# INTERACTIVE BROKERS LLC X-17A-5 (2021-02-26) — Broker-dealer annual report - Company: INTERACTIVE BROKERS LLC - Form: X-17A-5 - Filed: 2021-02-26 - Period: 2020-12-31 - Accession: 0000922792-21-000002 - CIK: 922792 - File #: 8-47257 - Material weakness: No - Auditor: Deloitte & Touche LLP - Auditor location: New York, NY - Contact: Denis Mendonca - Phone: 2036185881 - Signed by: Paul J. Brody (Secretary) Original filing: https://www.sec.gov/Archives/edgar/data/922792/000092279221000002/ibllc_public-20201231.pdf --- {0}------------------------------------------------ #### INTERACTIVE BROKERS LLC (SEC I.D. No. 8-47257) ### STATEMENT OF FINANCIAL CONDITION AS OF DECEMBER 31, 2020 AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM \* \* \* \* \* \* \* Filed pursuant to Rule 17a-5(e)(3) under the Securities Exchange Act of 1934 as a Public Document {1}------------------------------------------------ ## **INTERACTIVE BROKERS LLC** | Table of Contents | | | | |-------------------|--|--|--| |-------------------|--|--|--| | Report of Independent Registered Public Accounting Firm. | 1 | |----------------------------------------------------------|------| | Statement of Financial Condition. | 2 | | Notes to the Statement of Financial Condition. | 3-21 | {2}------------------------------------------------ **Deloitte & Touche LLP** 30 Rockefeller Plaza New York, NY 10112 USA # Fax: +1 212 489 1687 Deloitte . Tel.: +1 212 492 4000 www.deloitte.com ## **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM** To the Directors and the Members of Interactive Brokers LLC Greenwich, CT ## **Opinion on the Financial Statement** We have audited the accompanying statement of financial condition of Interactive Brokers LLC (the "Company") as of December 31, 2020 and the related notes (collectively referred to as the "financial statement"). In our opinion, the financial statement presents fairly, in all material respects, the financial position of the Company as of December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. ## **Basis for Opinion** The financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statement, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statement. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement. We believe that our audit of the financial statement provides a reasonable basis for our opinion. February 26, 2021 We have served as the Company's auditor since 1994. {3}------------------------------------------------ ### **Interactive Brokers LLC Statement of Financial Condition** As of December 31, 2020 *(Dollars in millions)* | Assets | | |------------------------------------------------------------------|--------------| | Cash and cash equivalents | \$
2,638 | | Cash - segregated for regulatory purposes | 3,330 | | Securities - segregated for regulatory purposes | 27,821 | | Securities borrowed | 4,383 | | Securities purchased under agreements to resell | 792 | | Financial instruments owned, at fair value | 10 | | Receivables | | | Customers (net of allowance for credit losses accounts of \$12) | 37,223 | | Brokers, dealers and clearing organizations | 1,044 | | Affiliates | 10 | | Interest | 95 | | Total receivables | 38,372 | | Other assets | 58 | | Total assets | \$
77,404 | | Liabilities and members' equity | | | Liabilities | | | Short-term borrowings | \$
22 | | Payables to customers | 62,695 | | Securities loaned | 8,739 | | Securities sold under agreements to repurchase | — | | Financial instruments sold, but not yet purchased, at fair value | 6 | | Other payables | | | Brokers, dealers and clearing organizations | 119 | | Accounts payable, accrued expenses and other liabilities | 53 | | Affiliates | 115 | | Interest | 7 | | Total other payables | 294 | | Total liabilities | 71,756 | | Members' capital | 5,648 | | Total liabilities and members' capital | \$
77,404 | See accompanying notes to the statement of financial condition. {4}------------------------------------------------ #### **1. Organization and Nature of Business** Interactive Brokers LLC (the "Company"), a Connecticut limited liability company, is a broker-dealer registered under the Securities Exchange Act of 1934 (the "Exchange Act") with the Securities and Exchange Commission ("SEC") and is a member of the Financial Industry Regulatory Authority ("FINRA") and various securities and commodities exchanges. The Company is also a member of the National Futures Association ("NFA") and is registered with Commodity Futures Trading Commission ("CFTC") as a Futures Commission Merchant and a Foreign Exchange Dealer. The Company executes and clears securities and commodities transactions for customers. Certain transactions are cleared through other clearing brokers. Accordingly, the Company carries securities accounts for customers and is subject to the requirements of Rule 15c3-3 under the Exchange Act (the "Customer Protection Rule") pertaining to the possession or control of customer-owned assets and reserve requirements. The Company carries customer commodities accounts and is subject to the segregation requirements of the Commodity Exchange Act. The Company is also subject to the requirements of Rule 15c3-1 under the Exchange Act (the "Uniform Net Capital Rule") and the CFTC's minimum financial requirements (Regulations 1.17 and 5.7). The Company is 99.9% owned by IBG LLC (the "Parent"), a Connecticut limited liability company. The Company has several affiliates which are also majority owned by the Parent (see Note 13). The Parent and its subsidiaries, including the Company, are consolidated by Interactive Brokers Group, Inc. ("IBG, Inc."), a publicly traded U.S. corporation. #### **2. Significant Accounting Policies** #### *Basis of Presentation* This statement of financial condition is presented in U.S. dollars and has been prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP"). In March 2020, the World Health Organization recognized the outbreak of the Coronavirus Disease 2019 ("COVID-19") caused by a novel strain of the coronavirus as a pandemic. The pandemic affects all countries in which we operate. The response of governments and societies to the COVID-19 pandemic, which includes temporary closures of certain businesses; social distancing; travel restrictions, "shelter in place" and other governmental regulations; and reduced consumer spending due to job losses, has significantly impacted volatility in the financial, commodities and energy markets, and general economic conditions. The effects of the COVID-19 pandemic on the Company's statement of financial condition for 2020 were not significant. The impact of the COVID-19 pandemic on the Company's future financial results could be significant but currently cannot be quantified, as it will depend on numerous evolving factors that currently cannot be accurately predicted, including, but not limited to, the duration and spread of the pandemic; its impact on our customers, employees and vendors; governmental actions in response to the pandemic; and the overall impact of the pandemic in the economy and society; among other factors. Any of these events could have significant accounting and financial reporting implications (i.e., reassessing accounting estimates related to credit losses and contingency reserves). The Company has reviewed its assumptions related to the above estimates and have not made any adjustments. #### *Use of Estimates* The preparation of the statement of financial condition in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the statement of financial condition and accompanying notes. These estimates and assumptions are based on judgment and the best available information at the time. Therefore, actual results could differ materially from those estimates. Such estimates include the allowance for credit losses, compensation accruals, and contingency reserves. #### *Fair Value* Substantially all of the Company's assets and liabilities, including financial instruments are carried at fair value based on published market prices and are marked to market, or are assets and liabilities which are short-term in nature and are carried at amounts that approximate fair value. {5}------------------------------------------------ *(Dollars in millions, unless otherwise noted)* The Company applies the fair value hierarchy in accordance with FASB ASC Topic 820, "Fair Value Measurement" ("ASC Topic 820"), to prioritize the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy are: - Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. - Level 2 Quoted prices for similar assets in an active market, quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly. - Level 3 Prices or valuations that require inputs that are both significant to fair value measurement and unobservable. Financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value are generally classified as Level 1 of the fair value hierarchy. The Company's Level 1 financial instruments, which are valued using quoted market prices as published by exchanges and