# WATERMILL INSTITUTIONAL TRADING LLC X-17A-5 (2023-02-28) — Broker-dealer annual report
- Company: WATERMILL INSTITUTIONAL TRADING LLC
- Form: X-17A-5
- Filed: 2023-02-28
- Period: 2022-12-31
- Accession: 0001467398-23-000001
- CIK: 1467398
- File #: 8-68311
- Type: Broker-dealer
- Material weakness: No
- Auditor: Citrin Cooperman & Company, LLP
- Auditor location: LIVINGSTON, NJ
- Contact: Dmitriy Rutitskiy
- Phone: 2127514422
- Email: dd@watermilltrading.com
- Website: watermilltrading.com
- Signed by: David J. Dempsey (Chief Operating Officer)
Original filing: https://www.sec.gov/Archives/edgar/data/1467398/000146739823000001/WatermillFSPublic2022.pdf
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
| OMB APPROVAL | |
|---------------------------|-----------|
| OMB Number: | 3235-0123 |
| Expires: October 31, 2023 | |
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# ANNUAL AUDITED REPORT FORM X-17A-5 PART III
| | SEC FILE NUMBER |
|-----------|-----------------|
| 8 - 68311 | |
FACING PAGE Information Required Pursuant to Rules 17a-5, 17a-12, and 18a-7 under the Securities Exchange Act of 1934
| MMDD/YYYYY
A. REGISTRANT IDENTIFICATION | | MM/DD/YYYYY | |
|-------------------------------------------------------------------|-------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|
| | | | |
| | | | |
| | WATERMILL INSTITUTIONAL TRADING LLC | | |
| | | | |
| □ Check here if respondent is also an OTC derivatives dealer | | | |
| ADDRESS OF PRINCIPAL PLACE OF BUSINESS: (Do not use P.O. Box No.) | | | |
| | | | |
| (No and Street) | | | |
| NJ | | 07310 | |
| (State) | | (Zip Code) | |
| PERSON TO CONTACT WITH REGARD TO THIS FILING | | | |
| 917-621-3829 | | dd@watermilltrading.com | |
| (Area Cade -- Telephone No.) | (Email Address) | | |
| | | | |
| | | | |
| | | | |
| | | | |
| LIVINGSTON | NI | 07039 | |
| (City) | (State) | (Zip Code) | |
| | | 2468 | |
| | | (PCAOB Registration Number, if applicable) | |
| | | | |
| | | X Broker-dealer
111 TOWN SQUARE PLACE SUITE 1520
B. ACCOUNTANT IDENTIFICATION
INDEPENDENT PUBLIC ACCOUNTANT whose reports are contained in this filing*
CITRIN COOPERMAN & COMPANY, LLP
(Name - if individual, state last, first, and middle name)
FOR OFFICIAL USE ONLY | |
\*Claims for exemption from the requirement that the annual reports of an independent public eccommiss be supported by a statement of facts and circumstances relied on as the basis of the exemption. See 17 CFR 240-17a-5(e){1}(ii), if applicable.
Persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.
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#### OATH OR AFFIRMATION
| David J. Dempsey sweat (or affirm) that, to the best of my knowledge and belief, the financial report perfaining to
Watermill Institutional Trading LLC C = = = = as of = as of = = = December 31, 2022 |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| the firm of
is true and correct. I further swear (or affirm) that neither the company nor any partner, officer, director, or equivalent person, |
| as the case may be, has any proprietary interest in any account classified solely as that of a customer. |
| MARYROSE MERCADO |
| Sigmatine
NOTARY PUBLIC, STATE OF NEW YORK
Registration No. 01ME6423025 |
| Qualified in Queens County
Chief Operating Officer |
| Goynmission Expires October 4, 20 Ju
Title |
| Notary Public |
| This filing ** contains (check all applicable boxes): |
| (a) Statement of financial condition |
| [x] (b) Notes to consolidated statement of financial condition |
| (c) Statement of income (loss) or, if there is other comprehensive in the period(s) presented, a statement of |
| comprehensive income (as defined in § 210.1-02 of Regulation S-X) |
| (d) Statement of cash flows |
| (e) Statement of changes in stockholders' or partners' or sole proprietor's equity |
| ( ) Statement of changes in liabilities subordinated to claims of creditors
(g) Notes to consolidated financial statements |
| (h) Computation of net capital under 17 CFR 240.15c3-1 or 17 CFR 240.18a-1. as applicable. |
| (i) Computation of tangible net worth under 17 CFR 240.18a-2. |
| (1) Computation for determination of customer reserve requirements pursuant to Exhibit A to 17 CFR 240.15c3-3 |
