ibkr_10q3q2013.htm



  UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________
 
FORM 10-Q
 
_____________________________________________________

(Mark One)
     
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
For the quarterly period ended September 30, 2013
     
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
For the transition  period from           to         

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

One Pickwick Plaza
Greenwich, Connecticut 06830
(Address of principal executive office)
 
(203) 618-5800
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x No  o.
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 
SS Smaller reporting company o
 
       
(Do not check if a smaller
   
       
reporting company)
   
           
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o    No  x.
 
As of November 8, 2013, there were 49,971,727 shares of the issuer’s Class A common stock, par value $0.01 per share, outstanding and 100 shares of the issuer’s Class B common stock, par value $0.01 per share, outstanding.
 


 
 
 


INTERACTIVE BROKERS GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2013
Table of Contents
 
 
       
Page
       
No.
PART I:
 
FINANCIAL INFORMATION
 
         
Item 1:
 
Financial Statements (Unaudited)
3
         
   
Condensed Consolidated Statements of Financial Condition
4
         
   
Condensed Consolidated Statements of Comprehensive Income
5
         
   
Condensed Consolidated Statements of Cash Flows
6
         
   
Condensed Consolidated Statements of Changes in Equity
7
         
   
Notes to Condensed Consolidated Financial Statements
8
         
Item 2:
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
         
Item 3:
 
Quantitative and Qualitative Disclosures About Market Risk
54
         
Item 4:
 
Controls and Procedures
57
         
PART II:
 
OTHER INFORMATION
 
         
Item 1:
 
Legal Proceedings
58
         
Item 1A:
 
Risk Factors
58
         
Item 2:
 
Unregistered Sales of Equity Securities and Use of Proceeds
58
         
Item 3:
 
Defaults upon Senior Securities
58
         
Item 5:
 
Other Information
58
         
Item 6:
 
Exhibits
59
         
SIGNATURES
 
60

 
2

 

PART I.  FINANCIAL INFORMATION
 

Financial Statements Introductory Note

Interactive Brokers Group, Inc. (“IBG, Inc.” or the “Company”) is a holding company whose primary asset is its ownership of approximately 12.4% of the membership interests of IBG LLC (the “Group”). See Notes 1 and 4 to the unaudited condensed consolidated financial statements for further discussion of the Company’s capital and ownership structure.

We are an automated global electronic broker and market maker specializing in executing and clearing trades in securities, futures, foreign exchange instruments, bonds and mutual funds on more than 100 electronic exchanges and trading venues around the world and offering custody, prime brokerage, stock and margin borrowing services to our customers. In the U.S., our business is conducted from our headquarters in Greenwich, Connecticut and from Chicago, Illinois and from Jersey City, New Jersey. Abroad, we conduct business through offices located in Canada, England, Switzerland, China (Hong Kong and Shanghai), India, Australia and Japan. At September 30, 2013, we had 878 employees worldwide.
 

 
3

 

Interactive Brokers Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Financial Condition
(Unaudited)
               
     September 30,  
 
 
December 31,
 
(in thousands, except share data)
 
2013
     
2012
 
Assets
             
Cash and cash equivalents
 1,548,520
   
 1,614,592
 
Cash and securities - segregated for regulatory purposes
 
       12,681,070
     
       12,482,388
 
Securities borrowed
 
         3,363,242
     
         2,833,145
 
Securities purchased under agreements to resell
 
            487,774
     
            428,904
 
Financial instruments owned, at fair value:
             
Financial instruments owned
 
         3,454,897
     
         3,617,879
 
Financial instruments owned and pledged as collateral
 
            970,376
     
            926,857
 
Total financial instruments owned
 
         4,425,273
     
         4,544,736
 
Receivables:
             
Customers, less allowance for doubtful accounts of $3,540 and $1,416 at September 30, 2013 and December 31, 2012
 
       12,727,552
     
         9,851,018
 
Brokers, dealers and clearing organizations
 
            490,859
     
            844,584
 
Receivable from affiliate
 
                   651
     
                   620
 
Interest
 
              24,236
     
              22,829
 
Total receivables
 
       13,243,298
     
       10,719,051
 
Other assets
 
            527,867
     
            576,741
 
Total assets
36,277,044
   
  33,199,557
 
               
Liabilities and equity
             
Liabilities:
             
Financial instruments sold but not yet purchased, at fair value
  3,593,292
   
   4,286,260
 
Securities loaned
 
         2,193,008
     
         1,839,274
 
Short-term borrowings
 
                2,579
     
            110,420
 
Payables:
             
Customers
 
       24,809,349
     
       21,421,978
 
Brokers, dealers and clearing organizations
 
            234,833
     
            361,834
 
Payable to affiliate
 
            259,723
     
            259,441
 
Accounts payable, accrued expenses and other liabilities
 
            108,895
     
            102,695
 
Interest
 
                2,483
     
                4,508
 
Total payables
 
       25,415,283
     
       22,150,456
 
               
Total liabilities
 
       31,204,162
     
       28,386,410
 
               
Commitments, contingencies and guarantees
             
               
Equity
             
Stockholders’ equity
             
Common stock, $0.01 par value per share:
             
Class A – Authorized - 1,000,000,000, Issued - 50,096,562 and 47,797,844 shares, Outstanding – 49,971,727 and 47,499,739 shares at September 30, 2013 and December 31, 2012
 
                   501
     
                   478
 
Class B – Authorized, Issued and Outstanding – 100 shares at September 30, 2013 and December 31, 2012
 
                        -
     
                        -
 
Additional paid-in capital
 
            517,865
     
            493,912
 
Retained earnings
 
            100,712
     
              82,072
 
Accumulated other comprehensive income, net of income taxes of $1,081 and $1,417 at September 30, 2013 and December 31, 2012
 
              26,038
     
              29,754
 
Treasury stock, at cost, 124,835 and 298,105 shares at September 30, 2013 and December 31, 2012
 
               (2,518
   
               (7,718
Total stockholders’ equity
 
            642,598
     
            598,498
 
Noncontrolling interests
 
         4,430,284
     
         4,214,649
 
Total equity
 
         5,072,882
     
         4,813,147
 
Total liabilities and stockholders’ equity
36,277,044
   
33,199,557
 
               
See accompanying notes to the unaudited condensed consolidated financial statements.