clearing houses or otherwise broadly distributed in active markets, include listed stocks, options and U.S. government securities which are included in securities – segregated for regulatory purposes and in financial instruments owned in the statement of financial condition. Currency forward contracts are valued using broadly distributed bank and broker prices, and are classified as Level 2 of the fair value hierarchy since inputs to their valuation can be generally corroborated by market data. Other securities that are not traded in active markets are also classified as Level 2 of the fair value hierarchy. Level 3 financial instruments are comprised of securities that have been delisted or otherwise are no longer tradable in active markets and have been valued by the Company based on internal estimates. #### *Current Expected Credit Losses* On January 1, 2020, the Company adopted FASB ASC Topic 326 – "Financial Instruments – Credit Losses" ("ASC Topic 326") which replaces the incurred loss methodology with the current expected credit loss ("CECL") methodology. The new guidance applies to financial assets measured at amortized cost, held-to-maturity debt securities and off-balance sheet credit exposures. For on-balance sheet assets, an allowance must be recognized at the origination or purchase of in-scope assets and represents the expected credit losses over the contractual life of those assets. Expected credit losses on off-balance sheet credit exposures must be estimated over the contractual period the Company is exposed to credit risk as a result of a present obligation to extend credit. The Company adopted ASC Topic 326 using the modified retrospective approach for all in-scope assets, which did not result in an adjustment to the opening balance in retained earnings. Results for reporting periods beginning after January 1, 2020 are presented under ASC Topic 326 while prior periods continue to be reported in accordance with previously applicable U.S. GAAP. The impact to the current period is not material since the Company's in-scope assets are primarily subject to collateral maintenance provisions for which the Company elected to apply the practical expedient of reporting the difference between the fair value of collateral and the amortized cost for the in-scope assets as the allowance for current expected credit losses. #### *Cash and Cash Equivalents* Cash and cash equivalents consist of deposits with banks and all highly liquid investments, with maturities of three months or less, that are not segregated and deposited for regulatory purposes or to meet margin requirements at clearing houses and clearing banks. #### *Cash and Securities - Segregated for Regulatory Purposes* As a result of customer activities, the Company is obligated by rules mandated by its primary regulator to segregate or set aside cash or qualified securities to satisfy such regulations, which have been promulgated to protect customer assets. Restricted cash represents cash and cash equivalents that are subject to withdrawal or usage restrictions. Cash segregated for regulatory purposes meets the definition of restricted cash. At December 31, 2020, securities segregated for regulatory purposes consisted of U.S. government securities of \$4.7 billion and securities purchased under agreements to resell of \$23.1 billion, which amounts approximate fair value. {6}------------------------------------------------ *(Dollars in millions, unless otherwise noted)* #### *Securities Borrowed and Securities Loaned* Securities borrowed and securities loaned are recorded at the amount of the cash collateral advanced or received. Securities borrowed transactions require the Company to provide counterparties with collateral, which may be in the form of cash or other securities. With respect to securities loaned, the Company receives collateral, which may be in the form of cash or other securities in an amount generally in excess of the fair value of the securities loaned. The Company monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as permitted contractually. The Company's policy is to net, in the statement of financial condition, securities borrowed and securities loaned entered into with the same counterparty that meet the offsetting requirements prescribed in FASB ASC Topic 210-20, "Balance Sheet – Offsetting" ("ASC Topic 210-20"). #### *Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase* Securities purchased under agreements to resell and securities sold under agreements to repurchase, which are reported as collateralized financing transactions, are recorded at contract value, which approximates fair value. To ensure that the fair value of the underlying collateral remains sufficient, the collateral is valued daily with additional collateral obtained or excess collateral returned, as permitted under contractual provisions. It is the Company's policy to net, in the statement of financial condition, securities purchased under agreements to resell transactions and securities sold under agreements to repurchase transactions entered into with the same counterparty that meet the offsetting requirements prescribed in ASC Topic 210-20. #### *Financial Instruments Owned and Financial Instruments Sold, But Not Yet Purchased, at Fair Value* Financial instrument transactions are accounted for on a trade date basis. Financial instruments owned and financial instruments sold, but not yet purchased are stated at fair value based upon quoted market prices, or if not available, are valued by the Company based on internal estimates (see *Fair Value* above). The Company's financial instruments pledged to counterparties where the counterparty has the right, by contract or custom, to sell or repledge the financial instruments are reported as financial instruments owned and pledged as collateral in the statement of financial condition. The Company also enters into currency forward contracts. These transactions, which are also accounted for on a trade date basis, are agreements to exchange a fixed amount of one currency for a specified amount of a second currency at completion of the currency forward contract term. Unrealized mark to market gains and losses on currency forward contracts are included in financial instruments owned, at fair value or financial instruments sold, but not yet purchased, at fair value in the statement of financial condition. #### *Currency Spot and Forward Contracts* The Company enters into currency swap contracts for customer funds denominated in foreign currencies to obtain U.S. dollars, with a locked-in rate of return, for the purpose of making bank deposits denominated in U.S. dollars to satisfy regulatory segregation requirements and on behalf of its affiliates. A currency swap contract is an agreement to exchange a fixed amount of one currency for a specified amount of a second currency at the outset and exchange back a specified amount at completion of the swap term (i.e., the forward contract). Interest rate differences, between currencies, are captured in the contractual swap rates. The Company also executes currency spot contracts on behalf of its customers and affiliates. These currency spot and forward transactions are recorded on a trade date basis at fair value based on distributed bank and broker prices. Included in receivables from and payables to brokers, dealers and clearing organizations are \$15 and \$7, respectively, which represent unsettled amounts of currency spot and forward contracts at December 31, 2020. #### *Customer Receivables and Payables* Customer securities transactions are recorded on a settlement date basis and customer commodities transactions are recorded on a trade date basis. Receivables from and payables to customers include amounts due on cash and margin transactions, including futures contracts transacted on behalf of customers. Securities owned by customers, including those that collateralize margin loans or other similar transactions, are not reported in the statement of financial condition. Receivables from institutional non-cleared customers and payables for execution and clearing fees are included in other assets and accounts payable, accrued expenses and other liabilities, respectively, in the statement of financial condition. #### *Receivables from and Payables to Brokers, Dealers and Clearing Organizations* Receivables from and payables to brokers, dealers and clearing organizations include net receivables and payables from unsettled trades, {7}------------------------------------------------ *(Dollars in millions, unless otherwise noted)* including amounts related to futures and options on futures contracts executed on behalf of customers, amounts receivable for securities not delivered by the Company to the purchaser by the settlement date ("fails to deliver") and cash deposits. Payables to brokers, dealers and clearing organizations also include amounts payable for securities not received by the Company from a seller by the settlement date ("fails to receive"). #### *Interest* Interest is accrued on customer margin balances, securities borrowed and securities loaned contract amounts, securities purchased under agreements to resell, securities sold under agreements to repurchase, interest bearing assets and liabilities included in financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair value. Interest is included in interest receivable and interest payable in the statement of financial condition. #### *Property and Equipment* Property and equipment, which are included in other assets in the statement of financial condition, consist of leasehold improvements, computer equipment, office furniture and equipment. Property and equipment are recorded at historical cost, less accumulated depreciation and amortization. Additions and improvements that extend the lives of assets are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Depreciation and amortization are computed using the straight-line method. Equipment is depreciated over the estimated useful lives of the assets, while leasehold improvements are amortized over the lesser of the estimated economic useful life of the asset or the term of the lease. Computer equipment is depreciated over three to five years and office furniture and equipment are depreciated over five to seven years. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the statement of financial condition. Fully depreciated (or amortized) assets are retired periodically throughout the year. #### *Leases* The Company follows FASB ASC Topic 842, "Leases," ("ASC Topic 842") which requires that a lessee recognize in the statement of financial condition a lease liability and a corresponding right-of-use asset, including for those leases that the Company had classified as operating leases. The right-of-use asset and the lease liability are initially measured using the present value of the remaining lease payments. As permitted under ASC Topic 842, the Company adopted the following practical expedients: (1) not to reassess whether an expired or non-lease contract that commenced before January 1, 2019 contained an embedded lease, (2) not to reassess the classification of existing leases, (3) not to determine whether initial direct costs related to existing leases should be capitalized under ASC Topic 842, and (4) not to separate lease and non-lease components. The Company reviews all relevant contracts to determine if the contract contains a lease at its inception date. A contract contains a lease if the contract conveys to the company the right to control the use of an underlying asset for a period of time in exchange for consideration. If the Company determines that a contract contains a lease, it recognizes, in the statement of financial condition, a lease liability and a corresponding right-of-use asset on the commencement date of the lease. The lease liability is initially measured at the present value of the future lease payments over the lease term using the rate implicit in the lease or, if not readily determinable, the Company's secured incremental borrowing rate. An operating lease right-of-use asset is initially measured at the value of the lease liability minus any lease incentives and initial direct costs incurred plus any prepaid rent. The Company's leases are classified as operating leases and consist of real estate leases for office space, data centers and other facilities. Each lease liability is measured using the Company's secured incremental borrowing rate, which is based on an internally developed yield curve using interest rates of third parties' corporate debt issued with a similar risk profile as the Company and a duration similar to the lease term. The Company's leases have remaining terms of one to six years, some of which include options to extend the lease term, and some of which include options to terminate the lease upon notice. The Company considers these options when determining the lease term used to calculate the right-of-use asset and the lease liability when the Company is reasonably certain it will exercise such option. The Company's operating leases contain both lease components and non-lease components. Non-lease components are distinct elements of a contract that are not related to securing the use of the underlying assets, such as common area maintenance and other management costs. The Company elected to measure the lease liability by combining the lease and non-lease components as a single lease component. As such, the Company includes the fixed payments and any payments that depend on a rate or index that relate to the lease and nonlease components in the measurement of the lease liability. Some of the non-lease components are variable in nature and not based on {8}------------------------------------------------ an index or rate, and as a result, are not included in the measurement of the right-of-use asset or lease liability. #### *Stock-Based Compensation* The Company follows FASB ASC Topic 718, "Compensation - Stock Compensation" ("ASC Topic 718"), to account for its employees' participation in IBG, Inc.'s stock-based compensation plans. ASC Topic 718 requires all share-based payments to employees to be recognized in the statement of financial condition using a fair value-based method. Grants, which are denominated in U.S. dollars, are communicated to employees in the year of grant, thereby establishing the fair value of each grant. Awards granted under stock-based compensation plans are subject to the plans' post-employment provisions in the event an employee ceases employment with the Company. The plans provide that employees who discontinue employment with the Company without cause and continue to meet the terms of the plans' post-employment provisions will be eligible to earn 50% of previously granted but not yet earned awards, unless the employee is over the age of 59, in which case the employee would be eligible to receive 100% of previously granted but not yet earned awards. #### *Income Taxes* The Company accounts for income taxes in accordance with FASB ASC Topic 740, "Income Taxes" ("ASC Topic 740"). The deferred tax assets and liabilities, and reserves for unrecognized tax benefits are based on enacted tax laws and reflect management's best assessment of estimated future taxes to be paid. Determining income tax requires significant judgment and estimates. The Company records tax liabilities in accordance with ASC Topic 740 and adjusts these liabilities when management's judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in payments that are different from the current estimates of these tax liabilities. The Company operates in the U.S. as a limited liability company that is treated as a partnership for U.S. federal income tax purposes. Accordingly, the Company's income is not subject to U.S. federal income taxes. Taxes related to income earned by partnershipsrepresent obligations of the individual partners. {9}------------------------------------------------ *(Dollars in millions, unless otherwise noted)* #### *FASB Standards Adopted During 2020* | Standard | Summary of guidance | Effect on statement of financial
condition
•
Adopted January 1, 2020.
•
The changes did not have a
material impact on the Company's
statement of financial condition.
The Company elected the practical
expedient relating to financial
assets subject to collateral
maintenance provisions. | | | | |--------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--| | Financial instruments – credit
losses (Topic 326)
Issued June 2016 | •
Replaces the current incurred loss impairment
guidance and establishes a single allowance
framework for financial assets carried at amortized
cost.
•
The allowance shall reflect managements' estimate of
credit losses over the life of the asset taking future
economic changes into consideration.
•
As of the beginning of the reporting period of
adoption, a cumulative-effect adjustment to retained
earnings shall be recognized. | | | | | | Fair Value Measurement (Topic
820)
Issued August 2018 | •
Eliminates the requirement to disclose: (a) the amount
and reasons for transfers between Level 1 and Level 2
of the fair value hierarchy; (b) an entity's policy for
timing of transfers between levels; (c) and an entity's
valuation processes for Level 3 fair value
measurements. | •
Adopted January 1, 2020.
•
Changes relating to Level 3 fair
value measurements were applied
prospectively. All other changes
were applied retrospectively.
•
The adoption of the changes did not
have a material impact on the
Company's statement of financial
condition. | | | | #### *FASB Standards issued but not adopted as of December 31, 2020* | Standard | Summary of guidance | Effect on statement of financial
condition | |--------------------------|-------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------| | Income Taxes (Topic 740) | •
Simplifies the accounting for income taxes by
removing certain exceptions to the general principles | •
Effective date: January 1, 2021.