| (k) Computation for determination of security-based swap reserve requirements pursuant to Exhibit B to 17 CFR 240.1503-3 or |
| Exhibit A to 17 CFR 240.18a-4. as applicable. |
| (1) Computation for Determination of PAB Requirements under Exhibit A to & 240.15c3-3 |
| (m) Information relating to possession or control requirements for customers under 17 CFR 240.1563-2 |
| (n) Information relating to possession or control requirements for security-based swap customers under 17 CFR |
| 240 15c3-3(p)(2) or 17 CFR 240,18a-4. as applicable. |
| (o) Reconciliations. including appropriate explanations. of the FOCUS Report with computation of net
worth under 17 CFR 240.15c3-1. 17 CFR 240.18a-1. or 17 CFR 240.18n-2. as applicable. and the reserve requirements under 17
CFR 240,15c3-3 or 17 CFR 240.18a-4. as applicable. if material differences exist, or a statement that no material differences
CAISL. |
| (p) Summary of financial data for subsidiaries not consolidated in the statement of financial condition |
| s q Qulh or allirmation in accordance with 17 CFR 240,17a-12, or 17 CFR 240,18a-7, as applicable, |
| (t) Compliance report in accordance with 17 CFR 240,17a-5 or 17 CFR 240,18a-7, as applicable |
| (s) Exemption report in accordance with 17 CFR 240.17a-5 or 17 CFR 240.18a-7, as applicable |
| 1) Independent public accountant's report based on an examination of the statement of financial condition |
| (u) Independent public accountant's report based on an examination of the financial statements under 1 |
| CFR 240.17a-5. 17 CFR 240.18a-7. or 17 CFR 240.17a-12. as applicable. |
| [ (y) Independent public accountant's report based on an examination of certain statements in the compliance report under 1 |
| CFR 240.17a-5 or 17 CFR 240.18a-7. as applicable,
(w) Independent public accountant's report based on a review of the exemption report under 17 CFR 240.17a-5 or 1 |
| CFR 240-18a-7. as applicable. |
| (x) Supplemental reports on applying agreed-upon procedures, in accordance with 17 CFR 240.17a-12 |
| as applicable.
(y) Report describing any material inadequacies found to have existed since the date of the previous audit, c |
| a statement that no material inadequacies exist. under 17 CFR 240.17a-12(k) |
| (z) Other |
| |
\*\*To request confidential treatment of certain portions of this filing, see 17 CFR 240s/7u-5(e){3) or 17 CFR 240,18a-7(d){2), as applicable.
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## **WATERMILL INSTITUTIONAL TRADING LLC (A Limited Liability Company)**
STATEMENT OF FINANCIAL CONDITION DECEMBER 31, 2022
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**Citrin Cooperman** & **Company, LLP** Certified Public Accountants
290 W. Mt. Pleasant Ave, Suite 3310 Livingston, NJ 07039 **T** 973.218.0500 **F** 973.218.7160 citrincooperman.com
# **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
To the Member Watermill Institutional Trading LLC
# **Opinion on the Financial Statement**
We have audited the accompanying statement of financial condition of Watermill Institutional Trading LLC as of December 31, 2022, 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 Watermill Institutional Trading LLC as of December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
# **Basis for Opinion**
This financial statement is the responsibility of Watermill Institutional Trading LLC's management. Our responsibility is to express an opinion on Watermill Institutional Trading LLC's 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 Watermill Institutional Trading LLC 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 provides a reasonable basis for our opinion.
We have served as Watermill Institutional Trading LLC's auditor since 2014. Livingston, New Jersey February 28, 2023
"Citrin Cooperman" is the brand under which Citrin Cooperman & Company, LLP, a licensed independent CPA firm, and Citrin Cooperman Advisors LLC serve clients' business needs. The two firms operate as separate legal entities in an alternative practice structure. Citrin Cooperman is an independent member of Moore North America, which is itself a regional member of Moore Global Network Limited (MGNL).
