The following discussion ofBGC Partners' financial condition and results of operations should be read together withBGC Partners' consolidated financial statements and notes to those statements, as well as the cautionary statements relating to forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act, included in this report. This discussion summarizes the significant factors affecting our results of operations and financial condition as of and during the years endedDecember 31, 2019 , 2018, and 2017. This discussion is provided to increase the understanding of, and should be read in conjunction with, our consolidated financial statements and the notes thereto included elsewhere in this report.
OVERVIEW AND BUSINESS ENVIRONMENT
We are a leading global brokerage and financial technology company servicing the global financial markets.
Through brands including BGC®, GFI®, Sunrise™, Besso™, Ed Broking®,Poten & Partners™ and RP Martin™, among others, our businesses specialize in the brokerage of a broad range of products, including fixed income such as government bonds, corporate bonds, and other debt instruments, as well as related interest rate derivatives and credit derivatives. We also broker products across FX, equities, energy and commodities, insurance, and futures. Our businesses also provide a wide variety of services, including trade execution, brokerage services, clearing, trade compression, post-trade, information, and other back-office services to a broad assortment of financial and non-financial institutions. Our integrated platform is designed to provide flexibility to customers with regard to price discovery, execution and processing of transactions, and enables them to use Voice, Hybrid, or in many markets, Fully Electronic brokerage services in connection with transactions executed either OTC or through an exchange. Through our Fenics® group of electronic brands, we offer a number of market infrastructure and connectivity services, Fully Electronic marketplaces, and the Fully Electronic brokerage of certain products that also may trade via Voice and Hybrid execution. The full suite of Fenics® offerings include market data and related information services, Fully Electronic brokerage, compression and other post-trade services, analytics related to financial instruments and markets, and other financial technology solutions. Fenics® brands operate under the names Fenics®, BGC Trader™, CreditMatch®, Fenics MD™, BGC Market Data™, kACE2®, EMBonds®, Capitalab®, Swaptioniser®, CBID® and Lucera®.
We previously offered real estate services through our publicly traded
subsidiary,
BGC,BGC Partners , BGC Trader, GFI, GFI Ginga, CreditMatch,Fenics , Fenics.com, Sunrise Brokers,Besso ,Ed Broking ,Poten & Partners , RP Martin, kACE2, EMBonds, Capitalab, Swaptioniser, CBID and Lucera are trademarks/service marks, and/or registered trademarks/service marks ofBGC Partners, Inc. and/or its affiliates. Our customers include many of the world's largest banks, broker-dealers, investment banks, trading firms, hedge funds, governments, corporations, and investment firms. We have dozens of offices globally in major markets includingNew York andLondon , as well as inBahrain ,Beijing ,Bermuda , Bogotá,Brisbane ,Buenos Aires ,Chicago ,Copenhagen ,Dubai ,Dublin ,Frankfurt ,Geneva ,Hong Kong ,Houston ,Istanbul ,Johannesburg ,Madrid ,Melbourne ,Mexico City ,Moscow , Nyon,Paris ,Rio de Janeiro ,Santiago , São Paulo,Seoul ,Shanghai ,Singapore ,Sydney ,Tel Aviv ,Tokyo andToronto .
As of
Newmark IPO, Separation and Spin-Off
OnDecember 13, 2017 , prior to the Newmark IPO, pursuant to the Separation and Distribution Agreement, we transferred substantially all of the assets and liabilities relating to our Real Estate Services business to Newmark. In connection with the Separation, Newmark assumed certain indebtedness and made a proportional distribution of interests inNewmark Holdings to holders of interests inBGC Holdings .
In
OnNovember 30, 2018 , we completed the Spin-Off of the shares of Newmark Class A and Class B common stock held by us to our stockholders as of the close of business on the Record Date through a special pro-rata stock dividend pursuant to which shares of Newmark Class A common stock held by BGC were distributed to holders of BGC Class A common stock and shares of Newmark Class B common stock held by BGC were distributed to holders of BGC Class B common stock (which holders of BGC Class B common stock were Cantor and another entity controlled by our CEO,Howard W. Lutnick ). Following the Spin-Off, BGC no longer holds any shares of Newmark.
For more information about these transactions, see Note 1-"Organization and Basis of Presentation" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
77 --------------------------------------------------------------------------------
GFI Merger
OnJanuary 12, 2016 , we completed our acquisition of GFI, a leading intermediary and provider of trading technologies and support services to the global OTC and listed markets, via the GFI Merger. GFI serves institutional clients in operating electronic and hybrid markets for cash and derivative products across multiple asset classes. Nasdaq Transaction OnJune 28, 2013 , we completed the sale of certain assets to Nasdaq, which purchased certain assets and assumed certain liabilities from us and our affiliates, including the eSpeed brand name and various assets comprising the Fully Electronic portion of our benchmark on-the-runU.S. Treasury brokerage, market data and co-location service businesses, for cash consideration of$750 million paid at closing, plus an earn-out of up to 14,883,705 shares of Nasdaq common stock to be paid ratably in each of the fifteen years following the closing in which the consolidated gross revenue of Nasdaq is equal to or greater than$25 million . During the third quarter of 2017, the Company transferred the right to receive earn-out payments from Nasdaq to Newmark. Following the Spin-Off, the right to receive earn-out payments from Nasdaq remains with Newmark. As a result of the sale of eSpeed, we only sold our on-the-run benchmark 2-, 3-, 5-, 7-, 10-, and 30-year Fully Electronic trading platform forU.S. Treasury Notes and Bonds. We continue to offer Voice brokerage for on-the-runU.S. Treasuries, as well as across various other products in rates, credit, FX, market data and software solutions. As we continue to focus our efforts on converting Voice and Hybrid desks to Fully Electronic execution, our e-businesses and revenues from inter-company data, software, and post-trade services, have continued to grow their revenues.
Going forward, we expect these businesses to become an even more valuable part of BGC as they continue to grow.
Fully Electronic (
For the purposes of this document and subsequentSEC filings, all of our Fully Electronic businesses are referred to asFenics . TheFenics business includes our group of electronic brands offering a number of market infrastructure and connectivity services, Fully Electronic marketplaces, and the Fully Electronic brokerage of certain products that also may trade via Voice and Hybrid execution. The full suite ofFenics offerings include market data and related information services, Fully Electronic brokerage, compression and other post-trade services, analytics related to financial instruments and markets, and other financial technology solutions. Historically, our technology-based product growth has led to higher margins and greater profits over time for exchanges and wholesale financial intermediaries alike, even if overall Company revenues remain consistent. This is largely because automated and electronic trading efficiency allows the same number of employees to manage a greater volume of trades as the marginal cost of incremental trading activity falls. Over time, the conversion of exchange-traded and OTC markets to Fully Electronic trading has also led, on average, to volumes increasing by enough to offset commission declines, and thus often to similar or higher overall revenues. We have been a pioneer in creating and encouraging Hybrid and Fully Electronic execution, and we continually work with our customers to expand such trading across more asset classes and geographies. Outside ofU.S. Treasuries and spot FX, the banks and financial firms that dominate the OTC markets had, until recent years, generally been hesitant in adopting electronically traded products. However, the banks, broker-dealers, and other professional trading firms are now much more active in Hybrid and Fully Electronically traded markets across various OTC products, including credit derivative indices, FX derivatives, non-U.S. sovereign bonds, corporate bonds, and interest rate derivatives. These electronic markets have grown as a percentage of overall industry volumes for the past few years as firms like BGC have invested in the kinds of technology favored by our customers. Regulation inAsia ,Europe and theU.S. regarding banking, capital markets, and OTC derivatives has accelerated the adoption of Fully Electronic execution, and we expect this to continue. We also believe that new clients, beyond our large bank customer base, will primarily transact electronically across ourFenics platform. The combination of more market acceptance of Hybrid and Fully Electronic execution and our competitive advantage in terms of technology and experience has contributed to our strong gains in electronically traded products. We continue to invest in Hybrid and Fully Electronic technology broadly across our product categories, not only launching existing product pools but also launching new platforms with market leading protocols and functionality, which we believe will be game changing in the sector.Fenics has exhibited strong growth over the past several years, and we believe that this growth has outpaced the wholesale brokerage industry as a whole. We expect this trend to accelerate as we convert more of our Voice and Hybrid brokerage into Fully Electronic brokerage across ourFenics platform. We expect to benefit from the secular trend towards electronic trading, increased demand for market data, and the need for increased automation and post-trade services. We continue to onboard new customers as the opportunities created by electronic and algorithmic trading continue to transform our industry. We continue to roll out our next-genFenics brokerage platforms across more products and geographies with the goal of seamlessly integrating Voice liquidity with customer electronic orders either by a graphical user interface or application programming interface, and we expect to have continued success converting Voice/Hybrid desks over time as we roll out these platforms across more products and geographies.
We have continued to invest in our new
• Fenics GO, our new electronic trading platform, which provides live,
real-time and tradeable two-way electronic liquidity for exchange-listed
futures and options, such as Eurex EURO STOXX 50 Index Options,
225, and related
Securities, who joined IMC,Maven Securities , and Optiver as electronic liquidity providers; 78
--------------------------------------------------------------------------------
• Fenics UST, which generated volume growth of approximately 230%
year-on-year in
overall primary dealer
based on data from the Securities Industry and Financial Markets
Association. Over the same timeframe, Fenics UST increased its market
share of CLOB trading from approximately 2% to nearly 10% and is now the
second largest CLOB platform for
based on data from
Fenics UST, CME BrokerTec, Nasdaq Fixed Income, and
these CLOB platforms as well as the volumes of platforms using other fully
electronic
market share from 1.3% to 5.4% year-on-year inDecember 2019 , perGreenwich Associates .
• Our expanded Fenics FX platforms, including MidFX, Spot, FX Options, and
non-deliverable and FX forwards;
• Lucera, which is our software-defined network, offering the trading
community direct connectivity to each other; and • Capitalab'sNikkei 225 options compression service, which is in partnership with the Singapore Exchange. Collectively, our newerFenics offerings, such as the five listed above, are not yet fully up to scale, and are not yet generating significant revenues. The net loss relating to investment in these new products and services was more than$55 million and$30 million for the years endedDecember 31, 2019 and 2018, respectively. Looking ahead, we expect the net loss relating to these investments inFenics offerings to improve by$15 million in 2020 and for the net loss to be approximately$40 million , and for these newer businesses to break even during 2021. Over time, we expect these new products and services to become profitable, high-margin businesses as their scale and revenues increase, all else equal. We believe that our newerFenics offerings have created significant shareholder value. As we continue to focus our efforts on converting Voice and Hybrid desks to Fully Electronic execution, net revenues in our higher margin Fully Electronic businesses across brokerage, data, software, and post-trade increased 12.2% to$73.2 million for the year endedDecember 31, 2019 . Going forward, we expectFenics to become an even more valuable part of BGC as it continues to grow. We continue to analyze how to optimally configure our Voice/Hybrid and Fully Electronic businesses.
Possible Restructuring
Before our first quarter 2020 earnings call, we expect to submit a proposal to the Board and relevant committees with respect to converting our partnership into a corporation. Our current target is to be positioned to begin executing a conversion around the end of the third quarter of 2020, and expect to complete the execution around year end 2020. Any such restructuring would be subject to tax, accounting, regulatory, and other considerations and approvals.
Impact of ASC 606 on Results
From 2014 through 2016, the FASB issued several accounting standard updates, which together comprise ASC Topic 606, Revenue from Contracts with Customers. Beginning in the first quarter of 2018, the Company began recording its financial results to conform to ASC 606. ASC 606 does not currently materially impact the results of BGC. The consolidated Company has elected to adopt the guidance using the modified retrospective approach to ASC 606, under which the consolidated Company applied the new standard only to new contracts initiated on or afterJanuary 1, 2018 and recorded the transition adjustments as part of "Total equity".
Financial Services Industry
The financial services industry has grown historically due to several factors. One factor was the increasing use of derivatives to manage risk or to take advantage of the anticipated direction of a market by allowing users to protect gains and/or guard against losses in the price of underlying assets without having to buy or sell the underlying assets. Derivatives are often used to mitigate the risks associated with interest rates, equity ownership, changes in the value of FX, credit defaults by corporate and sovereign debtors and changes in the prices of commodity products. Over this same timeframe, demand from financial institutions, financial services intermediaries and large corporations have increased volumes in the wholesale derivatives market, thereby increasing the business opportunity for financial intermediaries. Another key factor in the historical growth of the financial services industry has been the increase in the number of new financial products. As market participants and their customers strive to mitigate risk, new types of equity and fixed income securities, futures, options and other financial instruments have been developed. Most of these new securities and derivatives were not immediately ready for more liquid and standardized electronic markets, and generally increased the need for trading and required broker-assisted execution. Due largely to the impacts of the global financial crises of 2008-2009, our businesses had faced more challenging market conditions from 2009 until the second half of 2016. Accommodative monetary policies were enacted by several major central banks, including theFederal Reserve, Bank ofEngland , Bank of Japan and theEuropean Central Bank , in response to the global financial crises. These policies have resulted in historically low levels of volatility and interest rates across many of the financial markets in which we operate. The global credit markets also faced structural issues, such as increased bank capital requirements under Basel III. Consequently, these factors contributed to lower trading volumes in our rates and credit asset classes across most geographies in which we operated. 79 -------------------------------------------------------------------------------- Since mid-2016, the overall financial services industry has benefited from sustained economic growth, a lower unemployment rate, higher consumer spending, the modification or repeal of certainU.S. regulations, and higher investment income. In addition, the secular trend towards digitalization and electronification within the industry has contributed to higher overall volumes and transaction count in Fully Electronic execution. Looking ahead, concerns about the future trade relationship between theU.K. and the EU after Brexit, a slowdown in global growth driven by the outbreak of coronavirus inChina , and an increase in trade protectionism are tempered by expectations of monetary and fiscal stimulus. Brexit OnJune 23, 2016 , theU.K. held a referendum regarding continued membership in the EU. The exit from the EU is commonly referred to as Brexit. The Brexit vote passed by 51.9% to 48.1%. TheU.K. subsequently formally left the EU onJanuary 31, 2020 , but its relationship with the bloc will remain in a transition period untilDecember 31, 2020 . During this period, theU.K. will, with some exceptions, remain subject to EU law. It will also maintain access to the EU's single market. If both theU.K. and the EU agree, this transition period may be extended once by up to two years, meaning it could remain in place untilDecember 31, 2022 . Such an extension must, however, be agreed upon beforeJuly 1, 2020 . TheU.K. government has ruled out any extension to the transition period and has legislated for a commitment not to agree to any extension. The government would then only be able to reverse that provision through new legislation. TheU.K. and EU are currently negotiating a trade deal which, once signed, should determine the new bilateral trade relationship going forward. Given the short time period involved, it is not certain that such trade deal will be sufficiently comprehensive to encompass financial services. In case no new trade deal (or one incorporating financial services) is in place by the end of the transition period, absent mitigating legislative measures by individual EU member states, the trade relationship between theU.K. and the EU would be solely based onWorld Trade Organization terms. This could hinder current levels of mutual market access. While other trade deals are being considered, for example between theU.K. and theU.S. , these may also prove challenging to negotiate and are unlikely to replace or compensate for a reduction, if any, inU.K. and EU trade at least in the short term. Further, the terms of aU.K. and EU trade deal may adversely impact the negotiation and terms of such other deals and vice versa. Given the current uncertainty around the future trade relationship and/or the length of the transition period, the consequences for the economies of theU.K. and the EU member states as a result of theU.K.'s withdrawal from the EU are unknown and unpredictable. Given the lack of comparable precedent, it is unclear what the broader macro-economic and financial implications theU.K. leaving the EU with no agreements in place would have. This uncertainty could adversely impact investor confidence which could result in additional market volatility. Historically, elevated volatility has often led to increased volumes in the Financial Services markets in which we broker, which could be beneficial for our businesses. At other times, increased volatility has led to many market participants curtailing trading activity. Furthermore, any future trade deal might lead to a fragmented regulatory environment, which could increase the costs of our operations and loss of existing levels of cross-border market access. While we have implemented plans to ensure continuity of service inEurope and continue to have regulated entities and offices in place in many of the major European markets in order to mitigate certain risks and uncertainties created by political negotiations between theU.K. and EU, these and other risks and uncertainties could have a material adverse effect on our customers, counterparties, businesses, prospects, financial condition and results of operations.
Regulation
See "Regulation" included in Part I, Item 1 of this Annual Report on Form 10-K for additional information related to our regulatory environment.
Industry Consolidation
In recent years, there has been significant consolidation among the interdealer-brokers and wholesale brokers with which we compete. In addition to our 2015 acquisition of GFI, Tullett and ICAP announced inNovember 2015 an agreement whereby Tullett would purchase the vast majority of ICAP's global Voice/Hybrid broking, as well as portions of its information businesses. Following the completion of this deal inDecember 2016 , ICAP changed its corporate name to NEX, and Tullett changed its name to TP ICAP plc. CME announced inMarch 2018 that it had agreed to acquire NEX and completed the acquisition inNovember 2018 . We expect to continue to compete with the electronic markets, post-trade and information businesses of NEX, that are part of CME now, through the various offerings on ourFenics platform. We will also continue to compete with TP ICAP across various Voice/Hybrid brokerage marketplaces as well as viaFenics . There has also been significant consolidation among smaller non-public wholesale brokers, including our acquisitions of RP Martin,Heat Energy Group ,Remate Lince and Sunrise Brokers Group . We view the recent consolidation in the industry favorably, as we expect it to provide additional operating leverage to our businesses in the future.
Growth Drivers
As a wholesale intermediary in the financial services industry, our businesses are driven primarily by overall industry volumes in the markets in which we broker, the size and productivity of our front-office headcount (including brokers, salespeople, managers and other front-office personnel), regulatory issues, and the percentage of our revenues we are able to generate by Fully Electronic means. 80
--------------------------------------------------------------------------------
Below is a brief analysis of the market and industry volumes for some of our products, including our overall Hybrid and Fully Electronic execution activities.