Early adoption is permitted. | | Issued December 2019 | in Topic 740. | •
The changes are not expected to
have a material impact on the
Company's statement of financial
condition. | {10}------------------------------------------------ #### **3. Trading Activities and Related Risks** The Company's trading activities are comprised of providing securities brokerage services. Trading activities expose the Company to market and credit risks. These risks are managed in accordance with established risk management policies and procedures. To accomplish this, management has established a risk management process that includes: - a regular review of the risk management process by executive management as part of its oversight role; - defined risk management policies and procedures supported by a rigorous analytic framework; and - articulated risk tolerance levels as defined by executive management that are regularly reviewed to ensure that the Company's risk-taking is consistent with its business strategy, its capital structure, and current and anticipated market conditions. #### *Market Risk* The Company is exposed to various market risks. Exposures to market risks arise from foreign currency exchange rate fluctuations and changes in interest rates. The following discussion describes the types of market risk faced: #### *Currency Risk* Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact the value of financial instruments. The Company manages this risk using spot (i.e., cash) currency transactions and currency forward contracts. #### *Interest Rate Risk* Interest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments. The Company is exposed to interest rate risk on cash and margin balances and fixed income securities. These risks are managed through investment policies and by entering into interest rate futures contracts, as needed. #### *Credit Risk* The Company is exposed to risk of loss if a customer, counterparty or issuer fails to perform its obligations under contractual terms ("default risk"). Both cash instruments and derivatives expose the Company to default risk. The Company has established policies and procedures for mitigating credit risk on principal transactions, including reviewing and establishing limits for credit exposure, maintaining collateral, and continually assessing the creditworthiness of counterparties. The Company's credit risk is limited as contracts entered into are settled directly at securities and commodities clearing houses or are settled through member firms and banks with substantial financial and operational resources. Over-the-counter transactions, such as securities lending, are marked to market daily and are conducted with counterparties that have undergone a thorough credit review. The Company seeks to control the risks associated with its customer margin activities by requiring customers to maintain collateral in compliance with regulatory and internal guidelines. In the normal course of business, the Company executes, settles, and finances various customer securities transactions. Execution of these transactions includes the purchase and sale of securities which exposes the Company to default risk arising from the potential that customers or counterparties may fail to satisfy their obligations. In these situations, the Company may be required to purchase or sell financial instruments at unfavorable market prices to satisfy obligations to customers or counterparties. Liabilities to other brokers and dealers related to unsettled transactions (i.e., securities fails to receive) are recorded at the amount for which the securities were purchased, and are paid upon receipt of the securities from other brokers or dealers. In the case of aged securities fails to receive, the Company may purchase the underlying security in the market and seek reimbursement for any losses from the counterparty. {11}------------------------------------------------ *(Dollars in millions, unless otherwise noted)* For cash management purposes, the Company enters into short-term securities purchased under agreements to resell and securities sold under agreements to repurchase transactions ("repos") in addition to securities borrowing and lending arrangements, all of which may result in credit exposure in the event the counterparty to a transaction is unable to fulfill its contractual obligations. Repos are collateralized by securities with a market value in excess of the obligation under the contract. Similarly, securities lending agreements are collateralized by deposits of cash or securities. The Company attempts to minimize credit risk associated with these activities by monitoring collateral values on a daily basis and requiring additional collateral to be deposited with or returned to the Company as permitted under contractual provisions. #### *Concentrations of Credit Risk* The Company's exposure to credit risk associated with its brokerage and other activities is measured on an individual counterparty basis, as well as by groups of counterparties that share similar attributes. Concentrations of credit risk can be affected by changes in political, industry or economic factors. To reduce the potential for risk concentration, credit limits are established and exposure is monitored in light of changing counterparty and market conditions. As of December 31, 2020, the Company did not have any material concentrations of credit risk outside the ordinary course of business. #### *Off-Balance Sheet Risks* The Company may be exposed to a risk of loss not reflected in the statement of financial condition to settle futures and certain over-the-counter contracts at contracted prices, which may require repurchase or sale of the underlying products in the market at prevailing prices. Accordingly, these transactions result in off-balance sheet risk as the Company's cost to liquidate such contracts may exceed the amounts reported in the Company's statement of financial condition. #### **4. Financial Assets and Financial Liabilities** #### *Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis* The tables below present, by level within the fair value hierarchy (see Note 2), financial assets and liabilities, measured at fair value on a recurring basis as of the period indicated. As required by ASC Topic 820, financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the respective fair value measurement. | | Financial Assets at Fair Value as of December 31, 2020 | | | | | | | | |------------------------------------------------------------------|--------------------------------------------------------|-------------------------------------------------------------|---------|---------------|---------|---------|-------|-------| | | Level 1 | | Level 2 | | Level 3 | | Total | | | | (in millions) | | | | | | | | | Securities segregated for regulatory purposes | \$ | 4,750 | \$ | — | \$ | — | \$ | 4,750 | | Financial instruments owned, at fair value | | | | | | | | | | Currency forward contracts | | — | | 10 | | — | | 10 | | | \$ | 4,750 | \$ | 10 | \$ | — | \$ | 4,760 | | | | Financial Liabilities at Fair Value as of December 31, 2020 | | | | | | | | | | Level 1 | | Level 2 | | Level 3 | | Total | | | | | | (in millions) | | | | | | Financial instruments sold, but not yet purchased, at fair value | | | | | | | | | | Currency forward contracts | \$ | — | \$ | 6 | \$ | — | \$ | 6 | | | \$ | — | \$ | 6 | \$ | — | \$ | 6 | {12}------------------------------------------------ *(Dollars in millions, unless otherwise noted)* #### *Financial Assets and Liabilities Not Measured at Fair Value* The table below represents the carrying value, fair value and fair value hierarchy category of certain financial assets and liabilities that are not recorded at fair value in the Company's statement of financial condition as of the period indicated. The table below excludes all non-financial assets and liabilities. | | December 31, 2020 | | | | | | | | | | |--------------------------------------------------------------|-------------------|-------------------|----------------------------------------|--------|----|---------|----|---------|----|---| | | | Carrying
Value | Fair Value
Level 1