 
4

 

Interactive Brokers Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
                               
     Three months ended  
 
 
Nine months ended
 
   
September 30,
     
September 30,
 
(in thousands, except for shares or per share amounts)
 
2013
     
2012
     
2013
     
2012
 
                               
Revenues:
                             
Trading gains
123,286
   
149,700
   
201,386
   
371,987
 
Commissions and execution fees
 
                120,331
     
           100,584
     
                377,961
     
                309,540
 
Interest income
 
                  74,000
     
             65,410
     
                220,572
     
                200,607
 
Other income
 
                  20,826
     
             17,104
     
                  64,999
     
                  50,750
 
Total revenues
 
                338,443
     
           332,798
     
                864,918
     
                932,884
 
                               
Interest expense
 
                  12,191
     
             14,199
     
                  38,636
     
                  49,475
 
                               
Total net revenues
 
                326,252
     
           318,599
     
                826,282
     
                883,409
 
                               
Non-interest expenses:
                             
Execution and clearing
 
                  56,016
     
             61,646
     
                180,283
     
                192,441
 
Employee compensation and benefits
 
                  44,242
     
             57,676
     
                148,578
     
                180,202
 
Occupancy, depreciation and amortization
 
                    9,387
     
               9,043
     
                  28,705
     
                  28,934
 
Communications
 
                    6,125
     
               6,089
     
                  17,281
     
                  17,249
 
General and administrative
 
                  14,100
     
             11,525
     
                  38,904
     
                  33,779
 
Total non-interest expenses
 
                129,870
     
           145,979
     
                413,751
     
                452,605
 
                               
Income before income taxes
 
                196,382
     
           172,620
     
                412,531
     
                430,804
 
                               
Income tax expense
 
                  10,414
     
             14,747
     
                  31,239
     
                  34,458
 
Net income
 
                185,968
     
           157,873
     
                381,292
     
                396,346
 
Less net income attributable to noncontrolling interests
 
                169,521
     
           145,385
     
                347,910
     
                364,790
 
Net income attributable to common stockholders
16,447
   
12,488
   
33,382
   
31,556
 
                               
Earnings per share:
                             
Basic
0.33
   
0.26
   
0.68
   
0.70
 
Diluted
0.32
   
0.26
   
0.67
   
0.70
 
                               
Weighted average common shares outstanding:
                 
Basic
 
49,966,050
     
47,488,459
     
48,807,321
     
46,588,213
 
Diluted
 
50,988,214
     
47,679,818
     
49,981,664
     
46,865,770
 
                               
                               
                               
Comprehensive income:
                             
Net income attributable to common stockholders
16,447
   
12,488
   
33,382
   
31,556
 
Other comprehensive income:
                             
Cumulative translation adjustment, before income taxes
 
                    3,691
     
               2,965
     
                   (4,051
   
                    1,274
 
Income taxes related to items of other comprehensive income
 
                         61
     
               1,071
     
                      (335
   
                       460
 
Other comprehensive income (loss), net of tax
 
                    3,630
     
               1,894
     
                   (3,716
   
                       814
 
Comprehensive income attributable to common stockholders
20,077
   
14,382
   
29,666
   
32,370
 
                               
                               
Comprehensive income attributable to noncontrolling interests:
     
Net income attributable to noncontrolling interests
169,521
   
145,385
   
347,910
   
364,790
 
Other comprehensive income (loss) - cumulative translation adjustment
 
                  26,013
     
             21,934
     
                 (29,602
   
                    9,876
 
Comprehensive income attributable to noncontrolling interests
195,534
   
167,319
   
318,308
   
374,666
 
                               
See accompanying notes to the unaudited condensed consolidated financial statements.

 
5

 


Interactive Brokers Group, Inc. and Subsidiaries
 
Condensed Consolidated Statements of Cash Flows
 
(Unaudited)
 
     
Nine Months Ended September 30,
 
(in thousands)
   
2013
     
2012
 
Cash flows from operating activities:
               
Net income
 
381,292
   
396,346
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Translation losses (gains)
   
                  19,839
     
                     (678
Deferred income taxes
   
                  11,164
     
                  16,881
 
Depreciation and amortization
   
                  13,914
     
                  14,201
 
Employee stock plan compensation
   
                  28,086
     
                  54,032
 
(Gains) losses on other investments, net
   
                  (2,728
   
                    7,742
 
Bad debt expense and other
   
                    2,472
     
                       607
 
Change in operating assets and liabilities:
               
Increase in cash and securities - segregated for regulatory purposes
   
              (199,142
   
           (2,255,850
Increase in securities borrowed
   
              (530,221
   
              (303,477
(Increase) decrease in securities purchased under agreements to resell
   
                (58,852
   
                  31,218
 
Decrease in financial instruments owned
   
                110,268
     
                911,667
 
Increase in receivables from customers
   
           (2,876,532
   
           (2,367,432
Decrease in other receivables
   
                350,520
     
                523,193
 
Decrease (increase) in other assets
   
                  23,258
     
                  (5,900
Decrease in financial instruments sold but not yet purchased
   
              (695,806
   
           (1,606,918
Increase in securities loaned
   
                354,398
     
                559,452
 
Increase in payable to customers
   
             3,387,375
     
             3,978,476
 
(Decrease) increase in other payables
   
              (127,152
   
                258,159
 
Net cash provided by operating activities
   
                192,153
     
                211,719
 
Cash flows from investing activities:
               
Purchases of other investments
   
              (189,934
   
              (326,784
Proceeds from sales of other investments
   
                202,245
     
                292,826
 
Distributions received from and redemptions of equity investments
   
                  11,054
     
                    1,567
 
Purchase of property and equipment
   
                (12,006
   
                (13,971
Net cash provided by (used in) investing activities
   
                  11,359
     
                (46,362
Cash flows from financing activities:
               
Dividends paid to shareholders
   
                (14,742
   
                (14,055
Dividends paid to noncontrolling interests
   
              (107,698
   
              (105,264
Redemptions of senior notes
   
                            -
     
              (101,411
(Decrease) increase in short-term borrowings, net
   
              (110,566
   
                  10,008
 
Net cash used in financing activities
   
              (233,006
   
              (210,722
Effect of exchange rate changes on cash and cash equivalents
   
                (36,578
   
                    9,375
 
Net decrease in cash and cash equivalents
   
                (66,072
   
                (35,990
Cash and cash equivalents at beginning of period
   
             1,614,592
     
             1,695,495
 
Cash and cash equivalents at end of period
 
1,548,520
   
1,659,505
 
                 
Supplemental disclosures of cash flow information:
               
    Cash paid for interest
 
40,661
   
51,168
 
    Cash paid for taxes
 
45,243
   
25,352
 
                 
Non-cash financing activities:
               
Adjustments to additional paid-in capital for changes in proportionate ownership in IBG LLC
 
20,463
   
13,766
 
Adjustments to noncontrolling interests for changes in proportionate ownership in IBG LLC
 
 (20,463
 
(13,766
Changes in redemption value of redeemable noncontrolling interests
 
    -
   
(5,269,619
Changes to total equity (deficit) for the change in the redemption value of redeemable noncontrolling interests
 
    -
   
5,269,619
 
                 
See accompanying notes to the unaudited condensed consolidated financial statements.
 

