.
|
|
|
|
|
|
|
|
|
GFI GROUP INC.
|
|
|
By:
|
|
/s/ JAMES A. PEERS
|
|
|
|
|
Name:
|
|
James A. Peers
|
|
|
|
|
Title:
|
|
Chief Financial Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed by the following persons in the capacities and on the
dates indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ MICHAEL GOOCH
Michael Gooch
|
|
Chairman of the Board and Chief Executive Officer (principal executive officer)
|
|
March 15, 2012
|
/s/ COLIN HEFFRON
Colin Heffron
|
|
President and Director
|
|
March 15, 2012
|
/s/ JAMES A. PEERS
James A. Peers
|
|
Chief Financial Officer (principal financial and accounting officer)
|
|
March 15, 2012
|
/s/ JOHN W. WARD
John W. Ward
|
|
Director
|
|
March 15, 2012
|
/s/ MARISA CASSONI
Marisa Cassoni
|
|
Director
|
|
March 15, 2012
|
/s/ FRANK FANZILLI, JR.
Frank Fanzilli, Jr.
|
|
Director
|
|
March 15, 2012
|
/s/ RICHARD W. P. MAGEE
Richard W. P. Magee
|
|
Director
|
|
March 15, 2012
|
165
Table of Contents
Schedule II
GFI GROUP INC. AND SUBSIDIARIES
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
Beginning of
Period
|
|
Charged to
Cost/
Expense
|
|
Charged to
Other
Accounts(a)
|
|
Deductions(b)
|
|
Balance at
End of
Period
|
|
|
|
(in thousands)
|
|
Allowance for Doubtful Accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2011
|
|
$
|
1,591
|
|
$
|
250
|
|
$
|
1
|
|
$
|
(389
|
)
|
$
|
1,453
|
|
Year ended December 31, 2010
|
|
|
4,099
|
|
|
(829
|
)
|
|
(31
|
)
|
|
(1,648
|
)
|
|
1,591
|
|
Year ended December 31, 2009
|
|
|
3,854
|
|
|
3,617
|
|
|
214
|
|
|
(3,586
|
)
|
|
4,099
|
|
-
(a)
-
For
all periods it includes the effects for exchange rate changes.
-
(b)
-
Net
adjustments to the reserve accounts for write-offs and credits issued during the years.
166