Overall Market Volumes and Volatility
Volume is driven by a number of factors, including the level of issuance for financial instruments, price volatility of financial instruments, macro-economic conditions, creation and adoption of new products, regulatory environment, and the introduction and adoption of new trading technologies. Historically, increased price volatility has often increased the demand for hedging instruments, including many of the cash and derivative products that we broker. Rates volumes in particular are influenced by market volumes and, in certain instances, volatility. Historically low and negative interest rates across the globe have significantly reduced the overall trading appetite for rates products. As a result of central bank policies and actions, as well as continued expectations of low inflation rates, many sovereign bonds continue to trade at or close to negative yields, especially in real terms. In addition, also weighing on yields and rates volumes are global central bank quantitative easing programs. The programs depress rates volumes because they entail central banks buying government securities or other securities in the open market - particularly longer-dated instruments - in an effort to promote increased lending and liquidity and bring down long-term interest rates. When central banks hold these instruments, they tend not to trade or hedge, thus lowering rates volumes across cash and derivatives markets industry-wide. Major central banks such as theU.S. Federal Reserve ,ECB , Bank of Japan,Bank of England , andSwiss National Bank continue to maintain historically low interest rates through quantitative easing programs, keeping key short-term interest rates low, or a combination of both. Even with theFederal Reserve unwind, the overall dollar value of balance sheets of the G-4 (theU.S. ,Eurozone ,Japan , andU.K. ) is expected to remain high as a percentage of G-4 GDP over the near term. Largely as a result of quantitative easing and expectations of continued low inflation, the yield onGermany's 10-year bond was (0.19)% and the yield onJapan's 10-year bond was (0.02)% as of the end of the fourth quarter of 2019. Additional factors have weighed down market volumes in the products we broker. For example, the Basel III accord, implemented in late 2010 by the G-20 central banks, is a global regulatory framework on bank capital adequacy, stress testing and market liquidity risk that was developed with the intention of making banks more stable in the wake of the financial crisis by increasing bank liquidity and reducing bank leverage. The accord, which is expected to be fully phased in as ofJanuary 1, 2022 , has already required most large banks in G-20 nations to hold approximately three times as much Tier 1 capital as was required under the previous set of rules. These capital rules have made it more expensive for banks to hold non-sovereign debt assets on their balance sheets, and as a result, analysts say that banks have reduced their proprietary trading activity in corporate and asset-backed fixed income securities as well as in various other OTC cash and derivative instruments. We believe that this has further reduced overall market exposure and industry volumes in many of the products we broker, particularly in credit. For the year endedDecember 31, 2019 , industry volumes were generally mixed year-over-year across fixed income, and higher for commodities, while FX and equities industry volumes were generally lower. Below is an expanded discussion of the volume and growth drivers of our various brokerage product categories.
Rates Volumes and Volatility
Our rates business is influenced by a number of factors, including global sovereign issuances, secondary trading and the hedging of these sovereign debt instruments. The amount of global sovereign debt outstanding remains high by historical standards, and the level of secondary trading and related hedging activity was mixed during 2019. In addition, according to Bloomberg and theFederal Reserve Bank of New York , the average daily volume of variousU.S. Treasuries, excludingTreasury bills, among primary dealers was 7% higher in 2019 as compared to a year earlier. Additionally, interest rate derivative volumes were down 13% and up 4% at ICE and the CME, respectively, all according to company press releases. In comparison, our revenue from Fenics Fully Electronic rates increased 13.7%, while our overall rates revenues were up 8.2% as compared to a year earlier to$594.9 million . Our rates revenues, like the revenues for most of our products, are not fully dependent on market volumes and, therefore, do not always fluctuate consistently with industry metrics. This is largely because our Voice, Hybrid, and Fully Electronic desks in rates often have volume discounts built into their price structure, which results in our rates revenues being less volatile than the overall industry volumes. Overall, analysts and economists expect the absolute level of sovereign debt outstanding to remain at elevated levels for the foreseeable future as governments finance their future deficits and roll over their sizable existing debt. Meanwhile, economists expect that the effects of various forms of quantitative easing undertaken by the various major central banks over the past several years will continue to negatively impact financial market volumes, as economic growth remains weak in mostOECD countries. As a result, we expect long-term tailwinds in our rates business from continuing high levels of government debt, but continued near-term headwinds due to the current low interest rate environment and continued accommodative monetary policies globally.
FX Volumes and Volatility
Global FX volumes were generally lower during 2019. Spot FX volumes at CME,
Refinitiv (formerly the Financial & Risk business of Thomson Reuters), and EBS
(CME formerly NEX) were down 14%, flat, and down 17%, respectively. In
comparison, our overall FX revenues decreased by 6.5% to
81 --------------------------------------------------------------------------------
Credit Volumes
The cash portion of our credit business is impacted by the level of global corporate bond issuance, while both the cash and credit derivatives sides of this business are impacted by sovereign and corporate issuance. The global credit derivative market turnover has declined over the last few years due to the introduction of rules and regulations around the clearing of credit derivatives in theU.S. and elsewhere, along with non-uniform regulation across different geographies. In addition, many of our large bank customers continue to reduce their inventory of bonds and other credit products in order to comply with Basel III and other international financial regulations. During 2019, primary dealer average daily volume for corporate bonds (excluding commercial paper) was up by 11% according to Bloomberg and theFederal Reserve Bank of New York . Total notional traded credit derivatives as reported by theInternational Swaps and Derivatives Association - a reflection of the OTC derivatives market - were down by 12%, from a year earlier. In comparison, our overall credit revenues were up by 5.0% to$306.7 million .
Energy and Commodities
Energy and commodities volumes were generally higher during 2019 compared with the year earlier. According to theFutures Industry Association , the total contracts traded in energy and commodities futures were up 14% in 2019 compared to the previous year. Similarly, total contracts traded in energy and commodities options were up 16% over the same period. In comparison, BGC's energy and commodities revenues increased by 25.6% to$286.6 million , which was driven by the acquisitions ofPoten & Partners and Ginga Petroleum, as well as organic growth, and partially offset by the sale of CSC.
Equities, Insurance, and Other Asset Classes
Global equity volumes were generally down during 2019. Research fromRaymond James indicates that the average daily volumes ofU.S. cash equities andU.S. options were down 4% and 5%, respectively, from a year ago. Over the same timeframe, average daily volumes of European cash equities were down 18% (in notional value), while Eurex average daily volumes of equity derivatives were up 4%. Our overall revenues from equities, insurance, and other asset classes increased by 14.3% to$409.2 million , which was driven by the acquisition ofEd Broking . For the three and twelve months endedDecember 31, 2019 , insurance brokerage revenues increased by 185.6% and 126.0% to$43.3 million and$155.8 million , respectively. Including interest income, total revenues associated with insurance brokerage increased by 186.5% and 127.7% to$44.0 million and$158.0 million , respectively, for the three and twelve months endedDecember 31, 2019 . Our overall insurance brokerage business now includesEd Broking , as well as our newly acquired aviation and space insurance brokerage business, whose producers are not yet generating meaningful revenue. Therefore, these newer insurance businesses are not yet up to scale. The pre-tax loss relating to our insurance brokerage business was$9.7 million and$18.0 million for the three and twelve months endedDecember 31, 2019 , respectively. The corresponding prior year periods had a pre-tax loss of$2.8 million and pre-tax income of$5.3 million for the three and twelve months endedDecember 31, 2018 , respectively. We currently expect our overall insurance brokerage business to operate around breakeven for the next two years as we seek to double this division's current revenues. We also expect our overall investment to turn profitable and deliver margins in excess of 15% by 2022. This is similar to the trend in revenues and profitability of our former real estate services business, Newmark, over its first three years as part of BGC. We believe our insurance brokerage business is worth materially more than our investment and are actively considering ways to better express its value for the benefit of our investors.
Summary of Results from Continuing Operations
Our results from continuing operations exclude the results of Newmark for all periods due to the Spin-Off. During the year endedDecember 31, 2019 , BGC's revenues increased 8.6%, to$2,104.2 million . This growth was largely due to an increase in brokerage revenues, which were up by 7.8% to$1,967.7 million . In addition, our data, software, and post-trade revenues increased by 12.2% from a year ago to$73.2 million . Income from operations before income taxes decreased by$41.7 million to$138.1 million for the year endedDecember 31, 2019 . FINANCIAL OVERVIEW Revenues Our revenues are derived primarily from brokerage commissions charged for either agency or matched principal transactions, fees from related parties, fees charged for market data, analytics and post-trade products, fees from software solutions, and interest income. 82 --------------------------------------------------------------------------------
Brokerage
We earn revenues from our brokerage services on both an agency and matched principal basis. In agency transactions, we charge a commission for connecting buyers and sellers and assisting in the negotiation of the price and other material terms of the transaction. After all material terms of a transaction are agreed upon, we identify the buyer and seller to each other and leave them to settle the trade directly. Principal transaction revenues are primarily derived from matched principal transactions, whereby revenues are earned on the spread between the buy and the sell price of the brokered security, commodity or derivative. Customers either see the buy or sell price on a screen or are given this information over the phone. The brokerage fee is then added to the buy or sell price, which represents the spread we earn as principal transactions revenues. On a limited basis, we enter into unmatched principal transactions to facilitate a customer's execution needs for transactions initiated by such customers. We also provide market data products for selected financial institutions.
We offer our brokerage services in seven broad product categories: rates, credit, FX, energy & commodities, equities, insurance, and other asset classes. The chart below details brokerage revenues by product category and by Voice/Hybrid versus Fully Electronic (in thousands):
For the Year Ended December 31, 2019 2018 2017 Brokerage revenue by product: Rates$ 594,884 $ 549,825 $ 510,880 FX 370,318 396,256 324,386 Credit 306,713 292,171 284,551 Energy and commodities 286,584 228,199 204,016
Equities, insurance, and other asset classes 409,242 358,124
328,406
Total brokerage revenues$ 1,967,741 $ 1,824,575 $ 1,652,239 Brokerage revenue by product (percentage): Rates 30.2 % 30.1 % 30.9 % FX 18.8 21.7 19.6 Credit 15.6 16.0 17.2 Energy and commodities 14.6 12.6 12.4 Equities, insurance, and other asset classes 20.8 19.6 19.9 Total brokerage revenues 100.0 % 100.0 % 100.0 % Brokerage revenue by type: Voice/Hybrid$ 1,763,114 $ 1,628,653 $ 1,483,945 Fully Electronic 204,627 195,922 168,294 Total brokerage revenues$ 1,967,741 $ 1,824,575 $ 1,652,239 Brokerage revenue by type (percentage): Voice/Hybrid 89.6 % 89.3 % 89.8 % Fully Electronic 10.4 10.7 10.2 Total brokerage revenues 100.0 % 100.0 % 100.0 % As the above table indicates, our brokerage operations in the rates product category produce a significant percentage of our total brokerage revenues. We expect that revenues from our rates product brokerage operations will increase in absolute terms, but decline as a percentage of our overall revenues as we continue to invest in expanding in other asset classes. Our position as a leading wholesale financial broker is enhanced by our Hybrid brokerage platform. We believe that the more complex, less liquid markets on which we focus often require significant amounts of personal and attentive service from our brokers. In more mature markets, we offer Fully Electronic execution capabilities to our customers through our platforms, includingFenics and BGC Trader. Our Hybrid platform allows our customers to trade on a Voice, Hybrid or, where available, Fully Electronic basis, regardless of whether the trade is OTC or exchange-based, and to benefit from the experience and market intelligence of our worldwide brokerage network. Our electronic capabilities include clearing, settlement, post-trade, and other back-office services as well as straight-through processing for our customers across several products. Furthermore, we benefit from the operational leverage in our Fully Electronic platform. We believe our Hybrid brokerage approach provides a competitive advantage over competitors who do not offer this full range of technology.
Rates
Our rates business is focused on government debt, futures and currency, and both listed and OTC interest rate derivatives, which are among the largest, most global and most actively traded markets. The main drivers of these markets are global macroeconomic forces such as growth, inflation, government budget policies and new issuances. 83
--------------------------------------------------------------------------------
Credit
We provide our brokerage services in a wide range of credit instruments, including asset-backed securities, convertible bonds, corporate bonds, credit derivatives and high yield bonds.
FX
The FX market is one of the largest financial markets in the world. FX transactions can either be undertaken in the spot market, in which one currency is sold and another is bought, or in the derivative market in which future settlement of the identical underlying currencies are traded. We provide full execution OTC brokerage services in most major currencies, including all G8 currencies, emerging market, cross and exotic options currencies.
Energy and Commodities
We provide brokerage services for most widely traded energy and commodities products, including futures and OTC products covering, refined and crude oil, liquid natural gas, coal, electricity, gold and other precious metals, base metals, emissions, and soft commodities. We also provide brokerage services associated with the shipping of certain energy and commodities products.
Equities, Insurance, and Other Asset Classes
We provide brokerage services in a range of markets for equity products, including cash equities, equity derivatives (both listed and OTC), equity index futures and options on equity products as well as insurance products.
Fees from Related Parties
We earn fees from related parties for technology services and software licenses and for certain administrative and back-office services we provide to affiliates, particularly from Cantor. These administrative and back-office services include office space, utilization of fixed assets, accounting services, operational support, human resources, legal services and information technology.
Data, software and post-trade
Fenics Market Data is a supplier of real-time, tradable, indicative, end-of-day and historical market data. Our market data product suite includes fixed income, interest rate derivatives, credit derivatives, FX, FX options, money markets, energy and equity derivatives and structured market data products and services. The data are sourced from the Voice, Hybrid and Fully Electronic broking operations, as well as the market data operations, including BGC, GFI and RP Martin, among others. It is made available to financial professionals, research analysts and other market participants via direct data feeds and BGC-hosted FTP environments, as well as via information vendors such as Bloomberg,Thomson Reuters,ICE Data Services ,QUICK Corp. , and other select specialist vendors. Through our software solutions business, we provide customized software to broaden distribution capabilities and provide electronic solutions to financial market participants. The software solutions business leverages our global infrastructure, software, systems, portfolio of intellectual property, and electronic trading expertise to provide customers with electronic marketplaces and exchanges and real-time auctions to enhance debt issuance and to customize trading interfaces. We take advantage of the scalability, flexibility and functionality of our electronic trading system to enable our customers to distribute products to their customers through online offerings and auctions, including private and reverse auctions, via our trading platform and global network. Using screen-based market solutions, customers are able to develop a marketplace, trade with their customers, issue debt, trade odd lots, access program trading interfaces and access our network and intellectual property. We provide option pricing and analysis tools that deliver price discovery that is supported with market data sourced from both our BGC and GFI trading systems. In the fourth quarter of 2017, Capitalab completed its largest G-4 Interest Rates IMO to date with more than 15 participating counterparties. The service enabled these counterparties to multilaterally shrink delta, vega and curvature bilateral counterparty risks and significantly reduce both non-cleared and cleared initial margin at the Central Clearing Counterparty. In January of 2018, Capitalab executed the first combined compression cycle in Swaptions, Caps, Floors and cleared interest rate swaps due to its appointment as an Approved Compression Service Provider at LCH's SwapClear. In the second quarter of 2019, Capitalab launched itsNikkei 225 options compression service in partnership with the Singapore Exchange.
Interest Income
We generate interest income primarily from the investment of our daily cash balances, interest earned on securities owned and reverse repurchase agreements. These investments and transactions are generally short-term in nature. We also earn interest income from employee loans, and we earn dividend income on certain marketable securities. Other Revenues
We earn other revenues from various sources, including underwriting and advisory fees.
84 --------------------------------------------------------------------------------
Expenses
Compensation and Employee Benefits
The majority of our operating costs consist of cash and non-cash compensation expenses, which include base salaries, broker bonuses based on broker production, guaranteed bonuses, other discretionary bonuses, and all related employee benefits and taxes. Our employees consist of brokers, salespeople, executives and other administrative support. The majority of our brokers receive a base salary and a formula bonus based primarily on a pool of brokers' production for a particular product or sales desk, as well as on the individual broker's performance. Members of our sales force receive either a base salary or a draw on commissions. Less experienced salespeople typically receive base salaries and bonuses. As part of our compensation plans, certain employees are granted LPUs inBGC Holdings which generally receive quarterly allocations of net income, that are cash distributed on a quarterly basis and generally contingent upon services being provided by the unit holders. As prescribed inU.S. GAAP guidance, the quarterly allocations of net income on such LPUs are reflected as a component of compensation expense under "Equity-based compensation and allocations of net income to limited partnership units and FPUs" in our consolidated statements of operations. Certain of these LPUs entitle the holders to receive post-termination payments equal to the notional amount in four equal yearly installments after the holder's termination. These limited partnership units are accounted for as post-termination liability awards underU.S. GAAP guidance, which requires that we record an expense for such awards based on the change in value at each reporting period and include the expense in our consolidated statements of operations as part of "Equity-based compensation and allocations of net income to limited partnership units and FPUs." The liability for LPUs with a post-termination payout amount is included in "Accrued compensation" on our consolidated statements of financial condition. Certain LPUs are granted exchangeability into our Class A common stock on a one-for-one basis (subject to adjustment). At the time exchangeability is granted, the Company recognizes an expense based on the fair value of the award on that date, which is included in "Equity-based compensation and allocations of net income to limited partnership units and FPUs" in our consolidated statements of operations. In addition, Preferred Units are granted in connection with the grant of certain LPUs, such as PSUs, that may be granted exchangeability or redemption in connection with the grant of shares of common stock to cover the withholding taxes owed by the unit holder upon such exchange or redemption. This is an acceptable alternative to the common practice among public companies of issuing the gross amount of shares to employees, subject to cashless withholding of shares to pay applicable withholding taxes. Each quarter, the net profits ofBGC Holdings andNewmark Holdings are allocated to Preferred Units at a rate of either 0.6875% (which is 2.75% per calendar year) or such other amount as set forth in the award documentation. The Preferred Distribution is deducted before the calculation and distribution of the quarterly partnership distribution for the remaining partnership interests. The Preferred Units are not entitled to participate in partnership distributions other than with respect to the Preferred Distribution. Preferred Units may not be made exchangeable into our Class A common stock and are only entitled to the Preferred Distribution, and accordingly they are not included in our fully diluted share count. The quarterly allocations of net income on Preferred Units are reflected in compensation expense under "Equity-based compensation and allocations of net income to limited partnership units and FPUs" in our consolidated statements of operations. We have entered into various agreements with certain of our employees and partners, whereby these individuals receive loans which may be either wholly or in part repaid from the distribution earnings that the individual receives on their LPUs or may be forgiven over a period of time. The forgivable portion of these loans is recognized as compensation expense over the life of the loan. From time to time, we may also enter into agreements with employees and partners to grant bonus and salary advances or other types of loans. These advances and loans are repayable in the timeframes outlined in the underlying agreements. In addition, we also enter into deferred compensation agreements with employees providing services to us. The costs associated with such plans are generally amortized over the period in which they vest. See Note 19-"Compensation" to our consolidated financial statements.
Other Operating Expenses
We have various other operating expenses. We incur leasing, equipment and maintenance expenses for our businesses worldwide. We also incur selling and promotion expenses, which include entertainment, marketing and travel-related expenses. We incur communication expenses for voice and data connections with our clients, clearing agents and general usage; professional and consulting fees for legal, audit and other special projects; and interest expense related to short-term operational funding needs, and notes payable and collateralized borrowings. Primarily in theU.S. , we pay fees to Cantor for performing certain administrative and other support services, including charges for occupancy of office space, utilization of fixed assets and accounting, operations, human resources, legal services and technology infrastructure support. Management believes that these charges are a reasonable reflection of the utilization of services rendered. However, the expenses for these services are not necessarily indicative of the expenses that would have been incurred if we had not obtained these services from Cantor. In addition, these charges may not reflect the costs of services we may receive from Cantor in the future. We incur commissions and floor brokerage fees for clearing, brokerage and other transactional expenses for clearing and settlement services. We also incur various other normal operating expenses. 85
--------------------------------------------------------------------------------
Other Income (Losses), Net
Gain (Loss) on Divestiture and Sale of Investments
Gain (Loss) on divestiture and sale of investments represent the gain or loss we recognize for the divestiture or sale of our investments.