 
6

 
Interactive Brokers Group, Inc. and Subsidiaries
 
Condensed Consolidated Statements of Changes in Equity
 
Nine months ended September 30, 2013 and September 30, 2012
 
(Unaudited)
 
(in thousands, except for share amounts)
                                                                   
  Common Stock    
 
                                                         
                                      Accumulated      
 
                         
             Additional    
 
             
Other
     
Total
     
Non-
                 
 
Issued
   
Par
   Paid-In
 
  Treasury  
 
  Retained  
 
  Comprehensive  
 
  Stockholders'  
 
  controlling  
 
 
Total
         
  Shares
 
  Value
 
 Capital
 
 
Stock
      Earnings  
 
 
Income
     
Equity
      Interests  
 
  Equity  
 
     
                                                                         
Balance, January 1, 2013
  47,797,844
 
           478
 
    493,912
   
        (7,718
  $
  82,072
   
                29,754
   
           598,498
   
    4,214,649
   
    4,813,147
         
                                                                         
Common Stock distributed pursuant to stock plans
    2,298,718
   
             23
   
            (23
   
         5,200
                     
               5,200
             
           5,200
         
Compensation for stock grants vesting in the future        
 
 
        3,513
                             
               3,513
     
         25,488
     
         29,001
         
Dividends paid to stockholders
                           
  (14,742
           
            (14,742
           
       (14,742
       
Dividends paid by IBG LLC to noncontrolling interests
                   
 
                     
                       -
     
      (107,698
   
     (107,698
       
Adjustments for changes in proportionate ownership in IBG LLC
       
 
 
      20,463
                             
             20,463
     
        (20,463
   
                  -
         
Comprehensive income, net of tax
 
                         
            33,382
     
                 (3,716
   
             29,666
     
       318,308
     
       347,974
         
Balance, September 30, 2013
  50,096,562
 
           501
 
    517,865
   
        (2,518
 
 100,712
   
  26,038
   
           642,598
   
    4,430,284
   
    5,072,882
         
                                                                         
                                                                         
                                                                         
  Common Stock    
 
                                                         
                              Retained  
 
  Accumulated  
 
 
Total
                         
              Additional      
 
      Earnings/  
 
 
Other
      Stockholders'  
 
 Other Non-
 
  Total  
 
 
 Redeemable
 
   Issued
 
 
Par
    Paid-In  
 
  Treasury  
 
 
(Accumulated
 
 
  Comprehensive  
 
  Equity  
 
  controlling  
 
  Equity  
 
 
 Noncontrolling
 
   Shares
  
  Value
 
  Capital  
 
  Stock  
 
  Deficit)  
 
 
Income
      (Deficit)  
 
  Interests  
 
  (Deficit)  
 
 
Interests
 
                                                                         
Balance, January 1, 2012
  46,061,256
 
           460
 
                -
   
      (13,310
 
        (465,138
 
                18,487
   
          (459,501
 
           1,837
   
     (457,664
 
           5,269,619
 
                                                                         
Adjustment of redeemable noncontrolling interests to redemption value
       
 
 
    472,409
             
          572,840
             
        1,045,249
     
    4,322,304
     
    5,367,553
     
          (5,269,619
Common Stock distributed pursuant to stock plans
    1,727,973
   
             17
   
            (17
   
         5,526
                     
               5,526
             
           5,526
         
Compensation for stock grants vesting in the future
       
 
 
        5,759
                             
               5,759
     
         18,262
     
         24,021
         
Deferred tax benefit retained
           
           495
                             
                  495
             
              495
         
Dividends paid to stockholders
                           
          (14,055
           
            (14,055
           
       (14,055
       
Dividends paid by IBG LLC to other noncontrolling interests                        
 
                 
                       -
     
        (70,271
   
       (70,271
       
Adjustments for changes in proportionate ownership in IBG LLC
       
 
 
      13,766
                             
             13,766
     
               (25
   
         13,741
         
Comprehensive income, net of tax
 
                         
            31,556
     
                     814
     
             32,370
     
       253,126
     
       285,496
         
Balance, September 30, 2012
  47,789,229
 
           477
 
    492,412
   
        (7,784
 
          125,203
   
                19,301
   
           629,609
   
    4,525,233
   
    5,154,842
   
                          -
 
                                                                         
 
See accompanying notes to the unaudited condensed consolidated financial statements.
 
 
7

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

1. Organization and Nature of Business

Interactive Brokers Group, Inc. (“IBG, Inc.” or the “Company”) is a Delaware holding company whose primary asset is its ownership of approximately 12.4% of the membership interests of IBG LLC, which, in turn, owns operating subsidiaries (collectively, “IBG LLC” or the “Group”). The accompanying unaudited condensed consolidated financial statements of IBG, Inc. reflect the consolidation of IBG, Inc.’s investment in IBG LLC for all periods presented (Note 4). IBG LLC is an automated global electronic broker and market maker specializing in routing orders and processing trades in securities, futures and foreign exchange instruments.
 
IBG LLC is a Connecticut limited liability company that conducts its business through its operating subsidiaries (collectively called the “Operating Companies”): Timber Hill LLC (“TH LLC”), Timber Hill Europe AG (“THE”), Timber Hill Securities Hong Kong Limited (“THSHK”), Timber Hill Australia Pty Limited (“THA”), Timber Hill Canada Company (“THC”), Interactive Brokers LLC (“IB LLC”) and subsidiary, Interactive Brokers Canada Inc. (“IBC”), Interactive Brokers (U.K.) Limited (“IBUK”), Interactive Brokers (India) Private Limited (“IBI”), Interactive Brokers Financial Products S.A. (“IBFP”), Interactive Brokers Hungary KFT (“IBH”), IB Exchange Corp. (“IBEC”), Interactive Brokers Securities Japan, Inc. (“IBSJ”), IB Brasil Participações Ltda (“IBBH”), Interactive Brokers Software Services Estonia OU (“IBEST”) and Interactive Brokers Software Services Russia (“IBRUS”).
 
IBG, Inc. operates in two business segments, electronic brokerage and market making. IBG, Inc. conducts its electronic brokerage business through certain Interactive Brokers subsidiaries, which provide electronic execution and clearing services to customers worldwide. The Company conducts its market making business principally through its Timber Hill subsidiaries on the world’s leading exchanges and market centers, primarily in exchange-traded equities, equity options and equity-index options and futures.
 
Certain of the Operating Companies are members of various securities and commodities exchanges in North America, Europe and the Asia/Pacific region and are subject to regulatory capital and other requirements (Note 14). IB LLC, IBUK, IBC, IBI and IBSJ carry securities accounts for customers or perform custodial functions relating to customer securities.
 