(in millions) | | | Level 2 | | Level 3 | | | | Financial assets, not measured at fair value: | | | | | | | | | | | | Cash and cash equivalents | \$ | 2,638 | \$ | 2,638 | \$ | 2,638 | \$ | - | \$ | - | | Cash - segregated for regulatory purposes | | 3,330 | | 3,330 | | 3,330 | | - | | - | | Securities - segregated for regulatory purposes | | 23,071 | | 23,071 | | | | 23,071 | | - | | Securities borrowed | | 4,383 | | 4,383 | | - | | 4,383 | | - | | Securities purchased under agreements to resell | | 792 | | 792 | | - | | 792 | | - | | Receivables from customers | | 37,223 | | 37,223 | | - | | 37,223 | | - | | Receivables from brokers, dealers and clearing organizations | | 1,044 | | 1,044 | | - | | 1,044 | | - | | Receivables from affiliates | | 10 | | 10 | | - | | 10 | | - | | Interest receivable | | 95 | | 95 | | - | | 95 | | - | | Other assets | | 5 | | 6 | | - | | 2 | | 4 | | Total financial assets, not measured at fair value: | \$ | 72,591 | \$ | 72,592 | \$ | 5,968 | \$ | 66,620 | \$ | 4 | | Financial liabilities, not measured at fair value: | | | | | | | | | | | | Short-term borrowings | \$ | 22 | \$ | 22 | \$ | - | \$ | 22 | \$ | - | | Payables to customers | | 62,695 | | 62,695 | | - | | 62,695 | | - | | Securities loaned | | 8,739 | | 8,739 | | - | | 8,739 | | - | | Payables to brokers, dealers and clearing organizations | | 119 | | 119 | | - | | 119 | | - | | Payables to affiliates | | 115 | | 115 | | - | | 115 | | - | | Interest payable | | 7 | | 7 | | - | | 7 | | - | | Total financial liabilities, not measured at fair value: | \$ | 71,697 | \$ | 71,697 | \$ | - | \$ | 71,697 | \$ | - | {13}------------------------------------------------ #### *Netting of Financial Assets and Financial Liabilities* \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ The Company's policy is to net securities borrowed and securities loaned, and securities purchased under agreements to resell and securities sold under agreements to repurchase that meet the offsetting requirements prescribed in ASC Topic 210-20. In the tables below, the amounts of financial instruments that are not offset in the statement of financial condition, but could be netted against cash or financial instruments with specific counterparties under master netting agreements, according to the terms of the agreements, including clearing houses or over the counter currency forward contract counterparties, are presented to provide financial statement readers with the Company's net payable or receivable with counterparties for these financial instruments. The table below presents the netting of financial assets and of financial liabilities as of the period indicated: | | December 31, 2020 | | | | | | | | | | | |---------------------------------------------------------------------------------------|-------------------|-----------------------------------------------------------------------------|----|-------------------------------------------------------------------------|----|--------------------------------------------------------------------------------------------|----|------------------------------------------------------------------------------------------------------|----|------------|--| | | | Gross
Amounts
of Financial
Assets and
Liabilities
Recognized | | Amounts
Offset in the
Statement of
Financial
2
Condition | | Net Amounts
Presented in the
Statement of
Financial
Condition
(in millions) | | Amounts Not Offset in
the Statement of
Financial Condition
Cash or Financial
Instruments | | Net Amount | | | Offsetting of financial assets:
Securities segregated for regulatory
purposes - | | | | | | | | | | | | | purchased under agreements to resell | \$ | 23,071 1 | \$ | — | \$ | 23,071 | \$ | (23,071) | \$ | — | | | Securities borrowed
Securities purchased under agreements to | | 4,383 | | — | | 4,383 | | (4,200) | | 183 | | | resell | | 792 | | — | | 792 | | (792) | | — | | | Financial instruments owned, at fair value | | | | | | | | | | | | | Currency forward contracts | | 10 | | — | | 10 | | — | | 10 | | | Total | \$ | 28,256 | \$ | — | \$ | 28,256 | \$ | (28,063) | \$ | 193 | | | Offsetting of financial liabilities: | | | | | | | | | | | | | Securities loaned | \$ | 8,739 | \$ | — | \$ | 8,739 | \$ | (8,266) | \$ | 473 | | | Financial instruments sold, but not yet
purchased, at fair value | | | | | | | | | | | | | Currency forward contracts | | 6 | | — | | 6 | | — | | 6 | | | Total | \$ | 8,745 | \$ | — | \$ | 8,745 | \$ | (8,266) | \$ | 479 | | (1) As of December 31, 2020, the Company had \$23.1 billion of securities purchased under agreements to resell that were segregated to satisfy regulatory requirements. These securities are included in "Securities - segregated for regulatory purposes" in the statement of financial condition. (2) The Company did not have any balances eligible for netting in accordance with ASC Topic 210-20 at December 31, 2020. {14}------------------------------------------------ *(Dollars in millions, unless otherwise noted)* #### *Secured Financing Transactions – Maturities and Collateral Pledged* The table below presents gross obligations for securities loaned transactions by remaining contractual maturity and class of collateral pledged as of the period indicated: | | | | | | December 31, 2020 | | | | | |-------------------|--------------------------------|----|----------------------|----|-------------------------------|----|--------------|-------|--| | | Remaining Contractual Maturity | | | | | | | | | | | Overnight and
Open | | Less than 30
days | | 30 - 90 days
(in millions) | | Over 90 days | Total | | | Securities loaned | | | | | | | | | | | Stocks | \$
8,712 | \$ | - | \$ | - | \$ | \$
- | 8,712 | | | Corporate bonds | 27 | | - | | - | | - | 27 | | | Total | \$
8,739 | \$ | - | \$ | - | \$ | \$
- | 8,739 | | #### **5. Collateralized Transactions** The Company enters into securities borrowing and lending transactions and agreements to repurchase and resell securities to obtain securities for settlement and to earn residual interest rate spreads. In addition, the Company's customers pledge their securities owned to collateralize margin loans. Under these transactions, the Company either receives or provides collateral, including equity, corporate debt and U.S. government securities. Under typical agreements, the Company is permitted to sell or repledge securities received as collateral and use these securities to secure securities purchased under agreements to resell, enter into securities lending transactions or deliver these securities to counterparties to cover short positions. The Company also engages in securities financing transactions with and for customers through margin lending. Customer receivables generated from margin lending activity are collateralized by customer-owned securities held by the Company. Customers' required margin levels and established credit limits are monitored continuously by risk management staff using automated systems. Pursuant to the Company's policy and as enforced by such systems, customers are required to deposit additional collateral or reduce positions, when necessary to avoid automatic liquidation of their positions. Margin loans are extended to customers on a demand basis and are not committed facilities. Factors considered in the acceptance or rejection of margin loans are the amount of the loan, the degree of leverage being employed in the customer account and an overall evaluation of the customer's portfolio to ensure proper diversification or, in the case of concentrated positions, appropriate liquidity of the underlying collateral. Additionally, transactions relating to concentrated or restricted positions are limited or prohibited by raising the level of required margin collateral (to 100% in the extreme case). Underlying collateral for margin loans is evaluated with respect to the liquidity of the collateral positions, valuation of securities, volatility analysis and an evaluation of industry concentrations. Adherence to the Company's collateral policies significantly limits the Company's credit exposure to margin loans in the event of a customer's default. Under margin lending agreements, the Company may request additional margin collateral from customers and may sell securities that have not been paid for or purchase securities sold but not delivered from customers, if necessary. At December 31, 2020, approximately \$37.2 billion of customer margin loans were outstanding. {15}------------------------------------------------ *(Dollars in millions, unless otherwise noted)* The table below presents a summary of the amounts related to collateralized transactions as of the period indicated: | | December 31, 2020 | | | | | | |----------------------------------------------------------------|--------------------------|----|---------|--|--|--| | | Permitted | | Sold or | | | | | | to Repledge
Repledged | | | | | | | | (in millions) | | | | | | | Securities lending transactions | \$
52,708 | \$ | 4,453 | | | | | Securities purchased under agreements to resell transactions 1 | 23,859 | | 23,832 | | | | | Customer margin assets | 43,709 | | 12,509 | | | | | | \$