Gains (Losses) on Equity Method Investments
Gains (losses) on equity method investments represent our pro-rata share of the net gains (losses) on investments over which we have significant influence but which we do not control. Other Income (Loss) Other Income (loss) is primarily comprised of gains or losses related to fair value adjustments on investments carried under the alternative method. Other Income (loss) also includes realized and unrealized gains or losses related to sales and mark-to-market adjustments on Marketable securities and any related hedging transactions when applicable. Acquisition-related fair value adjustments of contingent consideration and miscellaneous recoveries are also included in Other Income (loss).
Provision (Benefit) for Income Taxes
We incur income tax expenses or benefit based on the location, legal structure and jurisdictional taxing authorities of each of our subsidiaries. Certain of the Company's entities are taxed asU.S. partnerships and are subject to the UBT inNew York City .U.S. federal and state income tax liability or benefit related to the partnership income or loss, with the exception of UBT, rests with the partners (see Note 2-"Limited Partnership Interests inBGC Holdings andNewmark Holdings " for discussion of partnership interests), rather than the partnership entity. The Company's consolidated financial statements includeU.S. federal, state and local income taxes on the Company's allocable share of theU.S. results of operations. Outside of theU.S. , we operate principally through subsidiary corporations subject to local income taxes.
REGULATORY ENVIRONMENT
See "Regulation" in Part I, Item 1 of this Annual Report on Form 10-K for additional information related to our regulatory environment.
LIQUIDITY
See "Liquidity and Capital Resources" herein for information related to our liquidity and capital resources.
HIRING AND ACQUISITIONS
Key drivers of our revenue are front-office producer headcount and average revenue per producer. We believe that our strong technology platform and unique partnership structure have enabled us to use both acquisitions and recruiting to profitably increase our front-office staff at a faster rate than our largest competitors since our formation in 2004. We have invested significantly to capitalize on the current business environment through acquisitions, technology spending and the hiring of new brokers, salespeople, managers and other front-office personnel. The business climate for these acquisitions has been competitive, and it is expected that these conditions will persist for the foreseeable future. We have been able to attract businesses and brokers, salespeople, managers and other front-office personnel to our platform as we believe they recognize that we have the scale, technology, experience and expertise to succeed in the current business environment. Our average revenue per front-office employee has historically declined year-over-year for the period immediately following significant headcount increases, and the additional brokers and salespeople generally achieve significantly higher productivity levels in their second or third year with the Company. Excluding our insurance brokerage business, as ofDecember 31, 2019 , our front-office headcount was 2,570 brokers, salespeople, managers and other front-office personnel, up 1% from 2,553 a year ago. Compared to the prior year, average revenue per front-office employee for the year endedDecember 31, 2019 decreased by 1% to$750 thousand from$760 thousand . On a stand-alone basis, our total insurance brokerage headcount increased by 122% to 591 from 266 a year ago. As ofDecember 31, 2019 , our front-office headcount, including our insurance brokerage business, was 2,990 brokers, salespeople, managers and other front-office personnel, up 13% from 2,654 a year ago. Our total technology headcount increased by 8% year-on-year to 691, related primarily to our newerFenics stand-alone Fully Electronic offerings. Compared to the prior year, average revenue per front-office employee, including our insurance brokerage business, for the year endedDecember 31, 2019 decreased by 7% to$703 thousand from$756 thousand . All figures mentioned in the previous two paragraphs exclude Newmark. Because revenue per broker is not a widely used or relevant statistic for the insurance brokerage industry, BGC will provide statistics with respect to front-office staff excluding this business beginning in the first quarter of 2020. 86
-------------------------------------------------------------------------------- The laws and regulations passed or proposed on both sides of theAtlantic concerning OTC trading seem likely to favor increased use of technology by all market participants, and are likely to accelerate the adoption of both Hybrid and Fully Electronic execution. We believe these developments will favor the larger inter-dealer brokers over smaller, non-public local competitors, as the smaller players generally do not have the financial resources to invest the necessary amounts in technology. We believe this will lead to further consolidation across the wholesale financial brokerage industry, and thus allow us to profitably grow our front-office headcount.
Since 2017, our acquisitions have included
On
On
OnNovember 15, 2018 , we acquiredPoten & Partners , a leading ship brokerage, consulting and business intelligence firm specializing in LNG, tanker and LPG markets. Founded over 80 years ago and with 170 employees worldwide,Poten & Partners provides its clients with valuable insight into the international oil, gas and shipping markets. OnJanuary 31, 2019 , we completed the acquisition ofEd Broking , an independentLloyd's of London insurance broker with a strong reputation across accident and health, aerospace, cargo, energy, financial and political risks, marine, professional and executive risks, property and casualty, specialty and reinsurance.Ed Broking has become part of the Company's overall insurance brokerage business. OnMarch 12, 2019 , we completed the acquisition of Ginga Petroleum. Ginga Petroleum provides a comprehensive range of broking services for physical and derivative energy products, including naphtha, liquefied petroleum gas, fuel oil, biofuels, middle distillates, petrochemicals and gasoline.
FINANCIAL HIGHLIGHTS
For the year endedDecember 31, 2019 , we had income (loss) from operations before income taxes of$138.1 million compared to income (loss) from operations before income taxes of$179.8 million in the year earlier period. Total revenues for the year endedDecember 31, 2019 increased$166.4 million to$2,104.2 million primarily led by our energy and commodities, equities, insurance, and other asset classes, rates, and credit businesses. Brokerage revenues for the year endedDecember 31, 2019 increased by$143.2 million . Our brokerage revenue growth was led by a 25.6% improvement in our energy and commodities business, which was driven by the acquisitions ofPoten & Partners and Ginga Petroleum, partially offset by the sale ofCSC Commodities . Revenues from equities, insurance, and other asset classes increased 14.3% primarily due to the acquisition ofEd Broking . Our insurance brokerage revenues increased 126% for the full year 2019, largely due to the acquisition ofEd Broking . Because of the significant growth of this business, we expect to break out insurance brokerage revenues separately from equities and other asset classes in the next quarter. We believe our insurance brokerage business is worth materially more than our investment and are actively considering ways to better express its value for the benefit of our investors. Within ourFenics business, net revenues were up 6.4%. Our Fully Electronic brokerage revenues increased 4.4%, which was primarily led by a 13.7% increase in ourFenics rates business, while our revenues from our high margin data, software, and post-trade business increased 12.2%. As our stand-aloneFenics offerings continue to gain traction, we convert Voice and Hybrid revenue to higher margin Fully Electronic execution, and as our recently added brokers and salespeople ramp up production, we expect the Company's revenues and profits to grow. Total expenses increased$205.8 million to$2,021.6 million , primarily due to a$118.9 million increase in non-compensation expenses driven by the impact of acquisitions; expenses related to the Company's previously disclosed settlements with the CFTC and the NYAG; interest expense associated with increased borrowing; and the Company's increased investment in technology. The increase in non-compensation expenses was also impacted by rent during the build-out of BGC's newU.K. -based headquarters, which was recently completed. Compensation expenses increased by$86.8 million , which was primarily driven by the impact of recent acquisitions.
On
87 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table sets forth our consolidated statements of operations data expressed as a percentage of total revenues for the periods indicated (in thousands): Year Ended December 31, 2019 2018 2017 Percentage Percentage Percentage Actual of Total Actual of Total Actual of Total Results Revenues Results Revenues Results Revenues Revenues: Commissions$ 1,645,818 78.2 %$ 1,511,522 78.0 %$ 1,334,383 76.2 % Principal transactions 321,923 15.3 313,053 16.2 317,856 18.2 Total brokerage revenues 1,967,741 93.5 1,824,575 94.2 1,652,239 94.4 Fees from related parties 29,442 1.4 24,076 1.2 27,094 1.5 Data, software and post-trade 73,166 3.5 65,185 3.4 54,557 3.1 Interest income 18,319 0.9 14,404 0.7 14,557 0.8 Other revenues 15,563 0.7 9,570 0.5 2,504 0.2 Total revenues 2,104,231 100.0 1,937,810 100.0 1,750,951 100.0 Expenses: Compensation and employee benefits 1,127,911 53.6 1,001,623 51.7 950,477 54.3 Equity-based compensation and allocations of net income to limited partnership units and FPUs 1 165,612 7.9 205,070 10.6 233,241 13.3 Total compensation and employee benefits 1,293,523 61.5 1,206,693 62.3 1,183,718 67.6 Occupancy and equipment 184,807 8.8 149,594 7.7 142,884 8.2 Fees to related parties 19,365 0.9 20,163 1.0 15,820 0.9 Professional and consulting fees 92,167 4.4 84,103 4.3 63,369 3.6 Communications 119,982 5.7 118,014 6.1 119,379 6.8 Selling and promotion 81,645 3.9 69,338 3.6 62,463 3.6 Commissions and floor brokerage 63,617 3.0 61,891 3.2 43,130 2.5 Interest expense 59,077 2.8 41,733 2.2 76,958 4.4 Other expenses 107,423 5.1 64,309 3.3 70,145 4.0 Total expenses 2,021,606 96.1 1,815,838 93.7 1,777,866 101.6 Other income (losses), net: Gains (losses) on divestitures and sale of investments 18,421 0.9 - - 561 0.0 Gains (losses) on equity method investments 4,115 0.2 7,377 0.4 4,627 0.3 Other income (loss) 32,953 1.5 50,468 2.6 25,863 1.5 Total other income (losses), net 55,489 2.6 57,845 3.0 31,051 1.8 Income (loss) from continuing operations before income taxes 138,114 6.5 179,817 9.3 4,136 0.2 Provision (benefit) for income taxes 53,171 2.5 76,120 3.9 92,772 5.3 Consolidated net income (loss) from continuing operations 84,943 4.0 103,697 5.4 (88,636 ) (5.1 )
Consolidated net income (loss) from
discontinued operations, net of tax - - 176,169 9.0 170,365 9.8 Consolidated net income (loss) 84,943 4.0 279,866 14.4 81,729 4.7 Less: Net income (loss) from continuing operations attributable to noncontrolling interest in subsidiaries 29,236 1.4 29,993 1.5 36,167 2.1 Less: Net income (loss) from discontinued operations attributable to noncontrolling interest in subsidiaries - - 52,353 2.7 (5,913 ) (0.3 )
Net income (loss) available to
common stockholders$ 55,707 2.6 %$ 197,520 10.2 %$ 51,475 2.9 %
1 The components of Equity-based compensation and allocations of net income to
limited partnership units and FPUs are as follows (in thousands): 88
--------------------------------------------------------------------------------
Year Ended December 31, 2019 2018 2017 Percentage Percentage Percentage Actual of Total Actual of Total Actual of Total Results Revenues Results Revenues Results Revenues Issuance of common stock and exchangeability expenses$ 100,948 4.8 %$ 150,147 7.7 %$ 176,463 10.1 % Allocations of net income 20,491 1.0 38,352 2.0 51,008 2.9 LPU amortization 36,708 1.7 11,359 0.6 1,194 0.1 RSU amortization 7,465 0.4 5,212 0.3 4,576 0.2 Equity-based compensation and allocations of net income to limited partnership units and FPUs$ 165,612 7.9 %$ 205,070 10.6 %$ 233,241 13.3 %
Year Ended
Revenues
Brokerage Revenues
Total brokerage revenues increased by$143.2 million , or 7.8%, to$1,967.7 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . Commission revenues increased by$134.3 million , or 8.9%, to$1,645.8 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . Principal transactions revenues increased by$8.9 million , or 2.8%, to$321.9 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 .
The increase in total brokerage revenues was primarily driven by increases in revenues from energy and commodities, equities, insurance, and other asset classes, rates, and credit, partially offset by a decrease in revenues from FX.
Our brokerage revenues from energy and commodities increased by$58.4 million , or 25.6%, to$286.6 million for the year endedDecember 31, 2019 . This increase was primarily driven by the acquisitions ofPoten & Partners and Ginga Petroleum, as well as organic growth, partially offset by the sale ofCSC Commodities .
Our brokerage revenues from equities, insurance, and other asset classes
increased by
Our brokerage revenues from rates increased by$45.1 million , or 8.2%, to$594.9 million for the year endedDecember 31, 2019 . The increase in rates revenues was primarily driven by higher global volumes and improvement in our Fully Electronic rates business, which was a result of our continued investment in technology and the ongoing conversion of our businesses to more profitable Fully Electronic execution. Our credit revenues increased by$14.5 million , or 5.0%, to$306.7 million for the year endedDecember 31, 2019 . This increase was mainly due to higher global volumes. Our FX revenues decreased by$25.9 million , or 6.5%, to$370.3 million for the year endedDecember 31, 2019 . This decrease was primarily driven by lower global volumes and a decrease in market volatility.
Fees from Related Parties
Fees from related parties increased by$5.4 million , or 22.3% to$29.4 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 .
Data, Software and Post-Trade
Data, software and post-trade revenues increased by$8.0 million , or 12.2%, to$73.2 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . This increase was primarily driven by the acquisition ofPoten & Partners , an increase in revenues from post-trade services and new business contracts.
Interest Income
Interest income increased by$3.9 million , or 27.2%, to$18.3 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . This increase was primarily due to higher interest earned on deposits and an increase in dividend income. 89
--------------------------------------------------------------------------------
Other Revenues
Other revenues increased by$6.0 million , or 62.6% to$15.6 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . This increase was primarily driven by revenues generated from the acquisitions ofPoten & Partners andEd Broking .
Expenses
Compensation and Employee Benefits
Compensation and employee benefits expense increased by$126.3 million , or 12.6%, to$1,127.9 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . The main drivers of this increase were the acquisitions ofPoten & Partners ,Ed Broking , and Ginga Petroleum, as well as the impact of higher brokerage revenues on variable compensation.
Equity-Based Compensation and Allocations of Net Income to Limited Partnership Units and FPUs
Equity-based compensation and allocations of net income to limited partnership units and FPUs decreased by$39.5 million , or 19.2%, to$165.6 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . This decrease was primarily driven by a decrease in charges related to equity-based compensation, as well as a decrease in allocations of net income to limited partnership units and FPUs.
Occupancy and Equipment
Occupancy and equipment expense increased by$35.2 million , or 23.5%, to$184.8 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . This increase was primarily driven by increases related to the acquisitions ofPoten & Partners ,Ed Broking , and Ginga Petroleum, as well as rent expense related to the build-out phase of BGC's newU.K. -based headquarters. Fees to Related Parties Fees to related parties decreased by$0.8 million , or 4.0%, to$19.4 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . Fees to related parties are allocations paid to Cantor for administrative and support services (such as accounting, occupancy, and legal).
Professional and Consulting Fees
Professional and consulting fees increased by$8.1 million , or 9.6%, to$92.2 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . This increase was primarily driven by fees attributed to the acquisitions ofEd Broking andPoten & Partners , and an increase in legal fees, which was partially offset by a decrease in consulting fees, notably with regards to the implementation of MiFID II during the year endedDecember 31, 2018 . Communications
Communications expense increased by
Selling and Promotion
Selling and promotion expense increased by$12.3 million , or 17.7%, to$81.6 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . This increase was primarily driven by the acquisitions ofPoten & Partners ,Ed Broking , and Ginga Petroleum.
Commissions and Floor Brokerage
Commissions and floor brokerage expense increased by$1.7 million , or 2.8%, to$63.6 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . This line item tends to move in line with brokerage revenues. 90
--------------------------------------------------------------------------------
Interest Expense
Interest expense increased by$17.3 million , or 41.6%, to$59.1 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . This increase was primarily driven by interest expense on the$450.0 million 5.375% Senior Notes due 2023 issued inJuly 2018 , interest expense related to the borrowings on the Revolving Credit Agreement, and interest expense on the$300 million 3.750% Senior Notes issued inSeptember 2019 , partially offset by lower interest expense on the$240.0 million 8.375% Senior Notes which were repaid inJuly 2018 .
Other Expenses
Other expenses increased by$43.1 million , or 67.0%, to$107.4 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 , which was primarily related to our previously disclosed settlements with the CFTC and the NYAG, as well as higher costs associated with the acquisitions ofPoten & Partners andEd Broking .
Other Income (Losses), Net
Gains (Losses) on Divestitures and Sale of Investments
For the year ended
Gains (Losses) on Equity Method Investments
Gains (losses) on equity method investments decreased by$3.3 million , to a gain of$4.1 million , for the year endedDecember 31, 2019 as compared to a gain of$7.4 million for the year endedDecember 31, 2018 . Gains (losses) on equity method investments represent our pro-rata share of the net gains or losses on investments over which we have significant influence, but which we do not control.
Other Income (Loss)
Other income (loss) decreased by$17.5 million , or 34.7% to$33.0 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . This was primarily driven by a decrease related to fair value adjustments on investments carried under the measurement alternative. There was also a decrease related the mark-to-market and/or hedging on the Nasdaq earn out shares. This was partially offset by an increase in other recoveries related to our insurance business.
Provision (Benefit) for Income Taxes
Provision (benefit) for income taxes decreased by$22.9 million , or 30.1%, to$53.2 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . This decrease was primarily driven by lower pre-tax earnings, as well as a change in the geographical and business mix of earnings, which can have an impact on our consolidated effective tax rate from period-to-period.
Net Income (Loss) From Continuing Operations Attributable to Noncontrolling Interest in Subsidiaries
Net income (loss) from continuing operations attributable to noncontrolling interest in subsidiaries decreased by$0.8 million , or 2.5%, to$29.2 million for the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 .
Net Income (Loss) From Discontinued Operations Attributable to Noncontrolling Interest in Subsidiaries
For the year endedDecember 31, 2019 there was no net income (loss) from discontinued operations attributable to noncontrolling interest in subsidiaries. For the year endedDecember 31, 2018 , we had net income (loss) from discontinued operations attributable to noncontrolling interest in subsidiaries of$52.4 million .
Year Ended
Revenues
Brokerage Revenues
Total brokerage revenues increased by$172.3 million , or 10.4%, to$1,824.6 million for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . Commission revenues increased by$177.1 million , or 13.3%, to$1,511.5 million for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . Principal transactions revenues decreased by$4.8 million , or 1.5%, to$313.1 million for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . The increase in brokerage revenues was primarily driven by increases in revenues from rates, FX, equities, insurance, and other asset classes, and energy and commodities. 91
-------------------------------------------------------------------------------- Our rates revenues increased by$38.9 million , or 7.6%, to$549.8 million in the year endedDecember 31, 2018 . The increase in rates revenues reflected strong improvement in our Fully Electronic rates business, which was a result of our continued investment in technology and the ongoing conversion of our businesses to more profitable Fully Electronic execution. Our FX revenues increased by$71.9 million , or 22.2%, to$396.3 million for the year endedDecember 31, 2018 . This increase was primarily driven by improved global volumes and increased market volatility.