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(A Limited Liability Company)
### DECEMBER 31, 2022
## TABLE OF CONTENTS
| | Page |
|---------------------------------------------------------|------|
| Report of Independent Registered Public Accounting Firm | |
| Financial Statement | |
| Statement of Financial Condition | 2 |
| Notes to Financial Statement | 3-9 |
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**(A Limited Liability Company)**
# **STATEMENT OF FINANCIAL CONDITION**
| December 31, 2022 | |
|------------------------------------------------------------------------|-----------------|
| ASSETS | |
| Cash | \$
2,966,943 |
| Cash segregated under federal regulations | 182,430 |
| Receivables from clearing broker, including \$500,000 clearing deposit | 1,212,435 |
| Receivables from broker dealers | 255,480 |
| Securities owned , at fair value | 16,137 |
| Property and equipment, net | 72,789 |
| Right of use asset | 156,755 |
| Prepaid expenses and other assets | 111 ,059 |
| Total assets | \$
4,974,028 |
| LIABILITIES AND MEMBER'S EQUITY | |
| Liabilities
Accounts payable and accrued expenses | \$
938,915 |
| Lease liability | 160,375 |
| Member's equity | 3,874,738 |
| TOTAL LIABILITIES AND MEMBER'S EQUITY | \$
4,974,028 |
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**(A Limited Liability Company)**
**NOTES TO FINANCIAL STATEMENT**
### **DECEMBER 31, 2022**
#### **1. Nature of business and summary of significant accounting policies**
#### Nature of Business
Watermill Institutional Trading LLC (the "Company") is a limited liability company organized under the laws of the state of Delaware on August 24, 2009. Operations of the Company commenced in August 2010. The Company's operations consist primarily of engaging in agency equity transactions and investment banking services with institutional counterparties. Effective August 1, 2012, 100% of the Company's membership interest was acquired by Watermill Trading Holdings LLC.
The Company is a registered broker-dealer with the Securities and Exchange Commission ("SEC") and is a member of the Financial Industry Regulatory Authority, Inc. ("FINRA") and the National Association of Securities Dealers Automated Quotations ("NASDAQ").
#### Basis of Presentation
The financial statement has been prepared in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP").
#### Cash and Cash Segregated Under Federal Regulations
Restricted cash is subject to a legal or contractual restriction by third parties as well as a restriction as to withdrawal or use, including restrictions that require the funds to be used for a specified purpose and restrictions that limit the purpose for which the funds can be used. As of December 31 , 2022, restricted cash consisted of cash segregated under federal regulations and a deposit with a clearing broker. The Company considers short-term, interest-bearing investments with initial maturities of three months or less to be cash equivalents. At December 31 , 2022, the Company has no cash equivalents.
#### Revenue from Contracts with Customers
The Company accounts for revenues from contracts with customers in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 606, Revenue with Contracts from Customers, which requires an entity to recognize revenue to depict the transfer of promised good or services to customers in the amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
#### Service Income
The Company provides research services for customers. Revenue for research arrangements is generally recognized at the point in time that performance under the arrangement is completed and the customer acknowledges benefit received from the services performed.
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**(A Limited Liability Company)**
### **NOTES TO FINANCIAL STATEMENT**
### **DECEMBER 31, 2022**
#### **1. Nature of business and summary of significant accounting policies (continued)**
#### Investment banking advisor fees
The Company provides a full range of capital market and financial advisory services. Capital market services include underwriting and placement agent services in the equity capital market, including private equity placements and initial public offerings. Revenue for advisory arrangements is generally recognized at the point in time that performance under the arrangement is completed (the closing date of the transaction) or the contract is cancelled.
#### Receivables from clearing broker
As of December 31 , 2022, receivables from clearing broker consisted of commissions due from the clearing agent for commission revenue earned and the clearing deposit held with the Company's clearing agent of \$712,435 and \$500,000, respectively. The balances as of December 31 , 2021 , were \$1 ,066,269 and \$500,000, respectively.
#### Receivables from broker dealers
Receivables from broker dealers consist of receivables from various broker dealers for advisory income earned. As of December 31 , 2022 and 2021 , the receivables from broker dealers amounted to \$255,480 and \$283,988, respectively.
#### Securities owned, at fair value
Purchases and sales of proprietary securities are recorded at fair value.
#### Commissions
The Company buys and sells securities on behalf of its customers. Each time a customer enters into a buy or sell transaction, the Company charges a commission. Commissions and related clearing expenses are recorded on the trade date (the date that the Company fills the trade order by finding and contracting with a counterparty and confirms the trade with the customer). The Company believes that the performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon and the risks and rewards of ownership of the securities have been transferred to/from the customer.