2. Significant Accounting Policies
  
Basis of Presentation
 
These unaudited condensed consolidated financial statements are presented in U.S. dollars and have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding financial reporting with respect to Form 10-Q and accounting standards generally accepted in the United States of America (“U.S. GAAP”) promulgated in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” or the “Codification”).  These unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries and include all adjustments of a normal, recurring nature necessary to present fairly the financial condition as of September 30, 2013 and December 31, 2012, the results of operations and comprehensive income for the three and nine months ended September 30, 2013 and 2012 and cash flows for the nine months ended September 30, 2013 and 2012. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in IBG, Inc.’s 2012 Annual Report on Form 10-K filed with the SEC on March 8, 2013. The condensed consolidated financial statement information as of December 31, 2012 has been derived from the 2012 audited consolidated financial statements. The results of operations for interim periods are not necessarily indicative of results for the entire year.

Principles of Consolidation, including Noncontrolling Interests
 
The unaudited condensed consolidated financial statements include the accounts of IBG, Inc. and its majority and wholly owned subsidiaries. As sole managing member of IBG LLC, IBG, Inc. exerts control over the Group’s operations.  In accordance with ASC 810, Consolidation, the Company consolidates the Group’s consolidated financial statements and records the interests in the Group that IBG, Inc. does not own as noncontrolling interests.

 
8

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

Prior to the June 6, 2012 amendment  (the “Amendment”) to the Exchange Agreement (Note 4), the Company was required to report IBG Holdings LLC’s (“Holdings”) ownership as redeemable noncontrolling interests (i.e., temporary equity) pursuant to ASC 810-10-45, ASC 815-40-25 and ASC 480-10-S99-3A (formerly FASB Emerging Issues Task Force Topic D-98), outside of total equity. Redemption value of these redeemable noncontrolling interests was measured as the number of equivalent shares of member interests in IBG LLC owned by Holdings multiplied by the then current market price per share of the Company’s common stock. The excess of the redemption value over the book value of these interests, which did not affect net income attributable to common stockholders or cash flows, was required to be accounted for as a reduction of the Company’s stockholders’ equity.
 
The Company elected to recognize changes in redemption value in each reporting period immediately as they occurred as if the end of each reporting period was also the redemption date for the entire redeemable noncontrolling interest under paragraph 15(b) of ASC 480-10-S99-3A, notwithstanding that the redeemable noncontrolling interests are redeemable over a period of time pursuant to a redemption schedule (Note 4).
 
 For periods after the above referenced amendment, the noncontrolling interests in IBG LLC attributable to Holdings are reported as a component of equity.
 
The Company’s policy is to consolidate all entities of which it owns more than 50% unless it does not have control. All inter-company balances and transactions have been eliminated. IBG, Inc. would also consolidate any Variable Interest Entities (“VIEs”) pursuant to ASC 860, Transfers and Servicing and ASC 810 of which it is the primary beneficiary. IBG, Inc. currently is not the primary beneficiary of any such entities and therefore no VIEs are included in the unaudited condensed consolidated financial statements.
 
Use of Estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the unaudited condensed consolidated financial statements and accompanying notes. Estimates, by their nature, are based on judgment and available information. Therefore, actual results could differ materially from those estimates. Such estimates include the estimated fair values of IBG LLC and the Company in connection with accounting for redeemable noncontrolling interests, the estimated value of investments accounted for under the equity method of accounting, the estimated useful lives of property and equipment, including capitalized internally developed software, the allowance for doubtful accounts, compensation accruals, current and deferred income taxes and estimated contingency reserves.
 
Fair Value
 
At September 30, 2013 and December 31, 2012, substantially all of IBG, Inc.’s assets and liabilities, including financial instruments, were carried at fair value based on published market prices and were marked to market, or were assets which are short-term in nature and were carried at amounts that approximate fair value.
 
IBG, Inc. applies the fair value hierarchy of ASC 820, Fair Value Measurement, to prioritize the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy are:
 
Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2
Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
Level 3
Prices or valuations that require inputs that are both significant to fair value measurement and unobservable.
 
Financial instruments owned and financial instruments sold, but not yet purchased are generally classified as Level 1 financial instruments.  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 U.S. government and sovereign obligations, active listed securities, options, futures, options on futures and corporate and municipal debt securities. IBG, Inc. does not adjust quoted prices for Level 1 financial instruments, even in the event that the Company may hold a large position whereby a purchase or sale could reasonably impact quoted prices.
 
Currency forward contracts are valued using broadly distributed bank and broker prices, and are classified as Level 2 financial instruments as such instruments are not exchange-traded.  Other securities that are not traded in active markets are also
 
9

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

classified in Level 2.  Level 3 financial instruments are comprised of securities that have been delisted or otherwise are no longer tradable and have been valued by the Company based on internal estimates, excluding securities subject to corporate actions that have a determinable external price, which remain classified as Level 1 securities.
 
Other fair value investments, reported in other assets in the accompanying unaudited condensed consolidated statement of financial condition and in Note 6 - Financial Assets and Financial Liabilities, are comprised of securities that the Company does not carry in its market making business, and include listed common stocks, corporate and municipal debt and mortgage backed and other asset backed securities.  These investments are generally reported as Level 2 financial instruments, except for unrestricted listed equities, which are classified as Level 1 financial instruments. The fair values of other fair value investments are determined using broker and vendor prices that have been independently validated by the Company.  Validation methods applied by the Company include comparisons of the broker and vendor prices to other independent pricing services and reviews of the underlying assumptions and other inputs (such as estimated cash flows, underlying default rates and variable interest rate sensitivity analysis) used by brokers or vendors to calculate these investments’ fair values.
 
Earnings Per Share
 
Earnings per share (“EPS”) are computed in accordance with ASC 260, Earnings per Share.  Shares of Class A and Class B common stock share proportionately in the earnings of IBG, Inc. Basic earnings per share are calculated utilizing net income available for common stockholders divided by the weighted average number of shares of Class A and Class B common stock outstanding for that period. Diluted earnings per share are calculated utilizing the Company’s basic net income available for common stockholders divided by diluted weighted average shares outstanding with no adjustments to net income available to common stockholders for dilutive potential common shares.
 
For periods prior to June 6, 2012 (Note 4), the Company has determined to reflect Topic D-98 measurement adjustments for non-fair value redemption rights through application of the two-class method of calculating earnings per share in lieu of recognizing the impact through the determination of net income attributable to common shareholders. Furthermore, in accordance with footnote 17 of ASC 480-10-S99-3A, the Company has elected to treat only the portion of the periodic measurement adjustments that reflect a redemption in excess of fair value as being akin to a dividend, reducing net income attributable to common stockholders for purposes of applying the two-class method. Decreases in the carrying amount of redeemable noncontrolling interests through Topic D-98 measurement adjustments are reflected in the application of the two-class method only to the extent they represent recoveries of amounts previously accounted for by applying the two-class method.
 
Stock-Based Compensation
 
IBG, Inc. follows ASC 718, Compensation—Stock Compensation, to account for its stock-based compensation plans. ASC 718 requires all share-based payments to employees to be recognized in the financial statements using a fair value-based method. As a result, IBG, Inc. expenses the fair value of awards granted to employees, generally 50% in the year of grant in recognition of plan forfeiture provisions (described below) and the remaining 50% over the related vesting period utilizing the “graded vesting” method permitted under ASC 718-10. In the case of “retirement eligible” employees (those employees older than 59), 100% of awards are expensed when granted.
 