Our brokerage revenues from equities, insurance, and other asset classes
increased by
Our brokerage revenues from energy and commodities increased by$24.2 million , or 11.9%, to$228.2 million for the year endedDecember 31, 2018 . This increase was primarily driven by improved global volumes.
Our credit revenues increased by
Fees from Related Parties
Fees from related parties decreased by$3.0 million , or 11.1%, to$24.1 million for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 .
Data, Software and Post-Trade
Data, software and post-trade revenues increased by$10.6 million , or 19.5%, to$65.2 million for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . This increase was primarily driven by new business contracts in 2018. Interest Income
Interest income decreased by
Other Revenues
Other revenues increased by$7.1 million , to$9.6 million for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . This increase was primarily driven by the acquisition ofPoten & Partners inNovember 2018 , as well as a settlement of$2.5 million received and recognized during the year endedDecember 31, 2018 . Expenses
Compensation and Employee Benefits
Compensation and employee benefits expense increased by$51.1 million , or 5.4%, to$1,001.6 million for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . The main drivers of this increase were the impact of higher brokerage revenues on variable compensation, and the acquisition ofPoten & Partners inNovember 2018 .
Equity-based compensation and allocations of net income to limited partnership units and FPUs
Equity-based compensation and allocations of net income to limited partnership units and FPUs decreased by$28.2 million , or 12.1%, to$205.1 million for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . This decrease was primarily driven by a decrease in changes related to exchangeability and issuances of common stock.
Occupancy and Equipment
Occupancy and equipment expense increased by
Fees to Related Parties
Fees to related parties increased by$4.3 million , or 27.5%, to$20.2 million for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . Fees to related parties are allocations paid to Cantor for administrative and support services (such as accounting, occupancy, and legal). 92 --------------------------------------------------------------------------------
Professional and Consulting Fees
Professional and consulting fees increased by
Communications
Communications expense decreased by$1.4 million , or 1.1%, to$118.0 million for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . As a percentage of total revenues, communications slightly decreased from the prior year period. Selling and Promotion
Selling and promotion expense increased by
Commissions and Floor Brokerage
Commissions and floor brokerage expense increased by$18.8 million , or 43.5%, to$61.9 million for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . This line item tends to move in line with brokerage revenues.
Interest Expense
Interest expense decreased by$35.2 million , or 45.8%, to$41.7 million for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . The decrease was primarily driven by lower interest expense on the$300.0 million 5.375% Senior Notes, and the$112.5 million 8.125% Senior Notes, both of which were assumed by Newmark as part of theDecember 2017 Separation Agreement, as well as lower interest expense on the$240.0 million 8.375% Senior Notes which were repaid inJuly 2018 . In addition, lower interest expense on the$575.0 million Senior Term Loan, and the$400.0 million credit facility, partially offset by an increase in interest expense on the$450.0 million 5.375% Senior Notes due 2023 issued inJuly 2018 .
Other Expenses
Other expenses decreased by$5.8 million , or 8.3%, to$64.3 million for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 , which was primarily related to lower costs associated with acquisitions in 2018 and a decrease in impairment charges and other provisions.
Other Income (Losses), Net
Gain (Loss) on Divestiture and Sale of Investments
We had no gains or losses from divestitures or sale of investments in the year endedDecember 31, 2018 . For the year endedDecember 31, 2017 , there was a gain of$0.6 million related to the sale of investments.
Gains (Losses) on Equity Method Investments
Gains (losses) on equity method investments increased by$2.8 million , or 59.4%, to a gain of$7.4 million , for the year endedDecember 31, 2018 as compared to a gain of$4.6 million for the year endedDecember 31, 2017 . Gains (losses) on equity method investments represent our pro-rata share of the net gains or losses on investments over which we have significant influence but which we do not control. Other Income (Loss) Other income (loss) increased by$24.6 million , or 95.1%, to$50.5 million for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . The increase was primarily due to a gain of$37.6 million related to a fair value adjustment on an investment held. This was partially offset by a decrease related to the mark-to-market and/or hedging on the Nasdaq shares and a decrease in other recoveries.
Provision (Benefit) for Income Taxes
Provision (benefit) for income taxes decreased by$16.7 million , or 17.9%, to$76.1 million for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . This decrease was primarily driven by the effect of the Tax Act in 2017 related to the remeasurement of deferred tax assets and liabilities and the one-time transition tax on accumulated foreign earnings partially offset by GILTI. In general, our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings. 93
--------------------------------------------------------------------------------
Net Income (Loss) From Continuing Operations Attributable to Noncontrolling Interest in Subsidiaries
Net income (loss) from continuing operations attributable to noncontrolling interest in subsidiaries decreased by$6.2 million , or 17.1%, to$30.0 million , for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 .
Net Income (Loss) From Discontinued Operations Attributable to Noncontrolling Interest in Subsidiaries
Net income (loss) from discontinued operations attributable to noncontrolling interest in subsidiaries increased by$58.3 million to$52.4 million , for the year endedDecember 31, 2018 as compared to the year endedDecember 31, 2017 . This increase was primarily driven by an increase in earnings. 94 --------------------------------------------------------------------------------
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our unaudited quarterly results of operations for the indicated periods (in thousands). Results of any period are not necessarily indicative of results for a full year and may, in certain periods, be affected by seasonal fluctuations in our business. Certain reclassifications have been made to prior period amounts to conform to the current period's presentation. December September June March 31, December September June March 31, 31, 2019 30, 2019 30, 2019 2019 31, 20181 30, 20181 30, 20181 20181 Revenues: Commissions$ 382,897 $ 409,765 $ 422,974 $ 430,182 $ 372,370 $ 352,292 $ 378,709 $ 408,151 Principal transactions 71,725 75,536 90,432 84,230 62,787 73,360 84,988 91,918 Fees from related parties 8,218 8,208 7,221 5,795 5,022 6,821 5,934 6,299 Data, software and post-trade 18,151 18,364 18,741 17,910 18,169 16,547 15,370 15,099 Interest income 2,865 3,976 7,813 3,665 3,919 2,870 4,940 2,675 Other revenues 3,300 5,288 4,006 2,969 4,084 3,752 1,102 632 Total revenues 487,156 521,137 551,187 544,751 466,351 455,642 491,043 524,774 Expenses: Compensation and employee benefits 271,296 278,544 290,071 288,000 249,951 221,575 252,250 277,847 Equity-based compensation and allocations of net income to limited partnership units and FPUs 69,389 40,330 43,752 12,141 85,178 34,901 45,602 39,389 Total compensation and employee benefits 340,685 318,874 333,823 300,141 335,129 256,476 297,852 317,236 Occupancy and equipment 48,987 44,709 45,109 46,002 38,934 39,148 34,365 37,147 Fees to related parties 2,858 7,123 6,457
2,927 4,586 5,644 5,882 4,051 Professional and consulting fees 27,553 21,262 23,347
20,005 23,865 22,329 20,001 17,908 Communications 29,715 29,882 29,974 30,411 26,808 29,078 30,729 31,399 Selling and promotion 21,432 20,320 21,491
18,402 19,112 16,146 17,855 16,225 Commissions and floor brokerage 16,377 15,831 16,791
14,618 17,549 15,082 15,345 13,915 Interest expense 15,636 15,258 14,985 13,198 11,615 10,722 10,028 9,368 Other expenses 18,886 42,757 21,765 24,015 17,541 14,882 14,548 17,338 Total expenses 522,129 516,016 513,742 469,719 495,139 409,507 446,605 464,587 Other income (losses), net: Gain (loss) on divestiture and sale of investments (14 ) - (1,619 ) 20,054 - - - -
Gains (losses) on equity method
investments 1,064 1,530 738
783 2,415 1,327 1,011 2,624 Other income (loss)
9,462 2,095 194
21,202 2,453 15,123 1,481 31,411 Total other income (losses), net 10,512 3,625 (687 )
42,039 4,868 16,450 2,492 34,035 Income (loss) from operations before
income taxes (24,461 ) 8,746 36,758
117,071 (23,920 ) 62,585 46,930 94,222 Provision (benefit) for income taxes
2,095 6,186 14,993
29,897 16,980 23,019 14,571 21,550 Consolidated net income (loss) from
continuing operations (26,556 ) 2,560 21,765
87,174 (40,900 ) 39,566 32,359 72,672 Consolidated net income (loss) from
discontinued operations, net of tax - - - - 11,041 122,738 17,631 24,759
Consolidated net income (loss) (26,556 ) 2,560 21,765
87,174 (29,859 ) 162,304 49,990 97,431 Less: Net income (loss) from continuing
operations attributable to noncontrolling interest in subsidiaries (10,313 ) 6,089 8,154
25,306 (18,995 ) 7,956 12,358 28,674 Less: Net income (loss) from discontinued
operations attributable to noncontrolling interest in subsidiaries - - - - 5,879 34,062 2,429 9,983 Net income (loss) available to common stockholders$ (16,243 ) $ (3,529 ) $ 13,611 $ 61,868 $ (16,743 ) $ 120,286 $ 35,203 $ 58,774
1 Financial results have been retrospectively adjusted as a result of the
Spin-Off to reflect Newmark through
operations for all periods presented.
95
--------------------------------------------------------------------------------
The table below details our brokerage revenues by product category for the indicated periods (in thousands):
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31, 2019 2019 2019 2019 2018 2018 2018 2018 Brokerage revenue by product: Rates$ 129,549 $ 156,765 $ 152,959 $ 155,611 $ 128,874 $ 121,984 $ 141,400 $ 157,567 FX 80,369 86,492 101,899 101,558 94,706 96,988 102,307 102,255 Credit 70,438 72,382 78,166 85,727 67,484 67,111 75,526 82,050 Energy and commodities 70,954 72,335 73,430 69,865 53,799 57,974 56,277 60,149 Equities, insurance, and other asset classes 103,312 97,327 106,952 101,651 90,294 81,595 88,187 98,048 Total brokerage revenues$ 454,622 $ 485,301
product (percentage): Rates 28.5 % 32.3 % 29.8 % 30.2 % 29.6 % 28.6 % 30.5 % 31.5 % FX 17.7 17.8 19.8 19.7 21.8 22.8 22.1 20.5 Credit 15.5 14.9 15.2 16.7 15.5 15.8 16.3 16.4 Energy and commodities 15.6 14.9 14.3 13.6 12.4 13.6 12.1 12.0
Equities, insurance, and other
asset classes 22.7 20.1 20.9 19.8 20.7 19.2 19.0 19.6 Total brokerage revenues 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Brokerage revenue by type: Voice/Hybrid$ 410,332 $ 436,841
44,290 48,460 53,047 58,830 45,954 43,380 53,321 53,267 Total brokerage revenues$ 454,622 $ 485,301
(percentage):
Voice/Hybrid 90.3 % 90.0 % 89.7 % 88.6 % 89.4 % 89.8 % 88.5 % 89.3 % Fully Electronic 9.7 10.0 10.3 11.4 10.6 10.2 11.5 10.7 Total brokerage revenues 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
LIQUIDITY AND CAPITAL RESOURCES
Balance Sheet
Our balance sheet and business model are not capital intensive. Our assets consist largely of cash, collateralized and uncollateralized short-dated receivables and less liquid assets needed to support our business. Longer-term capital (equity and notes payable) is held to support the less liquid assets and potential capital investment opportunities. Total assets as ofDecember 31, 2019 were$3.9 billion , an increase of 14.1% as compared toDecember 31, 2018 . The increase in total assets was driven primarily by increases in Cash segregated under regulatory requirements, Accrued commissions and other receivables, net and less liquid assets, including ROU assets for leases. We maintain a significant portion of our assets in Cash and cash equivalents and Securities owned, with our liquidity (which we define as Cash and cash equivalents, Reverse repurchase agreements, Marketable securities and Securities owned, less Securities loaned and Repurchase agreements) as ofDecember 31, 2019 of$473.2 million . See "Liquidity Analysis" below for a further discussion of our liquidity. Our Securities owned were$57.5 million as ofDecember 31, 2019 , compared to$58.4 million as ofDecember 31, 2018 . Our Marketable securities decreased to$14.2 million as ofDecember 31, 2019 , compared to$32.1 million as ofDecember 31, 2018 . We did not have any Reverse repurchase agreements as ofDecember 31, 2019 andDecember 31, 2018 . We had Securities loaned of$13.9 million and no Repurchase agreements as ofDecember 31, 2019 . As ofDecember 31, 2018 , we had Securities loaned of$15.1 million and Repurchase agreements of$1.0 million . OnMarch 19, 2018 , we entered into the BGC Credit Agreement with Cantor. The BGC Credit Agreement provides for each party and certain of its subsidiaries to issue loans to the other party or any of its subsidiaries in the lender's discretion in an aggregate principal amount up to$250.0 million outstanding at any time. The BGC Credit Agreement replaced the previous Credit Facility between BGC and an affiliate of Cantor, and was approved by the Audit Committee. OnAugust 6, 2018 , the Company entered into an amendment to the BGC Credit Agreement, which increased the aggregate principal amount that can be loaned to the other party or any of its subsidiaries from$250.0 million to$400.0 million that can be outstanding at any time. The BGC Credit Agreement will mature on the earlier to occur of (a)March 19, 2020 , after which the maturity date of the BGC Credit Agreement will continue to be extended for successive one-year periods unless prior written notice of non-extension is given by a lending party to a borrowing party at least six months in advance of such renewal date and (b) the termination of the BGC Credit Agreement by either party pursuant to its terms. The outstanding amounts under the BGC Credit Agreement will bear interest for any rate period at a per annum rate equal to the higher of BGC's or Cantor's short-term borrowing rate in effect at such time plus 1.00%. As ofDecember 31, 2019 , there were no borrowings by BGC or Cantor outstanding under this Agreement. 96
-------------------------------------------------------------------------------- As part of our cash management process, we may enter into tri-party reverse repurchase agreements and other short-term investments, some of which may be with Cantor. As ofDecember 31, 2019 and 2018, there were no reverse repurchase agreements outstanding. Additionally, inAugust 2013 , the Audit Committee authorized us to invest up to$350 million in an asset-backed commercial paper program for which certain Cantor entities serve as placement agent and referral agent. The program issues short-term notes to money market investors and is expected to be used from time to time as a liquidity management vehicle. The notes are backed by assets of highly rated banks. We are entitled to invest in the program so long as the program meets investment policy guidelines, including policies relating to ratings. Cantor will earn a spread between the rate it receives from the short-term note issuer and the rate it pays to us on any investments in this program. This spread will be no greater than the spread earned by Cantor for placement of any other commercial paper note in the program. As ofDecember 31, 2019 and 2018, we had no investments in the program.
Funding
Our funding base consists of longer-term capital (equity and notes payable), collateralized financings, shorter-term liabilities and accruals that are a natural outgrowth of specific assets and/or our business model, such as matched fails and accrued compensation. We have limited need for short-term unsecured funding in our regulated entities for their brokerage businesses. Contingent liquidity needs are largely limited to potential cash collateral that may be needed to meet clearing bank, clearinghouse, and exchange margins and/or to fund fails. Capital expenditures tend to be cash neutral and approximately in line with depreciation. Current cash balances exceed our potential normal course contingent liquidity needs. We believe that cash in and available to our largest regulated entities, inclusive of financing provided by clearing banks and cash segregated under regulatory requirements, is adequate for potential cash demands of normal operations, such as margin or fail financing. We expect our operating activities going forward to generate adequate cash flows to fund normal operations, including any dividends paid pursuant to our dividend policy. However, we continually evaluate opportunities for us to maximize our growth and further enhance our strategic position, including, among other things, acquisitions, strategic alliances and joint ventures potentially involving all types and combinations of equity, debt and acquisition alternatives. As a result, we may need to raise additional funds to: • increase the regulatory net capital necessary to support operations; • support continued growth in our businesses;
• effect acquisitions, strategic alliances, joint ventures and other
transactions; • develop new or enhanced products, services and markets; and • respond to competitive pressures. Acquisitions and financial reporting obligations related thereto may impact our ability to access longer-term capital markets funding on a timely basis and may necessitate greater short-term borrowings in the interim. This may impact our credit rating or the interest rates on our debt. We may need to access short-term capital sources to meet business needs from time to time, including, but not limited to, conducting operations; hiring or retaining brokers, salespeople, managers and other front-office personnel; financing acquisitions; and providing liquidity, including in situations where we may not be able to access the capital markets in a timely manner when desired by us. Accordingly, we cannot guarantee that we will be able to obtain additional financing when needed on terms that are acceptable to us, if at all. As described earlier in this document, onNovember 30, 2018 , we completed the Spin-Off of Newmark. (See "Newmark IPO, Separation Transaction and Spin-Off" above for more information). As set forth in the Separation and Distribution Agreement, Newmark assumed certain BGC indebtedness and repaid such indebtedness. (See "Notes Payable, Other and Short-term Borrowings" below for more information). OnJanuary 12, 2016 , we completed the two-step GFI Merger. The GFI Merger allowed BGC to acquire the remaining approximately 33% of the outstanding shares of GFI common stock that BGC did not already own. Following the closing of the GFI Merger, BGC and its affiliates owned 100% of the outstanding shares of GFI's common stock. As ofDecember 31, 2019 , our liquidity, which we define as Cash and cash equivalents, Reverse repurchase agreements, Marketable securities and Securities owned, less Securities loaned and Repurchase agreements, was$473.2 million . We expect to use our financial resources to repay debt, profitably hire, make accretive acquisitions, pay dividends, and/or repurchase shares and units of BGC, all while maintaining or improving our investment-grade rating. 97 --------------------------------------------------------------------------------
Notes Payable, Other and Short-term Borrowings
Unsecured Senior Revolving Credit Agreement
OnSeptember 8, 2017 , we entered into a committed unsecured senior revolving credit agreement withBank of America, N.A ., as administrative agent, and a syndicate of lenders. The revolving credit agreement provided for revolving loans of up to$400.0 million . The maturity date of the facility wasSeptember 8, 2019 . OnNovember 22, 2017 , the Company and Newmark entered into an amendment to the unsecured senior revolving credit agreement. Pursuant to the amendment, the then-outstanding borrowings of the Company under the revolving credit facility were converted into the Converted Term Loan. There was no change in the maturity date or interest rate. EffectiveDecember 13, 2017 , Newmark assumed the obligations of the Company as borrower under the Converted Term Loan. We remained a borrower under, and retained access to, the revolving credit facility for any future draws, subject to availability which increased as Newmark repaid the Converted Term Loan. During the year endedDecember 31, 2018 , Newmark repaid the outstanding balance of the Converted Term Loan. During the year endedDecember 31, 2018 , we borrowed$195.0 million under the committed unsecured senior revolving credit agreement and repaid the$195.0 million during the year. Therefore, there were no borrowings outstanding as ofDecember 31, 2018 . OnNovember 28, 2018 , we entered into the Revolving Credit Agreement which replaced the existing committed unsecured senior revolving credit agreement. The maturity date of the new Revolving Credit Agreement wasNovember 28, 2020 and the maximum revolving loan balance has been reduced from$400.0 million to$350.0 million . Borrowings under this agreement bear interest at either LIBOR or a defined base rate plus additional margin. OnDecember 11, 2019 , we entered into an amendment to the new unsecured Revolving Credit Agreement. Pursuant to the amendment, the maturity date was extended toFebruary 26, 2021 . There was no change to the interest rate or the maximum revolving loan balance. OnFebruary 26, 2020 , the Company entered into a second amendment to the unsecured Revolving Credit Agreement, pursuant to which, the maturity date was extended by two years toFebruary 26, 2023 . The size of the Revolving Credit Agreement, along with the interest rate on the borrowings therefrom, remained unchanged. As ofDecember 31, 2019 , there was$68.9 million of borrowings outstanding, net of deferred financing costs of$1.1 million , under the new unsecured Revolving Credit Agreement. The average interest rate on the outstanding borrowings was 3.88% for the year endedDecember 31, 2019 .