120,276 | \$ | 40,794 | | | | (1) As of December 31, 2020, \$23.1 billion or 97% of securities acquired through agreements to resell that are shown as repledged have been deposited in a separate bank account for the exclusive benefit of customers in accordance with the Customer Protection Rule. #### **6. Receivables and Payables from Contracts with Customers** \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Receivables arise when the Company has an unconditional right to receive payment under a contract with a customer and are derecognized when the cash is received. As of December 31, 2020, receivables of \$10 are reported in other assets in the statement of financial condition. Contract assets arise when the revenue associated with the contract is recognized prior to the Company's unconditional right to receive payment under a contract with a customer (i.e., unbilled receivable) and are derecognized when either it becomes a receivable or the cash is received. Contract assets are reported in other assets in the statement of financial condition. As of December 31, 2020, contract asset balances were not material. Contract liabilities arise when customers remit contractual cash payments in advance of the Company satisfying its performance obligations under the contract and are derecognized when the revenue associated with the contract is recognized either when a milestone is met triggering the contractual right to bill the customer or when the performance obligation is satisfied. Contract liabilities are reported in accounts payable, accrued expenses and other liabilities in the statement of financial condition. As of December 31, 2020, contract liability balances were not material. {16}------------------------------------------------ #### **7. Employee Incentive Plans** #### *Defined Contribution Plan* The Company offers all employees who have met minimum service requirements the opportunity to participate in defined contribution retirement plans qualifying under the provisions of Section 401(k) of the Internal Revenue Code. The general purpose of this plan is to provide employees with an incentive to make regular savings in order to provide additional financial security during retirement. This plan provides for the Company to match 50% of the employees' pre-tax contribution, up to a maximum of 10% of eligible earnings. The employee is vested in the matching contribution incrementally over six years of service. #### *2007 Stock Incentive Plan* Under IBG, Inc.'s Stock Incentive Plan, up to 30 million shares of IBG, Inc.'s Class A common stock may be issued to satisfy vested restricted stock units granted to directors, officers, employees, contractors and consultants of the Company. The purpose of the Stock Incentive Plan is to promote the Company's long-term financial success by attracting, retaining and rewarding eligible participants. The Stock Incentive Plan is administered by the Compensation Committee of IBG, Inc.'s Board of Directors. The Compensation Committee has discretionary authority to determine the eligibility to participate in the Stock Incentive Plan and establishes the terms and conditions of the awards, including the number of awards granted to each participant and all other terms and conditions applicable to such awards in individual grant agreements. Awards are expected to be made primarily through grants of IBG, Inc.'s restricted stock units. Stock Incentive Plan awards are subject to issuance over time. All previously granted but not yet earned awards may be cancelled by the Company upon the participant's termination of employment or violation of certain applicable covenants prior to issuance, unless determined otherwise by the Compensation Committee. The Stock Incentive Plan provides that, upon a change in control, the Compensation Committee may, at its discretion, fully vest any granted but not yet earned awards under the Stock Incentive Plan, or provide that any such granted but not yet earned awards will be honored or assumed, or new rights substituted by the new employer on a substantially similar basis and on terms and conditions substantially comparable to those of the Stock Incentive Plan. IBG, Inc. is expected to continue to grant awards on or about December 31 of each year to eligible participants, including employees of the Company, as part of an overall plan of equity compensation. Restricted stock units vest, and become distributable to participants in accordance with the following schedule: - 10% on the first vesting date, which is on or about May 9 of each year; and - an additional 15% on each of the following six anniversaries of the first vesting, assuming continued employment with the Company and compliance with non-competition and other applicable covenants. For the year ended December 31, 2020, the Company's employees were granted 319,063 restricted stock units with fair value of \$18. Estimated future grants under the Stock Incentive Plan are accrued for ratably during each year (see Note 2). In accordance with the vesting schedule, outstanding awards vest and are distributed to participants yearly on or about May 9 of each year. At the end of each year, no vested awards remain undistributed. {17}------------------------------------------------ *(Dollars in millions, unless otherwise noted)* The table below summarizes the Stock Incentive Plan activity for the period indicated: | | Stock Incentive Plan
Units | Intrinsic Value of SIP
Shares which Vested
and were Distributed 2 | | | |------------------------------|-------------------------------|-------------------------------------------------------------------------|--|--| | Balance, December 31, 2019 1 | 1,326,351 | | | | | Granted | 319,063 | | | | | Cancelled | (55,632) | | | | | Distributed | (321,123) | \$
13 | | | | Balance, December 31, 2020 | 1,268,659 | | | | (1) Stock Incentive Plan number of granted restricted stock units related to 2019 was adjusted by 415 restricted stock units during the year ended December 31, 2020. (2) Intrinsic value of SIP units distributed represents the compensation value reported to the participants. Awards previously granted but not yet earned under the Stock Incentive Plan are subject to the plan's post-employment provisions in the event a participant ceases employment with the Company. Through December 31, 2020, a total of 128,422 restricted stock units have been distributed under these post-employment provisions. #### **8. Leases** \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ All of the Company's leases are classified as operating leases and primarily consist of real estate leases for corporate offices, data centers, and other facilities. As of December 31, 2020, the weighted-average remaining lease term on these leases is approximately 6 years and the weighted-average discount rate used to measure the lease liabilities is approximately 4.18%. The Company's lease agreements do not contain any residual value guarantees, restrictions or covenants. The table below presents balances reported in the statement of financial condition related to the Company's leases as of December 31, 2020: | December 31, 2020 | |-------------------| | (in millions) | | \$
9 | | \$
\$11 | | | (1) Right-of-use assets are included in other assets and lease liabilities are included in accounts payable, accrued expenses and other liabilities in the Company's statement of financial condition. {18}------------------------------------------------ *(Dollars in millions, unless otherwise noted)* The table below reconciles the undiscounted cash flows of the Company's leases as of December 31, 2020 to the present value of its operating lease payments: | 2021
\$
2022
2023
2024
2025
Thereafter | December 31, 2020
(in millions) | | |----------------------------------------------------------|------------------------------------|--| | | | | | | 2 | | | | 2 | | | | 2 | | | | 2 | | | | 2 | | | | 3 | | | Total undiscounted operating lease payments | 13 | | | Less: imputed interest | (2) | | | Present value of operating lease liabilities