Awards granted under the stock-based compensation plans are subject to forfeiture in the event an employee ceases employment with the Company. The plans provide that employees who discontinue employment with the Company without cause and continue to meet the terms of the plans’ post-employment provisions will forfeit 50% of unvested previously granted awards unless the employee is over the age of 59, in which case the employee would be eligible to receive 100% of unvested awards previously granted.
 
Cash and Cash Equivalents
 
IBG, Inc. defines cash equivalents as short-term, highly liquid securities and cash deposits, other than those used to support margin and clearing requirements or assets held in segregated accounts for regulatory purposes.
 
Cash and Securities—Segregated for Regulatory Purposes
 
As a result of customer activities, certain Operating Companies are obligated by rules mandated by their primary regulators to segregate or set aside cash or qualified securities to satisfy such regulations, which regulations have been promulgated to protect customer assets. In addition, substantially all of the Operating Companies are members of various clearing organizations at which cash
 
10

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

or securities are deposited as required to conduct day-to-day clearance activities. Securities segregated for regulatory purposes consisted of U.S. Treasury Bills of $2.50 billion and $2.30 billion at September 30, 2013 and December 31, 2012, respectively, which are recorded as Level 1 financial assets and securities purchased under agreements to resell in the amount of $6.51 billion and $6.37 billion as of September 30, 2013 and December 31, 2012, respectively, which amounts approximate fair value.
 
Securities Borrowed and Securities Loaned
 
Securities borrowed and securities loaned are recorded at the amount of collateral advanced or received. Securities borrowed transactions require the Company to provide counterparties with collateral, which may be in the form of cash, letters of credit or other securities. With respect to securities loaned, IBG, Inc. receives collateral, which may be in the form of cash or other securities in an amount generally in excess of the fair value of the securities loaned.
 
IBG, Inc. monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as permitted contractually. Receivables and payables with the same counterparty are not offset in the unaudited condensed consolidated statements of financial condition. For these transactions, the fees received or paid by IBG, Inc. are recorded as interest income or interest expense in the unaudited condensed consolidated statements of comprehensive income.
 
Securities Purchased Under Agreements to Resell
 
Securities purchased under agreements to resell, which are reported as collateralized financing transactions, are recorded at contract value, plus accrued interest, which approximates fair value. The Company’s policy is to obtain possession of collateral with a fair value equal to or in excess of the principal amount loaned under resale agreements. To ensure that the fair value of the underlying collateral remains sufficient, this collateral is valued daily with additional collateral obtained or excess collateral returned, as permitted under contractual provisions.  The Company does not net securities purchased under agreements to resell transactions with securities sold under agreements to repurchase transactions entered into with the same counterparty.
 
Financial Instruments Owned and Sold But Not Yet Purchased
 
Financial instrument transactions are accounted for on a trade date basis. Financial instruments owned and financial instruments sold but not yet purchased are recorded at fair value based upon quoted market prices. All firm-owned financial instruments pledged to counterparties where the counterparty has the right, by contract or custom, to sell or repledge the financial instruments are classified as financial instruments owned and pledged as collateral in the unaudited condensed consolidated statements of financial condition.
 
IBG, Inc. also enters into currency forward contracts. These transactions, which are also 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 reported as components of financial instruments owned or financial instruments sold but not yet purchased in the unaudited condensed consolidated statements of financial condition.
 
Customer Receivables and Payables
 
Customer securities transactions are recorded on a settlement date basis and customer commodities transactions are recorded on a trade date basis. Receivables from and payables to customers include amounts due on cash and margin transactions, including futures contracts transacted on behalf of customers. Securities owned by customers, including those that collateralize margin loans or other similar transactions, are not reported in the unaudited condensed consolidated statements of financial condition. Amounts receivable from customers that are determined by management to be uncollectible are expensed as a component of general and administrative expense.
 
Receivables from and Payables to Brokers, Dealers and Clearing Organizations
 
Receivables and payables to brokers, dealers and clearing organizations include net receivables and payables from unsettled trades, including amounts related to futures and options on futures contracts executed on behalf of customers, amounts receivable for securities not delivered by IBG, Inc. to the purchaser by the settlement date (“fails to deliver”) and cash margin deposits. Payables to brokers, dealers and clearing organizations also include amounts payable for securities not received by IBG, Inc. from a seller by the settlement date (“fails to receive”).
 
11

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

Investments
 
IBG, Inc. makes certain strategic investments related to financial services and accounts for these investments under the cost method of accounting or under the equity method of accounting as required under ASC 323, Investments—Equity Method and Joint Ventures. Investments are accounted for under the equity method of accounting when IBG, Inc. has significant influence over the investee. Investments accounted for under the equity method, including where the investee is a limited partnership or limited liability company, are recorded at the fair value amount of IBG, Inc.’s initial investment and adjusted each period for IBG, Inc.’s share of the investee’s income or loss. IBG, Inc.’s share of the income or losses from equity investments is reported as a component of other income in the unaudited condensed consolidated statements of comprehensive income.  The recorded amounts of IBG, Inc.’s equity method investments, $27.0 million at September 30, 2013 ($34.7 million at December 31, 2012), which are reported as a component of other assets in the unaudited condensed consolidated statements of financial condition, increase or decrease accordingly.  Contributions paid to and distributions received from equity investees are recorded as additions or reductions, respectively, to the respective investment balance.
 
A judgmental aspect of accounting for investments is evaluating whether an other-than-temporary decline in the value of an investment has occurred. The evaluation of an other-than-temporary impairment is dependent on specific quantitative and qualitative factors and circumstances surrounding an investment, including recurring operating losses, credit defaults and subsequent rounds of financing. IBG, Inc.’s equity investments do not have readily determinable market values. All equity method investments are reviewed for changes in circumstances or occurrence of events that suggest IBG, Inc.’s investment may not be recoverable. If an unrealized loss on any investment is considered to be other-than-temporary, the loss is recognized in the period the determination is made. IBG, Inc. also holds exchange memberships and investments in equity securities of certain exchanges as required to qualify as a clearing member, and strategic investments in corporate stock that do not qualify for equity method accounting. Such investments, $27.8 million at September 30, 2013 ($36.2 million at December 31, 2012), are recorded at cost or, if an other-than-temporary impairment in value has occurred, at a value that reflects management’s estimate of the impairment, and are also components of other assets in the unaudited condensed consolidated statements of financial condition. Dividends received from cost basis investments are recognized as a component of other income as such dividends are received.
 
The Company also makes other fair value investments (which are not considered core business activities) that are accounted for at fair value (Note 6), with gains and losses recorded as a component of other income.
 