Unsecured Senior Term Loan Credit Agreement
OnSeptember 8, 2017 , we entered into the Term Loan. The Term Loan provided for loans of up to$575.0 million . The maturity date of the Term Loan wasSeptember 8, 2019 . OnNovember 22, 2017 , we and Newmark entered into an amendment to the Term Loan. Pursuant to the Term Loan amendment and effective as ofDecember 13, 2017 , Newmark assumed the obligations of the Company as borrower under the Term Loan. There was no change in the maturity date or interest rate. As ofDecember 31, 2017 , Newmark had$270.7 million borrowings outstanding under the Term Loan. During the year endedDecember 31, 2018 , Newmark repaid the outstanding balance of$270.7 million at which point the facility was terminated. As ofDecember 31, 2019 and 2018, there were no borrowings outstanding under the Term Loan.
8.125% Senior Notes
OnJune 26, 2012 , we issued an aggregate of$112.5 million principal amount of 8.125% Senior Notes due 2042. The 8.125% Senior Notes were senior unsecured obligations. The 8.125% Senior Notes were redeemable for cash, in whole or in part, on or afterJune 26, 2017 , at our option, at any time and from time to time, until maturity at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued but unpaid interest on the principal amount being redeemed to, but not including, the redemption date. The 8.125% Senior Notes were listed on theNew York Stock Exchange under the symbol "BGCA." We used the proceeds to repay short-term borrowings under our unsecured revolving credit facility and for general corporate purposes, including acquisitions. In connection with the issuance of the 8.125% Senior Notes, the Company lent the proceeds of the 8.125% Senior Notes to BGCU.S. OpCo, and BGCU.S. OpCo issued the 2042 Promissory Note. The initial carrying value of the 8.125% Senior Notes was$108.7 million , net of debt issuance costs of$3.8 million . OnDecember 13, 2017 , Newmark OpCo assumed all of the BGCU.S. OpCo's rights and obligations under the 2042 Promissory Note. During the year endedDecember 31, 2018 , Newmark repaid the Company in full for the 2042 Promissory Note, and the Company subsequently repaid the 8.125% Senior Notes onSeptember 5, 2018 .
5.375% Senior Notes
OnDecember 9, 2014 , we issued an aggregate of$300.0 million principal amount of 5.375% Senior Notes. The 5.375% Senior Notes were general senior unsecured obligations of the Company. These Senior Notes bore interest at a rate of 5.375% per year, payable in cash onJune 9 andDecember 9 of each year, commencingJune 9, 2015 . The interest rate payable on the notes was subject to adjustments from time to time based on the debt rating assigned by specified rating agencies to the notes, as set forth in the Indenture. The 5.375% Senior Notes were scheduled to mature onDecember 9, 2019 . In connection with the issuance of the 5.375% Senior Notes, we lent the proceeds of the 5.375% Senior Notes to BGCU.S. OpCo, and BGCU.S. OpCo issued the 2019 Promissory Note. OnDecember 13, 2017 , Newmark OpCo assumed all of BGCU.S. OpCo's rights and obligations under the 2019 Promissory Note. The initial carrying value of the 5.375% Senior Notes was$295.1 million , net of the discount and debt issuance costs of$4.9 million . During the year endedDecember 31, 2018 , Newmark repaid the Company in full for the 2019 Promissory Note, and the Company subsequently redeemed the 5.375% Senior Notes onDecember 5, 2018 . 98 --------------------------------------------------------------------------------
8.375% Senior Notes
As part of the GFI acquisition, we assumed$240.0 million in aggregate principal amount of 8.375% Senior Notes. Interest on these notes was payable, semi-annually in arrears on the 19th of January and July. OnJuly 19, 2018 , the Company repaid the$240.0 million principal amount of its 8.375% Senior Notes upon their maturity. 5.125% Senior Notes OnMay 27, 2016 , we issued an aggregate of$300.0 million principal amount of 5.125% Senior Notes. The 5.125% Senior Notes are general senior unsecured obligations of the Company. The 5.125% Senior Notes bear interest at a rate of 5.125% per year, payable in cash onMay 27 andNovember 27 of each year, commencingNovember 27, 2016 . The 5.125% Senior Notes will mature onMay 27, 2021 . The Company may redeem some or all of the notes at any time or from time to time for cash at certain "make-whole" redemption prices (as set forth in the Indenture). If a "Change of Control Triggering Event" (as defined in the Indenture) occurs, holders may require the Company to purchase all or a portion of its notes for cash at a price equal to 101% of the principal amount of the notes to be purchased plus any accrued and unpaid interest to, but excluding, the purchase date. Cantor purchased$15.0 million of such senior notes and still holds such notes as ofDecember 31, 2019 . The initial carrying value of the 5.125% Senior Notes was$295.8 million , net of the discount and debt issuance costs of$4.2 million . The carrying value of the 5.125% Senior Notes as ofDecember 31, 2019 was$298.7 million .
5.375% Senior Notes due 2023
OnJuly 24, 2018 , we issued an aggregate of$450.0 million principal amount of 5.375% Senior Notes due 2023. The 5.375% Senior Notes due 2023 are general senior unsecured obligations of the Company. The 5.375% Senior Notes due 2023 bear interest at a rate of 5.375% per year, payable in cash onJanuary 24 andJuly 24 of each year, commencingJanuary 24, 2019 . The 5.375% Senior Notes due 2023 will mature onJuly 24, 2023 . We may redeem some or all of the 5.375% Senior Notes due 2023 at any time or from time to time for cash at certain "make-whole" redemption prices (as set forth in the indenture related to the 5.375% Senior Notes due 2023). If a "Change of Control Triggering Event" (as defined in the indenture related to the 5.375% Senior Notes due 2023) occurs, holders may require the Company to purchase all or a portion of their notes for cash at a price equal to 101% of the principal amount of the notes to be purchased plus any accrued and unpaid interest to, but excluding, the purchase date. The initial carrying value of the 5.375% Senior Notes due 2023 was$444.2 million , net of the discount and debt issuance costs of$5.8 million , of which$0.3 million were underwriting fees paid to CF&Co and$41 thousand were underwriting fees paid toCastleOak Securities, L.P. We also paid CF&Co an advisory fee of$0.2 million in connection with the issuance. The issuance costs are amortized as interest expense and the carrying value of the 5.375% Senior Notes due 2023 will accrete up to the face amount over the term of the notes. The carrying value of the 5.375% Senior Notes as ofDecember 31, 2019 was$445.2 million .
On
3.750% Senior Notes
OnSeptember 27, 2019 , we issued an aggregate of$300.0 million principal amount of 3.750% Senior Notes. The 3.750% Senior Notes are general unsecured obligations of the Company. The 3.750% Senior Notes bear interest at a rate of 3.750% per annum, payable on eachApril 1 andOctober 1 , commencingApril 1, 2020 . The initial carrying value of the 3.750% Senior Notes was$296.1 million , net of discount and debt issuance costs of$3.9 million , of which$0.2 million are underwriting fees payable to CF&Co and$36 thousand are underwriting fees payable toCastleOak Securities, L.P. The issuance costs will be amortized as interest expense and the carrying value of the 3.750% Senior Notes will accrete up to the face amount over the term of the notes. The carrying value of the 3.750% Senior Notes was$296.1 million as ofDecember 31, 2019 . OnOctober 11, 2019 , we filed a Registration Statement on Form S-4, which was declared effective by theSEC onOctober 24, 2019 . OnOctober 28, 2019 , BGC launched an exchange offer in which holders of the 3.750% Senior Notes, issued in a private placement onSeptember 27, 2019 may exchange such notes for new registered notes with substantially identical terms. The exchange offer closed onDecember 9, 2019 at which point the initial 3.750% Senior Notes were exchanged for new registered notes with substantially identical terms.
Collateralized Borrowings
OnMarch 13, 2015 , we entered into a secured loan arrangement of$28.2 million under which it pledged certain fixed assets as security for a loan. This arrangement incurred interest at a fixed rate of 3.70% per year and matured onMarch 13, 2019 ; therefore, there were no borrowings outstanding as ofDecember 31, 2019 . As ofDecember 31, 2018 , we had$1.8 million outstanding related to this secured loan agreement. The book value of the fixed assets pledged as ofDecember 31, 2018 was$0.1 million . 99 -------------------------------------------------------------------------------- OnMay 31, 2017 , we entered into a secured loan arrangement of$29.9 million under which it pledged certain fixed assets as security for a loan. This arrangement incurs interest at a fixed rate of 3.44% and matures onMay 31, 2021 . As ofDecember 31, 2019 and 2018, we had$11.7 million and$19.2 million , respectively, outstanding related to this secured loan arrangement. The book value of the fixed assets pledged as ofDecember 31, 2019 was$2.3 million . The book value of the fixed assets pledged as ofDecember 31, 2018 was$6.5 million . OnApril 8, 2019 , we entered into a secured loan arrangement of$15.0 million , under which it pledged certain fixed assets as security for a loan. This arrangement incurs interest at a fixed rate of 3.77% and matures onApril 8, 2023 . As ofDecember 31, 2019 , we had$13.2 million outstanding related to this secured loan arrangement. The net book value of the fixed assets pledged as ofDecember 31, 2019 was$8.1 million . Also, onApril 19, 2019 , we entered into a secured loan arrangement of$10.0 million , under which it pledged certain fixed assets as security for a loan. This arrangement incurs interest at a fixed rate of 3.89% and matures onApril 19, 2023 . As ofDecember 31, 2019 , we had$8.8 million outstanding related to this secured loan arrangement. The book value of the fixed assets pledged as ofDecember 31, 2019 was$5.7 million .
Short-term Borrowings
OnAugust 22, 2017 , we entered into a committed unsecured loan agreement withItau Unibanco S.A. The credit agreement provides for short-term loans of up to$5.0 million (BRL 20.0 million ). The maturity date of the agreement isMay 20, 2020 . Borrowings under this facility bear interest at the Brazilian Interbank offering rate plus 3.30%. As ofDecember 31, 2019 , there were$5.0 million (BRL 20.0 million ) of borrowings outstanding under the facility. As ofDecember 31, 2019 , the interest rate was 7.8%. OnAugust 23, 2017 , we entered into a committed unsecured credit agreement withItau Unibanco S.A. The credit agreement provides for an intra-day overdraft credit line up to$12.4 million (BRL 50.0 million ). The maturity date of the agreement isMarch 13, 2020 . This facility bears a fee of 1.00% per year. As ofDecember 31, 2019 and 2018, there were no borrowings outstanding under this facility.
CREDIT RATINGS
As of
Rating Outlook Fitch Ratings Inc. BBB- Stable Standard & Poor's BBB- Stable Credit ratings and associated outlooks are influenced by a number of factors, including, but not limited to: operating environment, earnings and profitability trends, the prudence of funding and liquidity management practices, balance sheet size/composition and resulting leverage, cash flow coverage of interest, composition and size of the capital base, available liquidity, outstanding borrowing levels and the firm's competitive position in the industry. A credit rating and/or the associated outlook can be revised upward or downward at any time by a rating agency if such rating agency decides that circumstances warrant such a change. Any reduction in our credit ratings and/or the associated outlooks could adversely affect the availability of debt financing on terms acceptable to us, as well as the cost and other terms upon which we are able to obtain any such financing. In addition, credit ratings and associated outlooks may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions. In connection with certain agreements, we may be required to provide additional collateral in the event of a credit ratings downgrade.
LIQUIDITY ANALYSIS
We consider our liquidity to be comprised of the sum of Cash and cash equivalents, Reverse repurchase agreements, Marketable securities, and Securities owned, less Securities loaned and Repurchase agreements. The discussion below describes the key components of our liquidity analysis, including earnings, dividends and distributions, net investing and funding activities, including repurchases and redemptions of BGC Class A common stock and partnership units, security settlements, changes in securities held and marketable securities, and changes in our working capital.
We consider the following in analyzing changes in our liquidity.
Our liquidity analysis includes a comparison of our Consolidated net income (loss) adjusted for Consolidated net income from discontinued operations, net of tax and certain non-cash items (e.g., Equity-based compensation) as presented on the cash flow statement. Dividends and distributions are payments made to our holders of common shares and limited partnership interests and are related to earnings from prior periods. These timing differences will impact our cash flows in a given period. Our investing and funding activities represent a combination of our capital raising activities, including short-term borrowings and repayments, issuances of shares under our CEO Program (net), BGC Class A common stock repurchases and partnership unit redemptions, purchases and sales of securities, dispositions, and other investments (e.g. acquisitions, forgivable loans to new brokers and capital expenditures-all net of depreciation and amortization). Our securities settlement activities primarily represent deposits with clearing organizations. In addition, when advantageous, we may elect to facilitate the settlement of matched principal transactions by funding failed trades, which results in a temporary secured use of cash and is economically beneficial to us. 100
--------------------------------------------------------------------------------
Other changes in working capital represent changes primarily in receivables and payables and accrued liabilities that impact our liquidity.
Changes in Reverse repurchase agreements, Securities owned, and Marketable securities may result from additional cash investments or sales, which will be offset by a corresponding change in Cash and cash equivalents and, accordingly, will not result in a change in our liquidity. Conversely, changes in the market value of such securities are reflected in our earnings or other comprehensive income (loss) and will result in changes in our liquidity. AtDecember 31, 2019 , the Company completed the calculation of the one-time transition tax on the deemed repatriation of foreign subsidiaries' earnings pursuant to the Tax Act and previously recorded a net cumulative tax expense of$25.0 million , net of foreign tax credits. An installment election can be made to pay the taxes over eight years with 40% paid in equal installments over the first five years and the remaining 60% to be paid in installments of 15%, 20% and 25% in years six, seven and eight, respectively. The cumulative remaining balance as ofDecember 31, 2019 is$19.4 million .
As of
Discussion of the year ended
The table below presents our Liquidity Analysis as ofDecember 31, 2019 andDecember 31, 2018 : December 31, 2019 December 31, 2018 (in millions) Cash and cash equivalents $ 415.4 $ 336.5 Securities owned 57.5 58.4 Marketable securities1 0.3 17.0 Repurchase agreements - (1.0 ) Total $ 473.2 $ 410.9 1 As ofDecember 31, 2019 and 2018,$13.9 million and$15.1 million ,
respectively, of Marketable securities on our balance sheet had been lent in
a Securities loaned transaction and, therefore, are not included in this
Liquidity Analysis.
The$62.3 million increase in our liquidity position from$410.9 million as ofDecember 31, 2018 to$473.2 million as ofDecember 31, 2019 was primarily related to the issuance of$300.0 million of the 3.750% Senior Notes, increased collateralized and other net borrowings of$82.6 million , partially offset by the financing of acquisitions, ordinary movements in working capital, and our continued investment in new revenue generating hires.
Discussion of the year ended
The table below presents our Liquidity Analysis as ofDecember 31, 2018 andDecember 31, 2017 : December 31, 2018 December 31, 2017 (in millions) Cash and cash equivalents $ 336.5 $ 513.3 Securities owned 58.4 33.0 Marketable securities1 17.0 5.8 Repurchase agreements (1.0 ) - Total $ 410.9 $ 552.1 1 As ofDecember 31, 2018 and 2017,$15.1 million and$144.7 million ,
respectively, of Marketable securities on our balance sheet had been lent in
a Securities loaned transaction and therefore are not included in this
Liquidity Analysis.
The$141.3 million decrease in our liquidity position from$552.1 million as ofDecember 31, 2017 to$410.9 million as ofDecember 31, 2018 was primarily related to our purchase of exchangeable limited partnership units inNewmark Holdings in the Investment in Newmark, cash paid with respect to various acquisitions throughout the year, our continued investment in revenue generating hires, and ordinary movements in working capital. 101 --------------------------------------------------------------------------------
CLEARING CAPITAL
InNovember 2008 , we entered into a clearing capital agreement with Cantor to clearU.S. Treasury andU.S. government agency securities transactions on our behalf. Pursuant to the terms of this agreement, so long as Cantor is providing clearing services to us, Cantor shall be entitled to request from us, and we shall post as soon as practicable, cash or other property acceptable to Cantor in the amount reasonably requested by Cantor under the clearing capital agreement. Cantor had not requested any cash or other property from us as collateral as ofDecember 31, 2019 .