\$ | 11 | | #### **9. Property and Equipment** Property and equipment, which are included in other assets in the statement of financial condition consist of leasehold improvements, computer equipment, office furniture and equipment**.** The table below presents balances related to property and equipment as of December 31, 2020: | | December 31, 2020 | | |--------------------------------------------------|-------------------|---------------| | | | (in millions) | | Leasehold improvements | \$ | 5 | | Computer equipment | | 8 | | Office furniture and equipment | | 2 | | | | 15 | | Less - accumulated depreciation and amortization | | (7) | | Property and equipment, net | \$ | 8 | #### **10. Commitments, Contingencies and Guarantees** #### *Legal, Regulatory and Governmental Matters* The Company is subject to certain pending and threatened legal, regulatory and governmental actions and proceedings that arise out of the normal course of business. Given the inherent difficulty of predicting the outcome of such matters, particularly in proceedings where claimants seek substantial or indeterminate damages, or which are in their early stages, the Company is generally not able to quantify the actual loss or range of loss related to such legal proceedings, the manner in which they will be resolved, the timing of their final resolution or the ultimate settlement. Management believes that the resolution of these matters will not have a material effect, if any, on the Company's business or financial condition. The Company accounts for potential losses related to litigation in accordance with FASB ASC Topic 450, "Contingencies." As of December 31, 2020, accruals for potential losses related to legal, regulatory, and governmental actions, and proceedings matters were not material. #### *Trading Technologies Matter* On February 3, 2010, Trading Technologies International, Inc. ("Trading Technologies") filed a complaint in the U.S. District Court for the Northern District of Illinois, Eastern Division, against IBG LLC and the Company ("Defendants"). The complaint, as amended, alleges that the Defendants have infringed and continue to infringe twelve U.S. patents held by Trading Technologies. Trading {19}------------------------------------------------ *(Dollars in millions, unless otherwise noted)* Technologies is seeking, among other things, unspecified damages and injunctive relief. The Defendants filed an answer to Trading Technologies' amended complaint, as well as related counterclaims. The Defendants deny Trading Technologies' claims, assert that the asserted patents are not infringed and are invalid, and assert several other defenses as well. The asserted patents were the subject of petitions before the United States Patent and Trademark Office ("USPTO") seeking Covered Business Method Review ("CBM Review"). The USPTO Patent Trial Appeal Board ("PTAB") found all claims of ten of the twelve asserted patents to be invalid. Of the remaining two patents, 53 of the 56 claims of one patent were held invalid and the other patent survived CBM Review proceedings. Appeals were filed by either Defendants or Trading Technologies on all PTAB determinations. The United States Court of Appeals for the Federal Circuit vacated the CBM Review determinations of invalidity for four patents, concluding that these patents were not eligible for CBM Review. The District Court trial with respect to these four patents is scheduled for August 2, 2021. While it is difficult to predict the outcome of the matter, the Company believes it has meritorious defenses to the allegations made in the complaint and intends to defend itself vigorously against them. However, litigation is inherently uncertain and there can be no guarantee that the Company will prevail or that the litigation can be settled on favorable terms. #### *Class Action Matter* On December 18, 2015, a former individual customer filed a purported class action complaint against the Company, IBG, Inc., and Thomas Frank, Ph.D., IBG, Inc.'s Executive Vice President and Chief Information Officer, in the U.S. District Court for the District of Connecticut. The complaint alleges that the purported class of the Company's customers were harmed by alleged "flaws" in the computerized system used to close out (i.e., liquidate) positions in customer brokerage accounts that have margin deficiencies. The complaint seeks, among other things, undefined compensatory damages and declaratory and injunctive relief. On September 28, 2016, the District Court issued an order granting the Company's motion to dismiss the complaint in its entirety, and without providing plaintiff leave to amend. On September 28, 2017, plaintiff appealed to the United States Court of Appeals for the Second Circuit. On September 26, 2018, the Court of Appeals affirmed the dismissal of plaintiff's claims of breach of contract and commercially unreasonable liquidation but vacated and remanded back to the District Court plaintiff's claims for negligence. On November 30, 2018, the plaintiff filed a second amended complaint. The Company filed a motion to dismiss the new complaint on January 15, 2019, which was denied on September 30, 2019. On December 9, 2019, the Company filed a motion requesting that the District Court certify to the Connecticut Supreme Court two questions of Connecticut law directly relevant to the motion to dismiss. The Court denied the Company's motion to certify on May 15, 2020. Currently, Plaintiff's motion for class certification is due on August 16, 2021. Regardless of the outcome of this motion, the Company does not believe that a purported class action is appropriate given the great differences in portfolios, markets and many other circumstances surrounding the liquidation of any particular customer's margindeficient account. The Company and the related defendants intend to continue to defend themselves vigorously against the case and, consistent with past practice in connection with this type of unwarranted action, any potential claims for counsel fees and expenses incurred in defending the case may be fully pursued against the plaintiff. #### *"Short Squeeze" Antitrust Litigation* Since late January 2021, more than three dozen federal class action lawsuits have been filed in different jurisdictions against various brokers and other market participants claiming that the defendants acted improperly in restricting trading in the shares and options of GameStop Corp. and other companies that were subject to unusual trading in January 2021 in what has been referred to as the Redditrelated short-squeeze. Most of these cases assert federal antitrust claims, including alleging an illegal antitrust conspiracy among the defendants, and various state law claims. The Company and its affiliates have been named as defendants in seven of these class action lawsuits. On February 4, 2021, plaintiffs in one of the class actions filed a motion with the Judicial Panel on Multidistrict Litigation ("JPML") to transfer all existing short-squeeze related class actions to the United States District Court for the Northern District of California for coordinated and consolidated pre-trial proceedings. The time for the Company and its affiliates to respond to the allegations will likely be stayed during the pendency of the JPML proceedings. The Company believes that the claims asserted against the Company and its affiliates lack merit on their face and it intends to file, at the appropriate time, a motion to dismiss any class action that might name the Company and its affiliates as defendants. {20}------------------------------------------------ #### *Regulatory Matters* The Company is subject to regulatory oversight and examination by numerous governmental and self-regulatory authorities. As announced on August 10, 2020, the Company agreed to settle certain matters related to our historical anti-money laundering and Bank Secrecy Act practices and procedures with FINRA, the SEC and the CFTC. As part of the settlements, the Company agreed to pay penalties of \$15 to FINRA, \$11.5 to the SEC and \$11.5 to the CFTC, plus approximately \$700 thousand in disgorgement. In addition, the Company agreed to continue the retention of an independent consultant to review the implementation of our enhanced compliance practices and procedures. The Company is also cooperating with a United States Department of Justice inquiry concerning these matters, and while its outcome cannot be predicted, the Company does not believe that the resolution of this inquiry is likely to have a materially adverse effect on its financial condition. #### *West Texas Intermediate Crude Oil Event* On April 20, 2020 the energy markets exhibited extraordinary price activity in the New York Mercantile Exchange ("NYMEX") West Texas Intermediate Crude Oil contract. The price of the May 2020 physically-settled futures contract dropped to an unprecedented negative price of \$37.63 dollars. This price was the basis for determining the settlement price for cash-settled futures contracts traded on the CME Globex and also for a separate, expiring cash-settled futures contract listed on the Intercontinental Exchange Europe ("ICE Europe"). Several of the Company's customers held long positions in these CME and ICE Europe futures contracts, and as a result they incurred losses, including losses in excess of the equity in their accounts. The Company fulfilled the required variation margin settlements with the respective clearinghouses on behalf of its customers. The Company subsequently compensated certain affected customers in connection with their losses resulting from the