Property and Equipment
 
Property and equipment, which is a component of other assets, consists of purchased technology hardware and software, internally developed software, leasehold improvements and office furniture and equipment. Property and equipment are recorded at historical cost, less accumulated depreciation and amortization. Additions and improvements that extend the lives of assets are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Depreciation and amortization are computed using the straight-line method. Equipment is depreciated over the estimated useful lives of the assets, while leasehold improvements are amortized over the lesser of the estimated economic useful life of the asset or the term of the lease. Computer equipment is depreciated over three to five years and office furniture and equipment are depreciated over five to seven years. Qualifying costs for internally developed software are capitalized and amortized over the expected useful life of the developed software, not to exceed three years.
 
Comprehensive Income and Foreign Currency Translation
 
The Company’s operating results are reported in the unaudited condensed consolidated statement of comprehensive income pursuant to Accounting Standards Update 2011-05, Comprehensive Income.
 
Comprehensive income consists of two components: net income and other comprehensive income (“OCI”). OCI is comprised of revenues, expenses, gains and losses that are reported in the comprehensive income section of the statement of comprehensive income, but are excluded from reported net income. IBG, Inc.’s OCI is comprised of foreign currency translation adjustments, net of related income taxes, where applicable.
 
IBG, Inc.’s non-U.S. domiciled subsidiaries have a functional currency that is other than the U.S. dollar. Such subsidiaries’ assets and liabilities are translated into U.S. dollars at period-end exchange rates, and revenues and expenses are translated at average exchange rates prevailing during the period. Adjustments that result from translating amounts from a subsidiary’s functional currency are reported as a component of accumulated OCI. In general, the practice and intention of the Company is to reinvest the earnings of its non-U.S. subsidiaries in those operations. Deferred income taxes have not been provided for U.S. tax liabilities or for additional foreign taxes on unremitted earnings that have been indefinitely reinvested.
 
12

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

Revenue Recognition
 
Trading Gains
 
Trading gains and losses are recorded on trade date and are reported on a net basis. Trading gains are comprised of changes in the fair value of financial instruments owned and financial instruments sold but not yet purchased (i.e., unrealized gains and losses) and realized gains and losses. Dividends are integral to the valuation of stocks and interest is integral to the valuation of fixed income instruments. Accordingly, both dividends and interest income and expense attributable to financial instruments owned and financial instruments sold but not yet purchased are reported on a net basis as a component of trading gains in the accompanying unaudited condensed consolidated statements of comprehensive income.
 
Commissions and Execution Fees
 
Commissions charged for executing and clearing customer transactions are recorded on a trade date basis and are reported as commissions and execution fees in the unaudited condensed consolidated statements of comprehensive income, and the related expenses are reported as execution and clearing expenses, also on a trade date basis.
 
Interest Income and Expense
 
The Company earns interest income and incurs interest expense primarily in connection with its electronic brokerage customer business and its securities lending activities. Such interest is recorded on the accrual basis.
 
Foreign Currency Transaction Gains and Losses
 
Foreign currency transaction gains and losses from market making are reported as a component of trading gains in the unaudited condensed consolidated statements of comprehensive income.  Electronic brokerage foreign currency transaction gains and losses are included in interest (if arising from currency swap transactions) or other income.
 
Income Taxes
 
IBG, Inc. accounts for income taxes in accordance with ASC 740, Income Taxes. The Company’s income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits are based on enacted tax laws (Note 11) and reflect management’s best assessment of estimated future taxes to be paid. The Company is subject to income taxes in both the United States and numerous foreign jurisdictions. Determining income tax expense requires significant judgments and estimates.
 
Deferred income tax assets and liabilities arise from temporary differences between the tax and financial statement recognition of the underlying assets and liabilities. In evaluating the ability to recover deferred tax assets within the jurisdictions from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, historical results are adjusted for changes in accounting policies and incorporate assumptions including the amount of future state, federal and foreign pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax-planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company is using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, three years of cumulative operating income (loss) are considered. Deferred income taxes have not been provided for U.S. tax liabilities or for additional foreign taxes on the unremitted earnings of foreign subsidiaries that have been indefinitely reinvested.
 
The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across the Company’s global operations. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on the Company’s results of operations, cash flows, or financial position.
 
ASC 740 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. ASC 740 also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
 
13

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

The Company records tax liabilities in accordance with ASC 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. These differences will be reflected as increases or decreases to income tax expense in the period in which new information becomes available.
 
Recently Issued Accounting Pronouncements
 
Subsequent to the adoption of the ASC, the FASB will issue Accounting Standards Updates (“ASUs”) as the means to add to or delete from, or otherwise amend the ASC. In 2013, prior to the issuance of the Company’s unaudited condensed consolidated financial statements, ASUs 2013-01 through 2013-11 have been issued. Following is a summary of recently issued ASUs that have affected or may affect the Company’s unaudited condensed consolidated financial statements:
 
   
Affects
 
Status
         
ASU 2011-11
 
Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities
 
Effective for fiscal periods beginning on or after January 1, 2013.  Retrospective disclosures have been made for comparative periods presented.
         
ASU 2013-01
 
Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities
 
Effective for fiscal periods beginning on or after January 1, 2013 (the same as the effective date of ASU 2011-11).
         
ASU 2013-02
 
Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
 
Effective for fiscal periods beginning on or after December 15, 2012.
         
ASU 2013-04
 
Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date
 
Effective prospectively for fiscal periods beginning on or after December 15, 2013.  Early adoption is permitted.
         
ASU 2013-05
 
Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity
 
Effective for fiscal periods beginning on or after December 15, 2013.  Early adoption is permitted.
 
Adoption of those ASUs that became effective during 2013, prior to the issuance of the Company’s unaudited condensed consolidated financial statements, did not have a material effect on those financial statements. Management is assessing the potential impact on the Company’s financial statements of adopting ASUs that will become effective in the future.
 
3. Trading Activities and Related Risks
 
IBG, Inc.’s trading activities include providing securities market making and brokerage services. Trading activities expose IBG, Inc. to market and credit risks. These risks are managed in accordance with established risk management policies and procedures. To accomplish this, management has established a risk management process that includes:
 
 
a regular review of the risk management process by executive management as part of its oversight role;
 
 
defined risk management policies and procedures supported by a rigorous analytic framework; and
 
 
articulated risk tolerance levels as defined by executive management that are regularly reviewed to ensure that IBG, Inc.’s risk-taking is consistent with its business strategy, capital structure, and current and anticipated market conditions.
 