REGULATORY REQUIREMENTS
Our liquidity and available cash resources are restricted by regulatory requirements of our operating subsidiaries. Many of these regulators, includingU.S. and non-U.S. government agencies and self-regulatory organizations, as well as state securities commissions in theU.S. , are empowered to conduct administrative proceedings that can result in civil and criminal judgments, settlements, fines, penalties, injunctions, enhanced oversight, remediation, or other relief. In addition, self-regulatory organizations, such as theFINRA and the NFA, along with statutory bodies such as theFCA , theSEC , and the CFTC require strict compliance with their rules and regulations. The requirements imposed by regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with broker-dealers and are not designed to specifically protect stockholders. These regulations often serve to limit our activities, including through net capital, customer protection and market conduct requirements. The final phase of Basel III (unofficially called "Basel IV") is a global prudential regulatory standard designed to make banks more resilient and increase confidence in the banking system. Its wide scope includes reviewing market, credit and operational risk along with targeted changes to leverage ratios. Basel IV includes updates to the calculation of bank capital requirements with the aim of making outcomes more comparable across banks globally. Most of the requirements are expected to be implemented by national and regional authorities by around 2022. The adoption of these proposed rules could restrict the ability of our large bank and broker-dealer customers to operate trading businesses and to maintain current capital market exposures under the present structure of their balance sheets, and will cause these entities to need to raise additional capital in order to stay active in our marketplaces. TheFCA is the relevant statutory regulator in theU.K. TheFCA's objectives are to protect customers, maintain the stability of the financial services industry and promote competition between financial services providers. It has broad rule-making, investigative and enforcement powers derived from the Financial Services and Markets Act 2000 and subsequent and derivative legislation and regulations. In addition, the majority of our other foreign subsidiaries are subject to similar regulation by the relevant authorities in the countries in which they do business. Certain other of our foreign subsidiaries are required to maintain non-U.S. net capital requirements. For example, inHong Kong ,BGC Securities (Hong Kong ), LLC,GFI (HK) Securities LLC and Sunrise Broker (Hong Kong ) Limited are regulated by theSecurities and Futures Commission .BGC Capital Markets (Hong Kong ), Limited andGFI (HK) Brokers Ltd are regulated by TheHong Kong Monetary Authority . All are subject toHong Kong net capital requirements. InFrance ,Aurel BGC andBGC France Holdings ; inAustralia ,BGC Partners (Australia) Pty Limited ,BGC (Securities) Pty Limited andGFI Australia Pty Ltd. ; inJapan ,BGC Shoken Kaisha Limited's Tokyo branch andBGC Capital Markets Japan LLC's Tokyo Branch; inSingapore ,BGC Partners (Singapore) Limited , andGFI Group Pte Ltd ; inKorea ,BGC Capital Markets & Foreign Exchange Broker (Korea) Limited andGFI Korea Money Brokerage Limited ; and inTurkey , BGC Partners Menkul Degerler AS, all have net capital requirements imposed upon them by local regulators. In addition, the LCH (LIFFE /LME) clearing organization, of whichBGC Brokers L.P. is a member, also imposes minimum capital requirements. InLatin America , BGC Liquidez Distribuidora De Titulos E Valores Mobiliarios Ltda. (Brazil ) has net capital requirements imposed upon it by local regulators. These subsidiaries may also be prohibited from repaying the borrowings of their parents or affiliates, paying cash dividends, making loans to their parent or affiliates or otherwise entering into transactions, in each case, that result in a significant reduction in their regulatory capital position without prior notification or approval from their principal regulator. See Note 22-"Regulatory Requirements" to our consolidated financial statements for further details on our regulatory requirements.
As of
InApril 2013 , theBoard and Audit Committee authorized management to enter into indemnification agreements with Cantor and its affiliates with respect to the provision of any guarantees provided by Cantor and its affiliates from time to time as required by regulators. These services may be provided from time to time at a reasonable and customary fee. BGC Derivative Markets and GFI Swaps Exchange, our subsidiaries, began operating as SEFs onOctober 2, 2013 . Both BGC Derivative Markets and GFI Swaps Exchange received permanent registration approval from the CFTC as SEFs onJanuary 22, 2016 . Mandatory Dodd-Frank Act compliant execution on SEFs by eligibleU.S. persons commenced inFebruary 2014 for "made available to trade" products, and a wide range of other rules relating to the execution and clearing of derivative products have been finalized with implementation periods in 2016 and beyond. We also own ELX, which became a dormant contract market onJuly 1, 2017 . 102 -------------------------------------------------------------------------------- Much of our global derivatives volumes continue to be executed by non-U.S. based clients outside theU.S. and subject to local prudential regulations. As such, we will continue to operate a number of EU regulated venues in accordance with EU directives and licensed by theFCA and other EU-based national Competent Authorities. These venues are also operated for non-derivative instruments for these clients. MiFID II was published by theEuropean Securities and Markets Authority inSeptember 2015 , and implemented inJanuary 2018 and introduced important infrastructural changes. MiFID II requires a significant part of the market in these instruments to trade on trading venues subject to transparency regimes, not only in pre- and post-trade prices, but also in fee structures and access. In addition, it has impacted a number of key areas, including corporate governance, transaction reporting, pre- and post-trade transparency, technology synchronization, best execution and investor protection. MiFID II is intended to help improve the functioning of the EU single market by achieving a greater consistency of regulatory standards. By design, therefore, it is intended that EU member states should have very similar regulatory regimes in relation to the matters addressed to MiFID. MiFID II has also introduced a new regulated execution venue category known as an OTF that captures much of the Voice-and Hybrid-oriented trading in EU. Much of our existing EU derivatives and fixed income execution business now take place on OTFs. Brexit may impact future market structures and MiFID II rulemaking and implementation due to potential changes in mutual passporting between theU.K. and EU member states. In addition, the GDPR came into effect in the EU onMay 25, 2018 and creates new compliance obligations in relation to personal data. The GDPR may affect our practices, and will increase financial penalties for non-compliance significantly. InSeptember 2019 , two of the Company's subsidiaries,BGC Financial L.P. andGFI Group Inc. , settled investigations conducted jointly by the CFTC and the NYAG. The CFTC and NYAG alleged that, in 2014 and 2015, certain emerging markets FX options (EFX options) brokers in theU.S. misrepresented that certain prices posted to their electronic platform were immediately executable when in fact they were not and that such brokers had communicated that transactions had been matched when they had not. OnOctober 9, 2019 , the Company paid an aggregate of$25.0 million in connection with the settlements and agreed to a monitor for two years to assess regulatory compliance. The NYAG settlements include a non-prosecution agreement, and there was no criminal penalty from either agency.
See "Regulation" included in Part I, Item 1 of this Annual Report on Form 10-K for additional information related to our regulatory environment.
EQUITY
Class A Common Stock
Changes in shares of the Company's Class A common stock outstanding were as follows (in thousands): Year EndedDecember 31, 2019 2018 Shares outstanding at beginning of period 291,475
256,968
Share issuances: Redemption/exchanges of limited partnership interests¹ 15,008
18,288
Issuance of Class A common stock for general corporate purposes -
24,924
Deferred stock awards -
979
Vesting of restricted stock units (RSUs) 435
528
Acquisitions 1,039
1,744
Other issuances of Class A common stock 213
101
Exchange from Class A to Class B common stock - (11,036 ) Treasury stock repurchases (233 ) (789 ) Forfeitures of restricted Class A common stock (22 ) (232 ) Shares outstanding at end of period 307,915 291,475
1 Included in redemption/exchanges of limited partnership interests for the
year ended
stock granted in connection with the cancellation of 11.5 million LPUs.
Included in redemption/exchanges of limited partnership interests for the
year ended
stock granted in connection with the cancellation of 7.6 million LPUs. Because LPUs are included in the Company's fully diluted share count, if dilutive, redemption/exchange in connection with the issuance of Class A
common shares would not impact the fully diluted number of shares and units
outstanding. 103
--------------------------------------------------------------------------------
Class B Common Stock
OnNovember 23, 2018 , pursuant to the Exchange Agreement, BGC issued 10,323,366 shares of BGC Class B common stock to Cantor and 712,907 shares of BGC Class B common stock to CFGM, an affiliate of Cantor, in each case in exchange for shares of BGC Class A common stock from Cantor and CFGM, respectively, on a one-to-one basis pursuant to Cantor's and CFGM's right to exchange such shares under the Exchange Agreement. Pursuant to the Exchange Agreement, no additional consideration was paid to BGC by Cantor or CFGM for the ClassB Issuance . The ClassB Issuance was exempt from registration pursuant to Section 3(a)(9) of the Securities Act. The Company did not issue any shares of BGC Class B common stock during the year endedDecember 31, 2019 . As ofDecember 31, 2019 and 2018, there were 45,884,380 shares of BGC Class B common stock outstanding.
Unit Redemptions and Share Repurchase Program
The Board and Audit Committee have authorized repurchases of BGC Class A common stock and redemptions of limited partnership interests or other equity interests in our subsidiaries. OnAugust 1, 2018 , the Company'sBoard and Audit Committee increased the Company's share repurchase and unit redemption authorization to$300.0 million , which may include purchases from Cantor, its partners or employees or other affiliated persons or entities. As ofDecember 31, 2019 , the Company had$256.7 million remaining from its share repurchase and unit redemption authorization. From time to time, the Company may actively continue to repurchase shares and/or redeem units. The table below represents the units redeemed and/or shares repurchased for cash and does not include units redeemed/cancelled in connection with the grant of shares of BGC Class A common stock nor the limited partnership interests exchanged for shares of BGC Class A common stock. The gross unit redemptions and share repurchases of BGC Class A common stock during the year endedDecember 31, 2019 were as follows (in thousands, except weighted-average price data): Approximate Dollar Value Total Number of Units and of Units Weighted- Shares That May Redeemed Average Price Yet Be Redeemed/ or Shares Paid per Unit Purchased Period Repurchased or Share Under the Program Redemptions1 January 1, 2019-March 31, 2019 1,203 $
6.00
April 1 , 2019-June 30, 2019 97
5.45
July 1 , 2019-September 30, 2019 73
5.24
October 1 , 2019-December 31, 2019 35
5.57
Total Redemptions 1,408 $
5.91
Repurchases2
January 1, 2019-March 31, 2019 233 $
5.30
April 1 , 2019-June 30, 2019 -
-
July 1 , 2019-September 30, 2019 -
-
October 1 , 2019-December 31, 2019 -
-
Total Repurchases 233 $
5.30
Total Redemptions and Repurchases 1,641 $ 5.82 $ 256,691
1 During the year ended
LPUs at an aggregate redemption price of
price of
of
year ended
LPUs at an aggregate redemption price of approximately
weighted-average price of
at an aggregate redemption price of approximately
weighted-average price of
units redeemed/cancelled in connection with the grant of 10.1 million and 6.8
million shares of BGC Class A common stock during the years ended December
31, 2019 and 2018, respectively, nor the limited partnership interests
exchanged for 4.4 million and 2.6 million shares of BGC Class A common stock
during the years ended
2 During the year ended
shares of BGC Class A common stock at an aggregate price of
a weighted-average price of
31, 2018, the Company repurchased approximately 0.8 million shares of BGC
Class A common stock at an aggregate price of approximately
a weighted-average price of
Following the Spin-Off, external data providers have restated the historical prices of BGC Class A common stock (BGCP). As such, the nominal prices listed in the footnotes above may not match the historical prices listed on such data services following the Spin-Off. 104 -------------------------------------------------------------------------------- The weighted-average share counts from continuing operations, including securities that were anti-dilutive for our earnings per share calculations, for the three months and year endedDecember 31, 2019 were as follows (in thousands): Three Months Ended Year Ended December 31, December 31, 2019 2019 Common stock outstanding1 351,431 344,332 Partnership units2 178,343 178,813 RSUs (Treasury stock method) 1,204 38 Other 1,039 1,367 Total3 532,017 524,550 1 Common stock consisted of Class A shares, Class B shares and contingent
shares for which all necessary conditions have been satisfied except for the
passage of time. For the quarter ended
weighted-average number of Class A shares was 305.5 million and Class B
shares was 45.9 million. For the year ended
weighted-average number of Class A shares was 298.4 and Class B shares was
45.9 million.
2 Partnership units collectively include FPUs, LPUs, and Cantor units (see Note
2-"Limited Partnership Interests in
consolidated financial statements in Part II, Item 8 of this Annual Report on
Form 10-K for more information).
3 Given the net loss during the quarter ended
180.8 million potentially dilutive securities were not included in the
computation of fully diluted earnings per share because their effect would
have been anti-dilutive. For the year ended
0.9 million potentially dilutive securities were not included in the
computation of fully diluted earnings per share because their effect would
have been anti-dilutive. Anti-dilutive securities for the year ended December
31, 2019 included, on a weighted-average basis, approximately 0.9 million
RSUs. As of
contingent Class A common stock and LPUs were excluded from fully diluted EPS
computations because the conditions for issuance had not been met by the end
of the period. The contingent Class A common stock is recorded as a liability
and included in "Accounts payable, accrued and other liabilities" in our
consolidated statement of financial condition as ofDecember 31, 2019 . The fully diluted period-end spot share count was as follows (in thousands): As ofDecember 31, 2019 Common stock outstanding 353,799 Partnership units 172,060 RSUs (Treasury stock method) 1,204 Other 3,308 Total 530,371 OnJune 5, 2015 , we entered into the Exchange Agreement with Cantor providing Cantor, CFGM and other Cantor affiliates entitled to hold BGC Class B common stock the right to exchange from time to time, on a one-to-one basis, subject to adjustment, up to an aggregate of 34,649,693 shares of BGC Class A common stock now owned or subsequently acquired by such Cantor entities for up to an aggregate of 34,649,693 shares of BGC Class B common stock. Such shares of BGC Class B common stock, which currently can be acquired upon the exchange of Cantor units owned inBGC Holdings , are already included in our fully diluted share count and will not increase Cantor's current maximum potential voting power in the common equity. The Exchange Agreement enabled the Cantor entities to acquire the same number of shares of BGC Class B common stock that they were already entitled to acquire without having to exchange its Cantor units inBGC Holdings . The Audit Committee and Board have determined that it was in the best interests of us and our stockholders to approve the Exchange Agreement because it will help ensure that Cantor retains its Cantor units inBGC Holdings , which is the same partnership in which our partner employees participate, thus continuing to align the interests of Cantor with those of the partner employees. OnNovember 23, 2018 , in the ClassB Issuance , BGC issued 10,323,366 shares of BGC Class B common stock to Cantor and 712,907 shares of BGC Class B common stock to CFGM, an affiliate of Cantor, in each case in exchange for shares of BGC Class A common stock from Cantor and CFGM, respectively, on a one-to-one basis pursuant to the Exchange Agreement. Pursuant to the Exchange Agreement, no additional consideration was paid to BGC by Cantor or CFGM for the ClassB Issuance . The Class B issuance was exempt from the Securities Act. Following this exchange, Cantor and its affiliates only have the right to exchange under the Exchange Agreement up to an aggregate of 23,613,420 shares of BGC Class A common stock, now owned or subsequently acquired, or its Cantor units inBGC Holdings , into shares of BGC Class B common stock. As ofDecember 31, 2019 , Cantor and CFGM do not own any shares of BGC Class A common stock. We and Cantor have agreed that any shares of BGC Class B common stock issued in connection with the Exchange Agreement would be deducted from the aggregate number of shares of BGC Class B common stock that may be issued to the Cantor entities upon exchange of Cantor units inBGC Holdings . Accordingly, the Cantor entities will not be entitled to receive any more shares of BGC ClassB Stock under this agreement than they were previously eligible to receive upon exchange of Cantor units. 105
-------------------------------------------------------------------------------- OnNovember 4, 2015 , partners ofBGC Holdings created five new classes of non-distributing partnership units (collectively with the NPSUs, "N Units"). These new N Units carry the same name as the underlying unit with the insertion of an additional "N" to designate them as the N Unit type and are designated as NREUs, NPREUs, NLPUs, NPLPUs and NPPSUs. The N Units are not entitled to participate in partnership distributions, will not be allocated any items of profit or loss and may not be made exchangeable into shares of BGC Class A common stock. The Eleventh Amendment was approved by the Audit Committee and by the Board. Subject to the approval of the Compensation Committee or its designee, certain N Units may be converted into the underlying unit type (i.e. an NREU will be converted into an REU) and will then participate in partnership distributions, subject to terms and conditions determined by the general partner ofBGC Holdings in its sole discretion, including that the recipient continue to provide substantial services to the Company and comply with his or her partnership obligations. Such N Units are not included in the fully diluted share count. OnDecember 14, 2016 , partners ofBGC Holdings amended certain terms and conditions of the partnership's N Units in order to provide flexibility to the Company and the Partnership in using such N Units in connection with compensation arrangements and practices. The amendment provides for a minimum$5 million gross revenue requirement in a given quarter as a condition for an N Unit to be replaced by another type of partnership unit in accordance with the Partnership Agreement and the grant documentation. The amendment was approved by the Audit Committee. OnDecember 13, 2017 , theAmended and Restated BGC Holdings Partnership Agreement was amended and restated a second time to include prior standalone amendments and to make certain other changes related to the Separation. The Second Amended and Restated BGC Holdings Partnership Agreement, among other things, reflects changes resulting from the division in the Separation ofBGC Holdings intoBGC Holdings andNewmark Holdings , including:
• an apportionment of the existing economic attributes (including, among
others, capital accounts and post-termination payments) of each BGC
Holdings limited partnership interests outstanding immediately prior to
the Separation between such Legacy BGC Holdings Unit and the fraction of a
Newmark Holdings LPU issued in the Separation in respect of such Legacy
BGC Holdings Unit, based on the relative value of BGC and Newmark as of
after the Newmark IPO; • an adjustment of the exchange mechanism between the Newmark IPO and the
Distribution so that one exchangeable
number of exchangeable
the Newmark Holdings Exchange Ratio as of such time, must be exchanged in
order to receive one share of BGC Class A common stock; and • a right of the employer of a partner (whether it be Newmark or BGC) to
determine whether to grant exchangeability with respect to Legacy BGC
Holdings Units or Legacy Newmark Holdings Units held by such partner.
The Second Amended and Restated BGC Holdings Partnership Agreement also removes certain classes ofBGC Holdings units that are no longer outstanding, and permits the general partner ofBGC Holdings to determine the total number of authorizedBGC Holdings units. The Second Amended and Restated BGC Holdings Limited Partnership Agreement was approved by the Audit Committee.
Registration Statements
We currently have in place an effective equity shelf registration statement on Form S-3 filed onMarch 9, 2018 with respect to the issuance and sale of up to an aggregate of$300.0 million of shares of BGC Class A common stock from time to time on a delayed or continuous basis. OnMarch 9, 2018 , we entered into theMarch 2018 Sales Agreement, pursuant to which we may offer and sell up to an aggregate of$300.0 million of shares of BGC Class A common stock. Proceeds from shares of BGC Class A common stock sold under this CEO Program Sales Agreement may be used for redemptions of limited partnership interests inBGC Holdings , as well as for general corporate purposes, including acquisitions and the repayment of debt. CF&Co is a wholly owned subsidiary of Cantor and an affiliate of us. Under this Sales Agreement, we have agreed to pay CF&Co 2% of the gross proceeds from the sale of shares. For additional information on the Company's CEO Program sales agreements, see Note 14-"Related Party Transactions." As ofDecember 31, 2019 , we have issued and sold 17,401,431 shares of BGC Class A common stock (or$209.8 million ) under theMarch 2018 Sales Agreement. As ofDecember 31, 2017 andMarch 31, 2018 , we had sold all 20 million shares of BGC Class A common stock pursuant to each of theNovember 2014 Sales Agreement andApril 2017 Sales Agreement. We intend to use the net proceeds of any shares of BGC Class A common stock sold for general corporate purposes for potential acquisitions, redemptions of LPUs and FPUs inBGC Holdings and repurchases of shares of BGC Class A common stock from partners, executive officers and other employees of ours or our subsidiaries and of Cantor and its affiliates. Certain of such partners will be expected to use the proceeds from such sales to repay outstanding loans issued by, or credit enhanced by, Cantor, orBGC Holdings . In addition to general corporate purposes, these sales along with our share repurchase authorization are designed as a planning device in order to facilitate the redemption process. Going forward, we may redeem units and reduce our fully diluted share count under our repurchase authorization or later sell shares of BGC Class A common stock under theMarch 2018 Sales Agreement. 106 -------------------------------------------------------------------------------- Further, we have an effective registration statement on Form S-4 filed onSeptember 3, 2010 , with respect to the offer and sale of up to 20 million shares of BGC Class A common stock from time to time in connection with business combination transactions, including acquisitions of other businesses, assets, properties or securities. As ofDecember 31, 2019 , we have issued an aggregate of 13.8 million shares of BGC Class A common stock under this Form S-4 registration statement. Additionally, onSeptember 13, 2019 , we filed a registration statement on Form S-4, with respect to the offer and sale of up to 20 million shares of Class A common stock from time to time in connection with business combination transactions, including acquisitions of other businesses, assets, properties or securities. As ofDecember 31, 2019 , we have not issued any shares of BGC Class A common stock under this Form S-4 registration statement. We also have an effective shelf registration statement on Form S-3 pursuant to which we can offer and sell up to 10 million shares of BGC Class A common stock under theBGC Partners, Inc. Dividend Reinvestment and Stock Purchase Plan. As ofDecember 31, 2019 , we have issued approximately 0.6 million shares of BGC Class A common stock under the Dividend Reinvestment and Stock Purchase Plan. The Compensation Committee may grant stock options, stock appreciation rights, deferred stock such as RSUs, bonus stock, performance awards, dividend equivalents and other equity-based awards, including to provide exchange rights for shares of BGC Class A common stock upon exchange of LPUs. OnJune 22, 2016 , at our Annual Meeting of Stockholders, our stockholders approved our Equity Plan to increase from 350 million to 400 million the aggregate number of shares of BGC Class A common stock that may be delivered or cash-settled pursuant to awards granted during the life of the Equity Plan. As ofDecember 31, 2019 , the limit on the aggregate number of shares authorized to be delivered allowed for the grant of future awards relating to 137.7 million shares of BGC Class A common stock.