futures contracts settling at a price below zero. The Company recognized a loss that did not have a material effect on its financial condition. #### *Guarantees* The Company provides guarantees to securities and commodities clearing houses and exchanges which meet the accounting definition of a guarantee under FASB ASC Topic 460, "Guarantees." Under standard membership agreements, clearing house and exchange members are required to guarantee collectively the performance of other members. Under the agreements, if a member becomes unable to satisfy its obligations, other members would be required to meet shortfalls. In the opinion of management, the Company's liability under these arrangements is not quantifiable and could exceed the cash and securities they have posted as collateral. However, the potential for the Company to be required to make payments under these arrangements is remote. Accordingly, no contingent liability is carried in the statement of financial condition for these arrangements. In connection with its retail brokerage business, the Company performs securities and commodities execution, clearance and settlement on behalf of its customers for whom it commits to settle trades submitted by such customers with the respective clearing houses. If a customer fails to fulfill its settlement obligations, the Company must fulfill those settlement obligations. No contingent liability is carried on the statement of financial condition for such customer obligations. #### *Other Commitments* Certain clearing houses, clearing banks and firms used by the Company are given a security interest in certain assets of the Company held by those clearing organizations. These assets may be applied to satisfy the obligations of the Company to the respective clearing organizations. #### **11. Segregation of Funds and Reserve Requirements** As a result of customer activities, the Company is obligated by rules mandated by its primary regulators, the SEC and the CFTC, to segregate or set aside cash or qualified securities to satisfy such rules which have been promulgated to protect customer assets. In addition, the Company is a member of various clearing organizations at which cash or securities are deposited as required to conduct of day-to-day clearance activities. In accordance with the Customer Protection Rule, the Company is required to maintain separate bank accounts for the exclusive benefit of customers. At December 31, 2020, the Company held cash of \$1,553 and securities purchased under agreements to resell with a carrying value of \$22,751 to satisfy this requirement. During the period ended December 31, 2020, the Company performed the computations for the assets in the proprietary accounts of {21}------------------------------------------------ *(Dollars in millions, unless otherwise noted)* brokers (commonly referred to as "PAB") in accordance with the customer reserve computation set forth under the Customer Protection Rule. At December 31, 2020, the Company held cash of \$1 and securities purchased under agreements to resell with a carrying value of \$320 to satisfy this requirement. In accordance with the Commodity Exchange Act, the Company is required to segregate all monies, securities and property received to margin and to guarantee or secure the trades or contracts of customers in regulated commodities. At December 31, 2020, the Company had cash and securities of \$5,989; receivables from brokers, dealers and clearing organizations of \$9; and commodities option contracts with net short market values of \$54 segregated to satisfy this requirement. At December 31, 2020, the net market values of long and short commodity option contracts were included in receivables from brokers, dealers and clearing organizations. In accordance with CFTC Regulation 30.7, the Company is required to segregate all monies, securities and property received to margin and to guarantee or secure the trades or contracts of foreign boards of trade. At December 31, 2020, the Company had cash and securities in the amount of \$537 and receivables from brokers, dealers and clearing organizations of \$176 segregated to satisfy this requirement. In accordance with NFA Financial Requirements Section 14, the Company is required to hold amounts, equal to or in excess of its retail forex obligation, at one or more qualifying institutions in the U.S. or money center countries (as defined in CFTC Regulation 1.49). NFA authorized the Company to utilize its daily securities reserve computations performed in accordance with the Customer Protection Rule to satisfy this requirement. #### **12. Net Capital Requirements** The Company is subject to the Uniform Net Capital Rule, which requires the maintenance of minimum net capital. The Company has elected to use the alternative method permitted by the rule, which requires it to maintain minimum net capital, as defined, equal to the greater of \$250 thousand or 2% of aggregate debit balances arising from customer transactions, as defined. The Company is also subject to the CFTC's minimum financial requirements (Regulation 1.17), which require it to maintain minimum net capital, as defined, equal to the greater of (a) \$20 plus 5% of total retail forex obligations in excess of \$10, or (b) 8% of the total commodities risk margin requirement for all positions carried in customer and non-customer accounts. The Uniform Net Capital Rule also provides that equity capital may not be withdrawn or cash dividends paid if the resulting net capital would be less than 5% of aggregate debit balances arising from customer transactions. At December 31, 2020, the Company had net capital of \$5,122, which was \$4,448 in excess of the required net capital of \$674. #### **13. Related Party Transactions** The Company's related party transactions are mainly conducted with its parent, IBG LLC, IBG Holdings LLC, Timber Hill LLC, Interactive Brokers Corp., Interactive Brokers Canada Inc., Interactive Brokers (U.K.) Limited, Covestor, Inc. and its subsidiary, Covestor Limited, Interactive Brokers Luxembourg SARL, IBKR Financial Services AG and its subsidiary, Global Financial Information Services GmbH, Interactive Brokers Hong Kong Limited, IB Business Services (Shanghai) Company Ltd., Interactive Brokers Securities Japan, Inc., Interactive Brokers Singapore Pte. Ltd., and Interactive Brokers Australia Pty Limited. In the normal course of business, the Company enters into securities transactions such as trade execution, securities lending, and securities purchased under agreements to resell transactions with affiliates. The Company also shares administrative, financial and technological resources with affiliates. All related party transactions have been executed under arm's length conditions. Brokerage transaction receivables and payables and other affiliate receivables and payables including interest, administrative, consulting and service fees, and advances are reported gross on the statement of financial condition. Included in receivables from and payables to customers in the statement of financial condition are accounts receivable from and payable to directors, officers and affiliate customer accounts. {22}------------------------------------------------ *(Dollars in millions, unless otherwise noted)* Included in the statement of financial condition are the following amounts with related parties as of the period indicated: | | December 31, 2020
(in millions) | | |--------------------------------------------------------------|------------------------------------|-------| | Related Party Assets and Liabilities | | | | Assets | | | | Securities borrowed | \$ | 627 | | Receivables from customers | | 5,098 | | Receivables from brokers, dealers and clearing organizations | | 488 | | Receivables from affiliates | | 10 | | Other receivables: interest | | 9 | | Total assets with related parties | \$ | 6,232 | | Liabilities | | | | Securities loaned | \$ | 1,238 | | Payables to customers | | 3,989 | | Payables to brokers, dealers and clearing organizations | | 3 | | Payables to affiliates | | 115 | | Interest payable | | 5 | | Total liabilities with related parties | \$ | 5,350 | #### **14. Subsequent Events** As required by FASB ASC Topic 855, "Subsequent Events", the Company has evaluated subsequent events for adjustment to or disclosure in its statement of financial condition through the date the statement of financial condition was issued. On January 20, 2021, February 19, 2021, and February 25, 2021, the Company made distributions to members of \$53, \$53, and \$100, respectively. Except as disclosed above and in Note 10, no other recordable or disclosable events occurred. \*\*\*\*\*\* Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.