14

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

Market Risk
 
IBG, Inc. is exposed to various market risks. Exposures to market risks arise from equity price risk, foreign currency exchange rate fluctuations and changes in interest rates. IBG, Inc. seeks to mitigate market risk associated with trading inventories by employing hedging strategies that correlate rate, price and spread movements of trading inventories and related financing and hedging activities. IBG, Inc. uses a combination of cash instruments and exchange traded derivatives to hedge its market exposures. The following discussion describes the types of market risk faced:
 
Equity Price Risk
 
Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the value of equity securities and other instruments that derive their value from a particular stock, a defined basket of stocks, or a stock index. IBG, Inc. is subject to equity price risk primarily in financial instruments owned and sold but not yet purchased. IBG, Inc. attempts to limit such risks by continuously reevaluating prices and by diversifying its portfolio across many different options, futures and underlying securities and avoiding concentrations of positions based on the same underlying security.
 
Currency Risk
 
Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact the value of financial instruments. Exchange rate contracts may include cross-currency swaps and currency futures contracts. Currency swaps are agreements to exchange future payments in one currency for payments in another currency. These agreements are used to effectively convert assets or liabilities denominated in different currencies. Currency futures are contracts for delayed delivery of currency at a specified future date. IBG, Inc. uses currency swaps to manage the levels of its non-U.S. dollar currency balances and currency cash and futures to hedge its global exposure.
 
Interest Rate Risk
 
Interest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments. IBG, Inc. is exposed to interest rate risk on cash and margin balances, positions carried in equity securities, options, futures and on its debt obligations. These risks are managed through investment policies and by entering into interest rate futures contracts.
 
Credit Risk
 
IBG, Inc. is exposed to risk of loss if an individual, counterparty or issuer fails to perform its obligations under contractual terms (“default risk”). Both cash instruments and derivatives expose IBG, Inc. to default risk. IBG, Inc. has established policies and procedures for mitigating credit risk on principal transactions, including reviewing and establishing limits for credit exposure, maintaining collateral, and continually assessing the creditworthiness of counterparties.
 
The Company’s credit risk is limited in that substantially all of the contracts entered into are settled directly at securities and commodities clearing houses and a small portion is settled through member firms and banks with substantial financial and operational resources. IBG, Inc. seeks to control the risks associated with its customer margin activities by requiring customers to maintain collateral in compliance with regulatory and internal guidelines.
 
In the normal course of business, IBG, Inc. executes, settles, and finances various customer securities transactions. Execution of these transactions includes the purchase and sale of securities by IBG, Inc. that exposes IBG, Inc. to default risk arising from the potential that customers or counterparties may fail to satisfy their obligations. In these situations, IBG, Inc. may be required to purchase or sell financial instruments at unfavorable market prices to satisfy obligations to customers or counterparties. Liabilities to other brokers and dealers related to unsettled transactions (i.e., securities fails to receive) are recorded at the amount for which the securities were purchased, and are paid upon receipt of the securities from other brokers or dealers. In the case of aged securities fails to receive, IBG, Inc. may purchase the underlying security in the market and seek reimbursement for any losses from the counterparty.
 
For cash management purposes, IBG, Inc. enters into short-term securities purchased under agreements to resell and securities sold under agreements to repurchase transactions (“repos”) in addition to securities borrowing and lending arrangements, all of which may result in credit exposure in the event the counterparty to a transaction is unable to fulfill its contractual obligations. In accordance with industry practice, repos are collateralized by securities with a market value in excess of the obligation under the contract. Similarly, securities borrowed and loaned agreements are collateralized by deposits of cash or securities. IBG, Inc. attempts to minimize credit risk associated with these activities by monitoring collateral values on a daily basis and requiring additional collateral to be deposited with or returned to IBG, Inc. as permitted under contractual provisions.
 
15

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

Concentrations of Credit Risk
 
IBG, Inc.’s exposure to credit risk associated with its trading and other activities is measured on an individual counterparty basis, as well as by groups of counterparties that share similar attributes. Concentrations of credit risk can be affected by changes in political, industry, or economic factors. To reduce the potential for risk concentration, credit limits are established and exposure is monitored in light of changing counterparty and market conditions. As of September 30, 2013, the Company did not have any material concentrations of credit risk outside the ordinary course of business.
 
Off-Balance Sheet Risks
 
IBG, Inc. may be exposed to a risk of loss not reflected in the unaudited condensed consolidated financial statements 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 IBG, Inc.’s cost to liquidate such contracts may exceed the amounts reported in IBG, Inc.’s unaudited condensed consolidated statements of financial condition.

4. Equity and Earnings Per Share
 
In connection with its initial public offering of Class A common stock (“IPO”) in May 2007, IBG, Inc. purchased 10.0% of the membership interests in IBG LLC from Holdings, became the sole managing member of IBG LLC and began to consolidate IBG LLC’s financial results into its financial statements. Holdings wholly owns all Class B common stock, which common stock has voting rights in proportion to its ownership interests in IBG LLC, approximately 87.6% as of September 30, 2013. The consolidated financial statements reflect the results of operations and financial position of IBG, Inc., including consolidation of its investment in IBG LLC. Prior to the June 6, 2012 amendment to the Exchange Agreement (described below), Holdings’ ownership interests in IBG LLC were accounted for and reported in these consolidated financial statements as “redeemable noncontrolling interests” (temporary equity) pursuant to ASC 810-10-45, ASC 815-40-25 and ASC 480-10-S99-3A. For periods after the Amendment, beginning with the quarter ended June 30, 2012, the noncontrolling interests in IBG LLC attributable to Holdings are reported as a component of total equity, as described below.
 
Recapitalization and Post-IPO Capital Structure
 
Immediately prior to and immediately following the consummation of the IPO, IBG, Inc., Holdings, IBG LLC and the members of IBG LLC consummated a series of transactions collectively referred to herein as the “Recapitalization.” In connection with the Recapitalization, IBG, Inc., Holdings and the historical members of IBG LLC entered into an exchange agreement, dated as of May 3, 2007 (the “Exchange Agreement”), pursuant to which the historical members of IBG LLC received membership interests in Holdings in exchange for their membership interests in IBG LLC. Additionally, IBG, Inc. became the sole managing member of IBG LLC.
 
In connection with the consummation of the IPO, Holdings used the net proceeds to redeem 10.0% of members’ interests in Holdings in proportion to their interests. Immediately following the Recapitalization and IPO, Holdings owned approximately 90% of IBG LLC and 100% of IBG, Inc.’s Class B common stock, which has voting power in IBG, Inc. in proportion to Holdings’ ownership of IBG LLC.
 
Since consummation of the IPO and Recapitalization, IBG, Inc.’s equity capital structure has been comprised of Class A and Class B common stock. All shares of common stock have a par value of $0.01 per share and have identical rights to earnings and dividends and in liquidation. As described previously in this Note 4, Class B common stock has voting power in IBG, Inc. proportionate to the extent of Holdings’ and IBG, Inc.’s respective ownership of IBG LLC. At September 30, 2013 and December 31, 2012, 1,000,000,000 shares of Class A common stock were authorized, of which 50,096,562 and 47,797,844 shares have been issued; and 49,971,727 and 47,499,739 shares were outstanding, respectively. Class B common stock is comprised of 100 authorized shares, of which 100 shares were issued and outstanding as of September 30, 2013 and December 31, 2012, respectively. In addition, 10,000 shares of preferred stock have been authorized, of which no shares are issued or outstanding as of September 30, 2013 and December 31, 2012, respectively.
 