On
On
OnDecember 16, 2019 , we filed a registration statement on Form S-3 pursuant to which CF&Co may make offers and sales of our 5.125% Senior Notes, 5.375% Senior Notes due 2023 and 3.750% Senior Notes in connection with ongoing market-making transactions which may occur from time to time. Such market-making transactions in these securities may occur in the open market or may be privately negotiated at prevailing market prices at a time of resale or at related or negotiated prices. Neither CF&Co, nor any other of our affiliates, has any obligation to make a market in our securities, and CF&Co or any such other affiliate may discontinue market-making activities at any time without notice.
CONTINGENT PAYMENTS RELATED TO ACQUISITIONS
Since 2016, the Company has completed acquisitions whose purchase price included an aggregate of approximately 2.2 million shares of the Company's Class A common stock (with an acquisition date fair value of approximately$9.2 million ), 0.1 million LPUs (with an acquisition date fair value of approximately$0.2 million ), 0.2 million RSUs (with an acquisition date fair value of approximately$1.2 million ) and$34.3 million in cash that may be issued contingent on certain targets being met through 2022.
As of
As of
DERIVATIVE SUIT OnOctober 5, 2018 , Roofers Local 149Pension Fund filed a putative derivative complaint in theDelaware Chancery Court , captioned Roofers Local 149Pension Fund vs.Howard Lutnick , et al. (Case No. 2018-0722), alleging breaches of fiduciary duty against (i) the members of the Board, (ii)Howard Lutnick , CFGM, and Cantor as controlling stockholders of BGC, and (iii)Howard Lutnick as an officer of BGC. The complaint challenges the transactions by which BGC (i) completed theBerkeley Point acquisition from CCRE for$875 million and (ii) committed to invest$100 million for a 27% interest inReal Estate, L.P. (collectively, the "Transaction"). Among other things, the complaint alleges that (i) the price BGC paid in connection with the Transaction was unfair, (ii) the process leading up to the Transaction was unfair, and (iii) the members of the special committee of the Board were not independent. It seeks to recover for the Company unquantified damages, disgorgement of any payments received by defendants, and attorneys' fees. A month later, onNovember 5, 2018 , the same plaintiffs' firm filed an identical putative derivative complaint against the same defendants seeking the same relief on behalf of a second client,Northern California Pipe Trades Trust Funds. The cases have been consolidated into a single action, captioned In reBGC Partners, Inc. Derivative Litigation (Consolidated C.A. No. 2018-0722-AGB), and the complaint filed by Roofers Local 149Pension Fund onOctober 5, 2018 was designated as the operative complaint. 107 -------------------------------------------------------------------------------- In response to motions to dismiss filed by all defendants inDecember 2018 , Plaintiffs filed a motion for leave to amend the operative complaint inFebruary 2019 , requesting that the Court allow them to supplement their allegations, which the Court granted. The amended complaint alleges the same purported breaches of fiduciary duty as the operative complaint, raises no new claims, and seeks identical relief, but includes additional allegations, including alleged reasons for plaintiffs' failure to make a demand on the Board, which was the basis of defendants' motion to dismiss. OnMarch 19, 2019 , all defendants filed motions to dismiss the amended complaints, again on demand grounds. OnSeptember 30, 2019 , the Court denied defendants' motions to dismiss, permitting the case to move forward into discovery. In its ruling, the Court determined that the amended complaint sufficiently pled that plaintiffs were not required to make demand on the Board in order to file a derivative suit, but did not make findings of fact with respect to the underlying merits of plaintiffs' allegations concerning the Transaction.
The Company continues to believe that the allegations pled against the defendants in the amended complaint are without merit and intends to defend against them vigorously as the case moves forward. However, as in any litigated matter, the outcome cannot be determined with certainty.
PURCHASE OF LIMITED PARTNERSHIP INTERESTS
Cantor has the right to purchase limited partnership interests (Cantor units) fromBGC Holdings upon redemption of non-exchangeable FPUs redeemed byBGC Holdings upon termination or bankruptcy of the Founding/Working Partner. In addition, pursuant to Article Eight, Section 8.08, of the Second Amended and Restated BGC Holdings Limited Partnership Agreement (previously the sixth amendment) and Article Eight, Section 8.08, of the Newmark Holdings Limited Partnership Agreement, where either current, terminating, or terminated partners are permitted by the Company to exchange any portion of their FPUs and Cantor consents to such exchangeability, the Company shall offer to Cantor the opportunity for Cantor to purchase the same number of new exchangeable limited partnership interests (Cantor units) inBGC Holdings at the price that Cantor would have paid for the FPUs had the Company redeemed them. Any such Cantor units purchased by Cantor are currently exchangeable for up to 23,613,420 shares of BGC Class B common stock or, at Cantor's election or if there are no such additional shares of BGC Class B common stock, shares of BGC Class A common stock, in each case on a one-for-one basis (subject to customary anti-dilution adjustments). OnNovember 7, 2016 , the Company issued exchange rights with respect to, and Cantor purchased, in transactions exempt from registration pursuant to Section 4(a)(2) of the Securities Act, an aggregate of 624,762 exchangeable limited partnership units inBGC Holdings , as follows: In connection with the redemption byBGC Holdings of an aggregate of 141,523 non-exchangeable founding partner units from founding partners ofBGC Holdings for an aggregate consideration of$560,190 , Cantor purchased 141,523 exchangeable limited partnership units fromBGC Holdings for an aggregate of$560,190 . In addition, pursuant to the Sixth Amendment, onNovember 7, 2016 , Cantor purchased 483,239 exchangeable limited partnership units fromBGC Holdings for an aggregate consideration of$1,796,367 in connection with the grant of exchangeability and exchange for 483,239 founding partner units. As a result of the Newmark IPO and the related Separation and Distribution Agreement, the aggregate exchangeable limited partnership units represent 624,762 and 283,983 exchangeable limited partnership units inBGC Holdings andNewmark Holdings , respectively. OnNovember 7, 2017 , the Company issued exchange rights with respect to, and Cantor purchased, in transactions exempt from registration pursuant to Section 4(a)(2) of the Securities Act, an aggregate of 1,179,788 exchangeable limited partnership units inBGC Holdings , as follows: In connection with the redemption byBGC Holdings of an aggregate of 823,178 non-exchangeable founding partner units from founding partners ofBGC Holdings for an aggregate consideration of$2,828,629 , Cantor purchased 823,178 exchangeable limited partnership units fromBGC Holdings for an aggregate of$2,828,629 . In addition, pursuant to the Sixth Amendment, onNovember 7, 2017 , Cantor purchased 356,610 exchangeable limited partnership units fromBGC Holdings for an aggregate consideration of$1,091,175 in connection with the grant of exchangeability and exchange for 356,610 founding partner units. As a result of the Newmark IPO and the related Separation and Distribution Agreement, the aggregate exchangeable limited partnership units represent 1,179,788 and 536,267 exchangeable limited partnership units inBGC Holdings andNewmark Holdings , respectively. As ofDecember 31, 2019 , there were 1,749,347 FPUs inBGC Holdings remaining, which the partnerships had the right to redeem or exchange and with respect to which Cantor had the right to purchase an equivalent number of Cantor units.
JOINT SERVICES AGREEMENT WITH CANTOR
InFebruary 2019 , the Audit Committee authorized us to enter into a short-term services agreement with Cantor pursuant to which Cantor would be responsible for clearing, settling and processing certain transactions executed on behalf of customers in exchange for a 33% revenue share based on net transaction revenue and the payment by BGC of the fully allocated cost of certain salespersons related thereto. 108
--------------------------------------------------------------------------------
GUARANTEE AGREEMENT FROM CF&CO
Under rules adopted by the CFTC, all foreign introducing brokers engaging in transactions withU.S. persons are required to register with the NFA and either meet financial reporting and net capital requirements on an individual basis or obtain a guarantee agreement from a registered Futures Commission Merchant. Our European-based brokers engage from time to time in interest rate swap transactions withU.S. -based counterparties, and therefore we are subject to the CFTC requirements. CF&Co has entered into guarantees on our behalf (and on behalf of GFI), and we are required to indemnify CF&Co for the amounts, if any, paid by CF&Co on our behalf pursuant to this arrangement. During the years endedDecember 31, 2019 and 2018, the Company recorded expenses of$125,000 with respect to these guarantees.
EQUITY METHOD INVESTMENTS
The Company was authorized to enter into loans, investments or other credit support arrangements for Aqua; such arrangements are proportionally and on the same terms as similar arrangements between Aqua and Cantor. OnFebruary 5, 2020 , the Company'sBoard and Audit Committee increased the authorized amount by an additional$2.0 million . The Company has been further authorized to provide counterparty or similar guarantees on behalf of Aqua from time to time, provided that liability for any such guarantees, as well as similar guarantees provided by Cantor, would be shared proportionally with Cantor (see Note 14-"Related Party Transactions," to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information).
UNIT REDEMPTIONS AND EXCHANGES-EXECUTIVE OFFICERS
OnMarch 27, 2019 , the Audit and Compensation Committees authorized the purchase by the Company fromStephen M. Merkel of up to 250,000 shares of BGC Class A common stock at the closing price onMarch 26, 2019 . Pursuant to this authorization, 233,172 shares of BGC Class A common stock were purchased by the Company onMarch 27, 2019 at$5.30 per share, the closing price onMarch 26, 2019 . OnFebruary 27, 2019 , the Audit Committee authorized the purchase byMr. Lutnick's retirement plan of up to$56,038 of BGC Class A common stock at the closing price onMarch 4, 2019 . Pursuant to this authorization, 8,980 shares of BGC Class A common stock were purchased by the plan onMarch 5, 2019 at$6.24 per share, the closing price onMarch 4, 2019 . OnOctober 3, 2018 ,Mr. Lutnick donated an aggregate of 53,368 shares of BGC Class A common stock from his personal asset trust to a charitable foundation for which his spouse serves as a director. The Company repurchased the 53,368 shares from the charitable foundation at a price of$11.73 per share, which was the closing price of BGC Class A common stock on that date. The transaction was approved by the Audit Committee. OnFebruary 16, 2018 , the Audit Committee authorized the purchase byMr. Lutnick's retirement plan of up to$105,000 of BGC Class A common stock at the closing price on the date of purchase. Pursuant to this authorization, 7,883 shares of BGC Class A common stock were purchased by the plan onFebruary 26, 2018 at$13.17 per share, the closing price on the date of purchase.
In connection with the Company's 2018 executive compensation process, the Company's executive officers received certain monetization of prior awards as set forth below.
OnDecember 31, 2018 , the Compensation Committee approved the cancellation of 113,032 non-exchangeable PSUs held byMr. Merkel , and the cancellation of 89,225 non-exchangeable PPSUs (which had a determination price of$5.36 per unit). In connection with these transactions, the Company issued$1,062,500 in BGC Class A common stock, less applicable taxes and withholdings at a 45% tax rate, resulting in 113,032 net shares of BGC Class A common stock at a price of$5.17 per share and the payment of$478,123 for taxes. OnDecember 31, 2018 , the Compensation Committee approved the monetization of 760,797 PPSUs held byMr. Lutnick (which at an average determination price of$6.57 per share on such date, had a value of$5,000,000 ). OnFebruary 1, 2019 , the Compensation Committee approved a modification which consisted of the following: (i) the right to exchange 376,651 non-exchangeable PSUs held byMr. Lutnick into 376,651 non-exchangeable HDUs (which, based on the closing price of BGC Class A common stock of$6.21 per share on such date, had a value of$2,339,000 ); and (ii) the right to exchange for cash 463,969 non-exchangeable PPSUs held byMr. Lutnick , for a payment of$2,661,000 for taxes when (i) is exchanged. OnDecember 31, 2018 , the Compensation Committee approved the grant of exchange rights toMr. Windeatt with respect to 139,265 non-exchangeableU.K. LPUs (which at the closing price of$5.17 per share on such date, had a value of$720,000 ) and the exchange for cash (at the average determination price of$4.388 per unit) of 63,814 non-exchangeable PLPUs for a payment of$280,002 for taxes. OnFebruary 22, 2019 , the Compensation Committee approved the grant of exchange rights toMr. Windeatt with respect to an additional 22,020 non-exchangeableU.K. LPUs (which at the closing price of$6.26 per share on such date, had a value of$137,845 ) and the exchange for cash (at the average determination price of$5.6457 per unit) of 9,495 non-exchangeable PLPUs for a payment of$53,606 for taxes. OnDecember 31, 2018 , the Compensation Committee approved the grant of exchange rights toMr. Lynn with respect to 750,308 non-exchangeableU.K. LPUs (which at the closing price of$5.17 per share on such date, had a value of$3,879,092 ) and the exchange for cash (at the average determination price of$3.894 per unit) of 287,888 non-exchangeable PLPUs for a payment of$1,120,909 for taxes. OnFebruary 22, 2019 , the Compensation Committee approved the grant of exchange rights toMr. Lynn with respect to an additional 43,131 non-exchangeableU.K. LPUs (which at the closing price of$6.26 per share on such date, had a value of$270,000 ) and the exchange for cash (at the average determination price of$4.1239 per unit) of 25,461 non-exchangeable PLPUs for a payment of$105,000 for taxes. 109
-------------------------------------------------------------------------------- OnMarch 11, 2018 , as part of 2017 year-end compensation, the BGC Compensation Committee authorized the Company to issueMr. Lutnick $30.0 million of BGC Class A common stock, less applicable taxes and withholdings, based on a price of$14.33 per share, which was the closing price of BGC Class A common stock on the trading day prior to the date of issuance, which resulted in the net issuance of 979,344 shares of BGC Class A common stock. In exchange, the following equivalent units were redeemed and cancelled: an aggregate of 2,348,479 non-exchangeable LPUs ofBGC Holdings consisting of 1,637,215 non-exchangeable BGC Holdings PSUs and 711,264 BGC Holdings PPSUs, having various determination prices per unit based on the date of the grant, and associated non-exchangeable LPUs ofNewmark Holdings consisting of 774,566 of non-exchangeable Newmark Holdings PSUs and 336,499 of non-exchangeable Newmark Holdings PPSUs.
EXECUTIVE COMPENSATION-INCENTIVE PLAN
OnJune 6, 2017 , at the Annual Meeting of Stockholders of the Company, the Company's stockholders approved the Company's Incentive Plan to approve the material terms of the performance goals under the Incentive Plan for compliance with Section 162(m) of the Internal Revenue Code of 1986, as amended, including an amendment to those performance goals in order to broaden the stock price performance goal to include dividends and/or total stockholder return.
MARKET SUMMARY
The following table provides certain volume and transaction count information for the quarterly periods indicated:
December 31, September 30, June 30, March 31, December 31, 2019 2019 2019 2019 2018 Notional Volume (in billions) Total fully electronic volume$ 5,975 $ 6,448$ 5,825 $ 6,703 $ 5,738 Total hybrid volume¹ 66,996 73,485 66,619 68,826 89,435 Total fully electronic and hybrid volume$ 72,971 $ 79,933 $ 72,444 $ 75,529 $ 95,173 Transaction Count (in thousands, except for days) Total fully electronic transactions 3,108 3,176 2,856 2,810 2,910 Total hybrid transactions 1,165 1,265 1,283 1,265 1,191 Total transactions 4,273 4,441 4,139 4,075 4,101 Trading days 64 64 63 61 64 1 Hybrid is defined as transactions involving some element of electronic
trading but executed by BGC's brokers, exclusive of voice-only transactions.
Fully electronic involves customer-to-customer trades, free from broker
execution.
Fully electronic volume, including new products, was$25.0 trillion for the year endedDecember 31, 2019 , compared to$23.2 trillion for the year endedDecember 31, 2018 . Our hybrid volume for the year endedDecember 31, 2019 was$275.9 trillion , compared to$308.8 trillion for the year endedDecember 31, 2018 .
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table summarizes certain of our contractual obligations at
Less Than More Than Total 1 Year 1-3 Years 3-5 Years 5 Years Long-term debt and collateralized borrowings1$ 1,153,696 $ 84,499 $ 315,946 $ 753,251 $ - Operating leases2 258,254 30,035 57,044 44,921 126,254 Interest on long-term debt and collateralized borrowings3 167,263 55,967 77,980 33,316 - Short-term borrowings4 4,962 4,962 - - - Interest on Short-term borrowings 186 186 - - - One-time transition tax5 19,431 1,266 2,533 6,384 9,248 Other6 3,999 3,999 - - -
Total contractual obligations
1 Long-term debt and collateralized borrowings reflect long-term borrowings of
million represents the principal amount of the debt; the carrying value of
the 5.125% Senior Notes as of
million),
value of the 5.375% Senior Notes as of
million represents the principal amount of the debt; the carrying value of
the 3.750% Senior Notes as of
million),
Revolving Credit Agreement dueFebruary 26, 2021 (the$70.0 million represents 110
--------------------------------------------------------------------------------
the principal amount of the debt; the carrying value of the committed
unsecured senior Revolving Credit Agreement as of
approximately
and
18- "Notes Payable, Other and Short-term Borrowings" to our consolidated
financial statements in Part II, Item 8 of this Annual Report on Form 10-K
for more information regarding these obligations, including timing of payments and compliance with debt covenants.