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**(A Limited Liability Company)**
### **NOTES TO FINANCIAL STATEMENT**
### **DECEMBER 31, 2022**
#### **1. Nature of business and summary of significant accounting policies (continued)**
#### Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. The Company provides for depreciation and amortization as follows:
| Asset | Useful Life | Estimated
Principal Method |
|------------------------------|-------------|-------------------------------|
| Furniture and fixtures | 5 years | Straight-line |
| Network and server equipment | 3 years | Straight-line |
| Computer hardware | 3 years | Straight-line |
| Computer software | 3 years | Straight-line |
| Leasehold improvements | Lease term | Straight-line |
| | | |
#### Use of Estimates
The preparation of the financial statement in conformity with U.S. GAAP requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statement. Actual results could differ from those estimates.
#### Income Taxes
The Company has elected to be treated as a partnership under the applicable provisions of income tax laws and, accordingly, no income taxes are incurred by the Company as all earnings and losses flow directly to the member.
The Company files income tax returns in the U.S. federal jurisdiction and various states and local jurisdictions.
#### Uncertain Tax Positions
The Company recognizes and measures its unrecognized tax benefits in accordance with FASB ASC 740, Income Taxes. Under that guidance, the Company assesses the likelihood, based on their technical merit, that tax positions will be sustained upon examination based on the facts , circumstances and information available at the end of each period. The measurement of unrecognized tax benefits is adjusted when new information is available, or when an event occurs that requires a change.
#### Credit Losses
The Company applies the provisions of ASC Topic 326, Financial Instruments - Credit Losses (Topic 326). Topic 326 utilizes a lifetime "expected credit loss" measurement objective for the recognition of credit losses for loans, held-to-maturity securities, and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. For financial assets measured at amortized cost (e.g. , cash and cash equivalents, receivables from broker-dealers, and receivables from customers), the Company has concluded that there are de minimus expected credit losses based on the nature and contractual life or expected life of the financial assets and immaterial historic and expected losses.
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**(A Limited Liability Company)**
**NOTES TO FINANCIAL STATEMENT**
## **DECEMBER 31, 2022**
#### **1. Nature of business and summary of significant accounting policies (continued)**
#### Right of Use Assets and Lease Liabilities
The Company recognizes its leases in accordance with ASC Topic 842, Leases ("ASC 842"). The guidance increases transparency by requiring the recognition of right of use assets and lease liabilities on the statement of financial condition.
In applying ASC 842, the Company made an accounting policy election not to recognize the right of use assets and lease liabilities relating to short term leases that have a lease term of 12 months or less at the lease inception, and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. The Company recognizes lease costs associated with short-term leases on a straight- line basis over the lease.
Right of use assets represent the Company's right to use the underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Right of use assets and lease liabilities are recognized at the commencement date based on the present value of the lease payments over the lease term. As the Company's leases do not provide an implicit rate and the implicit rate is not readily determinable, the Company estimates its incremental borrowing rate based on the information available at the commencement date in determining the present value of the lease payments.
The discount rate is the implicit rate if it is readily determinable or the Company may use its incremental borrowing rate. The present value of the lease payments was determined using a 6.00% incremental borrowing rate. Right of use assets also exclude lease incentives.
#### Subsequent Events
The Company has evaluated events occurring after the date of the financial statement for potential recognition or disclosure in its financial statement. The Company did not identify any material subsequent events requiring adjustment to or disclosure in its financial statement.
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**(A Limited Liability Company)**
### **NOTES TO FINANCIAL STATEMENT**
### **DECEMBER 31, 2022**
#### **2. Property and equipment**
Details of property and equipment at December 31 , 2022 are as follows:
| Furniture and fixtures | \$ | 186,468 |
|--------------------------------|---------|-----------|
| Network and server equipment | | 168,109 |
| Computer hardware | | 483,225 |
| Computer software | | 11 ,414 |
| Leasehold improvements | 235 007 | |
| | | 1,084,223 |
| Less: accumulated depreciation | | |
| and amortization | | 1 011 434 |
| | \$ | 72,789 |
#### **3. Net capital requirement**
The Company, as a member of FINRA, is subject to the SEC Uniform Net Capital Rule 15c3-1. This rule requires the maintenance of minimum net capital and that the ratio of aggregate indebtedness to net capital , both as defined, shall not exceed 15 to 1. The Company computes its net capital under the alternative method permitted by the Rule, which requires that the Company maintain minimum net capital , as defined. At December 31 , 2022, the Company's net capital was \$3,612,259, which was \$3,362,259 in excess of its minimum requirement of \$250,000.
#### **4. Commitments**
The Company leases its Jersey City office facility under an operating lease, which expires in September 2024.
As of December 31 , 2022, maturities of the outstanding lease liability for the Company are as follows:
| Year Ending December 31: | | Amount | |
|---------------------------------|----|---------|--|
| 2023 | \$ | 96,360 | |
| 2024 | | 73 010 | |
| Total | | 169,370 | |
| Less: Discount to present value | | 8 995 | |
| Lease Liability | \$ | 160,375 | |
As of December 31 , 2022, the weighted average remaining lease term is 1.67 years and the weighted average discount rate is 6.0%.
The Company leases its Florida office facility on a month-to-month basis for \$5,000 per month from Watermill Trading Holdings LLC.
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**(A Limited Liability Company)**
#### **NOTES TO FINANCIAL STATEMENT**
### **DECEMBER 31, 2022**
#### **5. Concentrations of credit risk**
At December 31 , 2022, and routinely throughout the year then ended, the Company maintained its cash balances in major financial institutions that exceed federally insured limits. The Company has not experienced any losses in these accounts, and management does not believe it is exposed to any significant credit risk with respect to cash.
#### **6. Employee benefit plan**
The Company maintains a retirement plan (the "401(k) Plan"), pursuant to Section 401(k) of the Internal Revenue Code ("IRC"), for eligible participants. Under the terms of the 401 (k) Plan, participants can contribute a portion of their annual compensation, subject to limitations provided by the IRC. The Company can make discretionary matching contributions to the 401 (k) Plan on behalf of participating employees.
#### **7. Soft dollar payables**
The Company has soft dollar arrangements with certain clients within the provisions of Rule 28(e) which establishes a safe harbor for money managers, which allows them to purchase research and brokerage services for clients using soft dollars.
The Company has cash segregated under federal regulations on the accompanying statement of financial condition in accordance with SEC Rule 15c3-3(k)(2)(i) of \$182,430 related to proceeds from soft dollar transactions. The Company has a soft dollar payable of \$100,606 at December 31 , 2022, which is included in "accounts payable and accrued expenses" on the accompanying statement of financial condition. The Company disburses this cash to third parties on behalf of its customers following Rule 28(e) requirements.
#### **8. Off-balance-sheet risk**
Pursuant to clearance agreements, the Company introduces all of its securities transactions to clearing brokers on a fully-disclosed basis. All of the customers' money balances and long and short security positions are carried on the books of the clearing brokers. In accordance with the clearance agreements, the Company has agreed to indemnify the clearing brokers for losses, if any, which the clearing brokers may sustain from carrying securities transactions introduced by the Company. In accordance with industry practice and regulatory requirements , the Company and the clearing brokers monitor collateral on the customers' accounts.
In the normal course of business, the Company's customer activities involve the execution, settlement, and financing of various customer securities transactions. These activities may expose the Company to off-balancesheet risk in the event the customer or other broker is unable to fulfill its contracted obligations and the Company has to purchase or sell the financial instrument underlying the contract at a loss.
In addition, the receivables from the clearing brokers are pursuant to these clearance agreements and include a clearing deposit of \$500,000.
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**(A Limited Liability Company)**
**NOTES TO FINANCIAL STATEMENT**
### **DECEMBER 31, 2022**
#### **9. Fair Value Measurements**
ASC Topic 820, Fair Value Measurement, requires disclosures about investments that are measured and reported at fair value. ASC Topic 820 establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors , including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Investments measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1 - Quoted prices are available in active markets for identical securities as of the reporting date. The types of investments included in Level 1 include listed equities and listed derivatives. As required , quoted prices for these investments are not adjusted, even in situations where a large position and a sale could reasonably impact the quoted price.
Level 2 - Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Securities which are generally included in this category include corporate bonds, municipal securities which are consensus priced, less liquid and restricted equity securities and certain over-the-counter derivatives.
Level 3 - Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.
The Company's Level 2 securities are valued based upon pricing feeds from outside pricing services used by the Company's clearing broker at December 31 , 2022.
The following table summarizes the valuation of securities owned under the fair value hierarchy levels as of December 31 , 2022:
| | LEVEL 2 |
|---------------------------------------|--------------|
| Securities owed, at fair value | |
| Class A Ordinary Shares | \$
16,137 |
| Total securities owned, at fair value | \$
16,137 |
Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.