2 Operating leases are related to rental payments under various non-cancelable
leases, principally for office space, net of sublease payments to be received. The total amount of sublease payments to be received is approximately$0.1 million over the life of the agreement. 3 Interest on long-term debt and collateralized borrowings also includes
interest on the undrawn portion of the committed unsecured senior Revolving
Credit Agreement which was calculated through the maturity date of the
facility, which is
portion of the committed unsecured Revolving Credit Agreement was
million.
4 Short-term borrowings reflects approximately
of borrowing under the Company's committed unsecured loan agreement. See Note
18- "Notes Payable, Other and Short-term Borrowings" for more information
regarding this obligation.
5 The Company completed the calculation of the one-time transition tax on the
deemed repatriation of foreign subsidiaries' earnings pursuant to the Tax Act
and previously recorded a net cumulative tax expense of
foreign tax credits, with an election to pay the taxes over eight years with
40% to be paid in equal installments over the first five years and the
remaining 60% to be paid in installments of 15%, 20% and 25% in years six,
seven and eight, respectively. The cumulative remaining balance as ofDecember 31, 2019 is$19.4 million . 6 Other contractual obligations reflect commitments to make charitable
contributions, which are recorded as part of "Accounts payable, accrued and
other liabilities" in the Company's consolidated statements of financial
condition. The amount payable each year reflects an estimate of futureCharity Day obligations.
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, we enter into arrangements with unconsolidated entities, including variable interest entities. See Note 15-"Investments" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to our investments in unconsolidated entities.
CRITICAL ACCOUNTING POLICIES and estimates
The preparation of our consolidated financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. These accounting estimates require the use of assumptions about matters, some of which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our consolidated statements of financial condition, consolidated statements of operations and consolidated statements of cash flows could be materially affected. We believe that the following accounting policies involve a higher degree of judgment and complexity. Revenue Recognition We derive our revenues primarily through commissions from brokerage services, the spread between the buy and sell prices on matched principal transactions, fees from related parties, data, software and post-trade services, and other revenues. See Note 3-"Summary of Significant Accounting Policies" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information regarding revenue recognition.
Equity-Based and Other Compensation
Discretionary Bonus: A portion of our compensation and employee benefits expense is comprised of discretionary bonuses, which may be paid in cash, equity, partnership awards or a combination thereof. We accrue expense in a period based on revenues in that period and on the expected combination of cash, equity and partnership units. Given the assumptions used in estimating discretionary bonuses, actual results may differ. Restricted Stock Units: We account for equity-based compensation under the fair value recognition provisions of theU.S. GAAP guidance. RSUs provided to certain employees are accounted for as equity awards, and in accordance with theU.S. GAAP, we are required to record an expense for the portion of the RSUs that is ultimately expected to vest. Further, forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Because assumptions are used in estimating employee turnover and associated forfeiture rates, actual results may differ from our estimates under different assumptions or conditions. 111 -------------------------------------------------------------------------------- The fair value of RSU awards to employees is determined on the date of grant, based on the fair value of BGC Class A common stock. Generally, RSUs granted by us as employee compensation do not receive dividend equivalents; as such, we adjust the fair value of the RSUs for the present value of expected forgone dividends, which requires us to include an estimate of expected dividends as a valuation input. This grant-date fair value is amortized to expense ratably over the awards' vesting periods. For RSUs with graded vesting features, we have made an accounting policy election to recognize compensation cost on a straight-line basis. The amortization is reflected as part of "Equity-based compensation and allocations of net income to limited partnership units and FPUs" in our consolidated statements of operations. Restricted Stock: Restricted stock provided to certain employees is accounted for as an equity award, and as per theU.S. GAAP guidance, we are required to record an expense for the portion of the restricted stock that is ultimately expected to vest. We have granted restricted stock that is not subject to continued employment or service; however, transferability is subject to compliance with our and our affiliates' customary noncompete obligations. Such shares of restricted stock are generally saleable by partners in five to ten years. Because the restricted stock is not subject to continued employment or service, the grant-date fair value of the restricted stock is expensed on the date of grant. The expense is reflected as non-cash equity-based compensation expense in our consolidated statements of operations. Limited Partnership Units: LPUs inBGC Holdings andNewmark Holdings are generally held by employees. Generally, such units receive quarterly allocations of net income, which are cash distributed on a quarterly basis and generally contingent upon services being provided by the unit holders. In addition, Preferred Units are granted in connection with the grant of certain LPUs, such as PSUs, that may be granted exchangeability or redeemed in connection with the grant of shares of common stock to cover the withholding taxes owed by the unit holder upon such exchange or grant. This is an acceptable alternative to the common practice among public companies of issuing the gross amount of shares to employees, subject to cashless withholding of shares to pay applicable withholding taxes. Our Preferred Units are not entitled to participate in partnership distributions other than with respect to a distribution at a rate of either 0.6875% (which is 2.75% per calendar year) or such other amount as set forth in the award documentation. The quarterly allocations of net income to such LPUs are reflected as a component of compensation expense under "Equity-based compensation and allocations of net income to limited partnership units and FPUs" in our consolidated statements of operations. Certain of these LPUs entitle the holders to receive post-termination payments equal to the notional amount, generally in four equal yearly installments after the holder's termination. These LPUs are accounted for as post-termination liability awards under theU.S. GAAP. Accordingly, we recognize a liability for these units on our consolidated statements of financial condition as part of "Accrued compensation" for the amortized portion of the post-termination payment amount, based on the current fair value of the expected future cash payout. We amortize the post-termination payment amount, less an expected forfeiture rate, over the vesting period, and record an expense for such awards based on the change in value at each reporting period in our consolidated statements of operations as part of "Equity-based compensation and allocations of net income to limited partnership units and FPUs." Certain LPUs are granted exchangeability into shares of BGC or Newmark Class A common stock or are redeemed in connection with the grant of BGC or Newmark Class A common stock issued; BGC Class A common stock is issued on a one-for-one basis, and Newmark Class A common stock is issued based on the number of LPUs exchanged or redeemed multiplied by the then Exchange Ratio. At the time exchangeability is granted or shares of BGC or Newmark Class A common stock are issued, we recognize an expense based on the fair value of the award on that date, which is included in "Equity-based compensation and allocations of net income to limited partnership units and FPUs" in our consolidated statements of operations. During the years endedDecember 31, 2019 , 2018 and 2017, we incurred compensation expense of$100.9 million ,$150.1 million and$176.5 million , respectively. Certain LPUs have a stated vesting schedule and do not receive quarterly allocations of net income. Compensation expense related to these LPUs is recognized over the stated service period, and these units generally vest between two and five years. During the years endedDecember 31, 2019 , 2018 and 2017, we incurred compensation expense related to these LPUs of$36.7 million ,$11.4 million , and$1.2 million , respectively. This expense is included in "Equity-based compensation and allocations of net income to limited partnership units and FPUs" in our consolidated statements of operations. Employee Loans: We have entered into various agreements with certain employees and partners, whereby these individuals receive loans that may be either wholly or in part repaid from distributions that the individuals receive on some or all of their limited partnership interests or may be forgiven over a period of time. Cash advance distribution loans are documented in formal agreements and are repayable in timeframes outlined in the underlying agreements. We intend for these advances to be repaid in full from the future distributions on existing and future awards granted. The distributions are treated as compensation expense when made and the proceeds are used to repay the loan. The forgivable portion of any loans is recognized as compensation expense in our consolidated statements of operations over the life of the loan. We review the loan balances each reporting period for collectability. If we determine that the collectability of a portion of the loan balances is not expected, we recognize a reserve against the loan balances. Actual collectability of loan balances may differ from our estimates. As ofDecember 31, 2019 and 2018, the aggregate balance of employee loans, net of reserve, was$315.6 million and$216.9 million , respectively, and is included as "Loans, forgivable loans and other receivables from employees and partners, net" in our consolidated statements of financial condition. Compensation expense for the above-mentioned employee loans for the years endedDecember 31, 2019 , 2018 and 2017 was$35.7 million ,$13.0 million and$26.9 million , respectively. The compensation expense related to these loans was included as part of "Compensation and employee benefits" in our consolidated statements of operations. 112
--------------------------------------------------------------------------------
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. As prescribed in theU.S. GAAP guidance, Intangibles -Goodwill and Other, goodwill is not amortized, but instead is periodically tested for impairment. We review goodwill for impairment on an annual basis during the fourth quarter 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. When reviewing goodwill for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If the results of the qualitative assessment are not conclusive, or if we choose to bypass the qualitative assessment, we perform a goodwill impairment analysis using a two-step process as follows. The first step involves comparing each reporting unit's estimated fair value to its carrying value, including goodwill. To estimate the fair value of the reporting units, we use a discounted cash flow model and data regarding market comparables. The valuation process requires significant judgment and involves the use of significant estimates and assumptions. These assumptions include cash flow projections, estimated cost of capital and the selection of peer companies and relevant multiples. Because assumptions and estimates are used in projecting future cash flows, choosing peer companies and selecting relevant multiples, actual results may differ from our estimates under different assumptions or conditions. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is deemed not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of potential impairment. The second step of the process involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated a potential impairment may exist. The implied fair value of goodwill is determined by measuring the excess of the estimated fair value of the reporting unit, as calculated in step one, over the estimated fair values of the individual assets, liabilities and identified intangibles. Events such as economic weakness, significant declines in operating results of reporting units, or significant changes to critical inputs of the goodwill impairment test (e.g., estimates of cash flows or cost of capital) could cause the estimated fair value of our reporting units to decline, which could result in an impairment of goodwill in the future. Income Taxes We account for income taxes using the asset and liability method as prescribed in theU.S. GAAP guidance, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to basis differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Certain of our entities are taxed asU.S. partnerships and are subject to UBT in theCity of New York . Therefore, the tax liability or benefit related to the partnership income or loss except for UBT rests with the partners (see Note 2-"Limited Partnership Interests inBGC Holdings andNewmark Holdings " for a discussion of partnership interests), rather than the partnership entity. As such, the partners' tax liability or benefit is not reflected in our consolidated financial statements. The tax-related assets, liabilities, provisions or benefits included in our consolidated financial statements also reflect the results of the entities that are taxed as corporations, either in theU.S. or in foreign jurisdictions. We provide for uncertain tax positions based upon management's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. Management is required to determine whether a tax position is more likely than not to be sustained upon examination by tax authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Because significant assumptions are used in determining whether a tax benefit is more likely than not to be sustained upon examination by tax authorities, actual results may differ from our estimates under different assumptions or conditions. We recognize interest and penalties related to income tax matters in "Provision for income taxes" in our consolidated statements of operations. A valuation allowance is recorded against deferred tax assets if it is deemed more likely than not that those assets will not be realized. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, the existence of cumulative losses in the most recent fiscal years, estimates of future taxable income and the feasibility of tax planning strategies. The measurement of current and deferred income tax assets and liabilities is based on provisions of enacted tax laws and involves uncertainties in the application of tax regulations in theU.S. and other tax jurisdictions. Because our interpretation of complex tax law may impact the measurement of current and deferred income taxes, actual results may differ from these estimates under different assumptions regarding the application of tax law. The Tax Act was enacted onDecember 22, 2017 , which includes the global intangible low-taxed income, GILTI, provision. This provision requires inclusion in the Company'sU.S. income tax return the earnings of certain foreign subsidiaries. The Company has elected to treat taxes associated with the GILTI provision using the Period Cost Method and thus has not recorded deferred taxes for basis differences under this regime. See Note 3-"Summary of Significant Accounting Policies" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding these critical accounting policies and other significant accounting policies.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1-"Organization and Basis of Presentation" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for information regarding recent accounting pronouncements.
113 --------------------------------------------------------------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Credit Risk
Credit risk arises from potential non-performance by counterparties and customers.BGC Partners has established policies and procedures to manage its exposure to credit risk.BGC Partners maintains a thorough credit approval process to limit exposure to counterparty risk and employs stringent monitoring to control the counterparty risk from its matched principal and agency businesses.BGC Partners' account opening and counterparty approval process includes verification of key customer identification, anti-money laundering verification checks and a credit review of financial and operating data. The credit review process includes establishing an internal credit rating and any other information deemed necessary to make an informed credit decision, which may include correspondence, due diligence calls and a visit to the entity's premises, as necessary.
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. Ongoing credit monitoring procedures include reviewing periodic financial statements and publicly available information on the client and collecting data from credit rating agencies, where available, to assess the ongoing financial condition of the client.
In addition,BGC Partners incurs limited credit risk related to certain brokerage activities. The counterparty risk relates to the collectability of the outstanding brokerage fee receivables. The review process includes monitoring both the clients and the related brokerage receivables. The review includes an evaluation of the ongoing collection process and an aging analysis of the brokerage receivables.
Principal Transaction Risk
Through its subsidiaries,BGC Partners executes matched principal transactions in which it acts as a "middleman" by serving as counterparty to both a buyer and a seller in matching back-to-back trades. These transactions are then settled through a recognized settlement system or 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.BGC Partners generally avoids settlement of principal transactions on a free-of-payment basis or by physical delivery of the underlying instrument. However, free-of-payment transactions may occur on a very limited basis. The number of matched principal tradesBGC Partners executes has continued to grow as compared to prior years. Receivables from broker-dealers, clearing organizations, customers and related broker-dealers and Payables to broker-dealers, clearing organizations, customers and related broker-dealers on the Company's consolidated statements of financial condition primarily represent the simultaneous purchase and sale of the securities associated with those matched principal transactions that have not settled as of their stated settlement dates.BGC Partners' experience has been that substantially all of these transactions ultimately settle at the contracted amounts.
Market Risk
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices or other factors will result in losses for a specified position.BGC Partners may allow certain of its desks to enter into unmatched principal transactions in the ordinary course of business and hold long and short inventory positions. These transactions are primarily for the purpose of facilitating clients' execution needs, adding liquidity to a market or attracting additional order flow. As a result,BGC Partners may have market risk exposure on these transactions.BGC Partners' exposure varies based on the size of its overall positions, the risk characteristics of the instruments held and the amount of time the positions are held before they are disposed of.BGC Partners has limited ability to track its exposure to market risk and unmatched positions on an intra-day basis; however, it attempts to mitigate its market risk on these positions by strict risk limits, extremely limited holding periods and hedging its exposure. These positions are intended to be held short term to facilitate customer transactions. However, due to a number of factors, including the nature of the position and access to the market on which it trades,BGC Partners may not be able to unwind the position and it may be forced to hold the position for a longer period than anticipated. All positions held longer than intra-day are marked to market. We also have investments in marketable equity securities, which are publicly-traded, and which had a fair value of$14.2 million as ofDecember 31, 2019 . These include shares of common stock of Nasdaq that we received in exchange for a portion of our electronic benchmarkTreasury platform. Investments in marketable securities carry a degree of risk, as there can be no assurance that the marketable securities will not lose value and, in general, securities markets can be volatile and unpredictable. As a result of these different market risks, our holdings of marketable securities could be materially and adversely affected. We may seek to minimize the effect of price changes on a portion of our investments in marketable securities through the use of derivative contracts. However, there can be no assurance that our hedging activities will be adequate to protect us against price risks associated with our investments in marketable securities. See Note 10-"Marketable Securities " and Note 12-"Derivatives" to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information regarding these investments and related hedging activities. Our risk management procedures and strict limits are designed to monitor and limit the risk of unintended loss and have been effective in the past. However, there is no assurance that these procedures and limits will be effective at limiting unanticipated losses in the future. Adverse movements in the securities 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, onBGC Partners' consolidated financial condition and results of operations for any particular reporting period. 114 --------------------------------------------------------------------------------
Operational Risk
Our businesses are highly dependent on our ability to process a large number of transactions across numerous and diverse markets in many currencies on a daily basis. If any of our data processing systems do not operate properly or are disabled or if there are other shortcomings or failures in our internal processes, people or systems, we could suffer impairment to our liquidity, financial loss, a disruption of our businesses, liability to clients, regulatory intervention or reputational damage. These systems may fail to operate properly or become disabled as a result of events that are wholly or partially beyond our control, including cybersecurity incidents, a disruption of electrical or communications services or our inability to occupy one or more of our buildings. The inability of our systems to accommodate an increasing volume of transactions could also constrain our ability to expand our businesses. In addition, despite our contingency plans, our ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports our businesses and the communities in which they are located. This may include a disruption involving electrical, communications, transportation or other services used by us or third parties with whom we conduct business. Further, our operations rely on the secure processing, storage and transmission of confidential and other information on our computer systems and networks. Although we take protective measures such as software programs, firewalls and similar technology to maintain the confidentiality, integrity and availability of our and our clients' information, the nature of the threats continue to evolve. As a result, our computer systems, software and networks may be vulnerable to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability or disruption of service, computer viruses, acts of vandalism, or other malicious code, cyber-attacks and other events that could have an adverse security impact. There have also been an increasing number of malicious cyber incidents in recent years in various industries, including ours. Any such cyber incidents involving our computer systems and networks, or those of third parties important to our businesses, could present risks to our operations.
Foreign Currency Risk
BGC Partners is exposed to risks associated with changes in foreign exchange rates. Changes in foreign exchange rates create volatility in theU.S. Dollar equivalent of the Company's revenues and expenses. In addition, changes in the remeasurement ofBGC Partners' foreign currency denominated financial assets and liabilities are recorded as part of its results of operations and fluctuate with changes in foreign currency rates. BGC monitors the net exposure in foreign currencies on a daily basis and hedges its exposure as deemed appropriate with highly rated major financial institutions. The majority of the Company's foreign currency exposure is related to theU.S. Dollar versus the British Pound and the Euro. While our international results of operations, as measured inU.S. Dollars, are subject to foreign exchange fluctuations, we do not consider the related risk to be material to our results of operations. For the financial assets and liabilities denominated in the British Pound and Euro, including foreign currency hedge positions related to these currencies, we evaluated the effects of a 10% shift in exchange rates between those currencies and theU.S. Dollar, holding all other assumptions constant. The analysis identified the worst case scenario as theU.S. Dollar weakening against the Euro and strengthening against the British Pound. If as ofDecember 31, 2019 , theU.S. Dollar had weakened against the Euro and strengthened against the British Pound by 10%, the currency movements would have had an aggregate negative impact on our net income of approximately$0.8 million .
Interest Rate Risk
BGC Partners had$1,073.7 million in fixed-rate debt outstanding as ofDecember 31, 2019 . These debt obligations are not currently subject to fluctuations in interest rates, although in the event of refinancing or issuance of new debt, such debt could be subject to changes in interest rates. In addition, as ofDecember 31, 2019 ,BGC Partners had$68.9 million of net borrowings outstanding under its Revolving Credit Agreement. The interest rate on these borrowings is based on LIBOR. Disaster Recovery Our processes address disaster recovery concerns. We operate most of our technology from US andUK primary data centers. Either site alone is typically capable of running all of our essential systems. Replicated instances of this technology are maintained in our redundant data centers. Our data centers are generally built and equipped to best-practice standards of physical security with appropriate environmental monitoring and safeguards. Failover for the majority of our systems is automated. 115
--------------------------------------------------------------------------------
© Edgar Online, source