As a result of a federal income tax election made by IBG LLC applicable to the acquisition of IBG LLC member interests by IBG, Inc., the income tax basis of the assets of IBG LLC acquired by IBG, Inc. have been adjusted based on the amount paid for such interests. Deferred tax assets were recorded as of the IPO date and in connection with the 2011 redemption of Holdings member interests in exchange for common stock, which deferred tax assets are a component of other assets in the unaudited condensed consolidated statement of financial condition and are being amortized as additional deferred income tax expense over 15 years from the IPO date and from the 2011 redemption date, respectively, as allowable under current tax law. As of September 30, 2013 and December 31, 2012, the unamortized balance of these deferred tax assets was $266.6 million and $281.6 million, respectively.
 
16

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

IBG, Inc. also entered into an agreement (the “Tax Receivable Agreement”) with Holdings to pay Holdings (for the benefit of the former members of IBG LLC) 85% of the tax savings that IBG, Inc. actually realizes as the result of tax basis increases. These payables, net of payments made to Holdings, are reported as payable to affiliate in the unaudited condensed consolidated statement of financial condition.
 
The remaining 15% is accounted for as a permanent increase to additional paid-in capital in the unaudited condensed consolidated statement of financial condition.
 
The cumulative amounts of deferred tax assets, payables to Holdings and credits to additional paid-in capital arising from stock offerings from the date of the IPO through September 30, 2013 were $387.1 million, $329.0 million and $58.1 million, respectively.  Amounts payable under the Tax Receivable Agreement are payable to Holdings annually upon the filing of IBG, Inc.’s federal income tax return. The Company has paid Holdings a total of $70.4 million through September 30, 2013 pursuant to the terms of the Tax Receivable Agreement.
 
The Exchange Agreement provides for future redemptions of member interests and for the purchase of member interests in IBG LLC by IBG, Inc. from Holdings, which could result in IBG, Inc. acquiring the remaining member interests in IBG LLC that it does not own. On an annual basis, holders of Holdings member interests are able to request redemption of such member interests over a minimum eight (8) year period following the IPO; 12.5% annually for seven (7) years and 2.5% in the eighth year.
 
At the time of the Company’s IPO in 2007, three hundred sixty (360) million shares of authorized Common Stock were reserved for future sales and redemptions. From 2008 through 2010, Holdings redeemed 5,013,259 IBG LLC shares with a total value of $114.0 million, which redemptions were funded using cash on hand at IBG LLC. Upon cash redemption these IBG LLC shares were retired. In 2011, the Company issued 1,983,624 shares of Common Stock directly to Holdings in exchange for an equivalent number of shares of member interests in IBG LLC.
 
As a consequence of these redemption transactions, and distribution of shares to employees (Note 10), IBG, Inc.’s interest in IBG LLC has increased to approximately 12.4%, with Holdings owning the remaining 87.6% as of September 30, 2013. The redemptions also resulted in an increase in the Holdings interest held by Thomas Peterffy and his affiliates from approximately 84.6% at the IPO to approximately 86.4% at September 30, 2013.
 
The Exchange Agreement, as amended June 6, 2012, provides that the Company may facilitate the redemption by Holdings of interests held by its members through the issuance of shares of common stock through a public offering in exchange for the interests in IBG LLC being redeemed by Holdings. The Amendment eliminated from the Exchange Agreement an alternative funding method, which provided that upon approval by the board of directors and by agreement of the Company, IBG LLC and Holdings, redemptions could be made in cash.
 
Subsequent to the amendment to the Exchange Agreement on June 6, 2012, the Company recorded adjustments to report Holdings’ noncontrolling interests in IBG LLC as component of total equity, reducing redeemable noncontrolling interests to zero and reversing the cumulative effect of adjustments through June 6, 2012 to redemption value previously recorded to additional paid-in capital. The effect of these adjustments was:
 
(in thousands)
Adjustments
as of June 6,
2012
Redeemable noncontrolling interests
$(5,367,553
Additional Paid in Capital
$472,409
 
Retained earnings
$572,840
 
Noncontrolling interests
$4,322,304
 

 
17

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

Earnings per Share
 
For periods prior to June 6, 2012, the Company reflected measurement adjustments for non-fair value redemption rights through application of the two-class method of calculating earnings per share in lieu of recognizing the impact through the determination of net income attributable to common stockholders.
 
 
Basic earnings per share are calculated utilizing net income available for common stockholders divided by the weighted average number of shares of Class A and Class B common stock outstanding for that period:
 
   
Three months ended
   
Nine months ended
   
September 30,
   
September 30,
   
2013
   
2012
   
2013
   
2012
Basic earnings per share:
                     
Net income attributable to common stockholders
             16,447
 
                 12,488
 
                  33,382
 
                  31,556
Add (deduct) net income attributable to non-fair value redemption rights
 
                            -
   
                  -
   
                            -
   
                    1,108
Net income available for common stockholders
16,447
 
                    12,488
 
                  33,382
 
                  32,664
                       
Weighted average shares of common stock outstanding:
                 
Class A
 
           49,965,950
   
           47,488,359
   
           48,807,221
   
           46,588,113
Class B
 
                       100
   
                       100
   
                       100
   
                       100
   
           49,966,050
   
           47,488,459
   
           48,807,321
   
           46,588,213
                       
Basic earnings per share
                      0.33
 
                      0.26
 
                      0.68
 
                      0.70
 
 
 Diluted earnings (loss) per share are calculated utilizing the Company’s basic net income available for common stockholders divided by diluted weighted average shares outstanding with no adjustments to net income available to common stockholders for potentially dilutive common shares:  
 
   
Three months ended
   
Nine months ended
   
September 30,
   
September 30,
   
2013
   
2012
   
2013
   
2012
Diluted earnings per share:
                     
Net income available for common stockholders
                  16,447
 
                12,488
 
                 33,382
 
                 32,664
                       
Weighted average shares of common stock outstanding:
                 
Class A:
                     
Issued and outstanding
 
           49,965,950
   
           47,488,359
   
          48,807,221
   
          46,588,113
Potentially dilutive common shares issuable pursuant to employee incentive plans
 
             1,022,164
   
            191,359
   
               1,174,343
   
           277,557
Class B
 
                       100
   
                       100
   
                       100
   
                       100
   
          50,988,214
   
           47,679,818
   
           49,981,664
   
          46,865,770
                       
Diluted earnings per share
                      0.32
 
                      0.26
 
                     0.67
 
                      0.70
 
Member and Stockholder Dividends
 
Through September 30, 2013, IBG LLC paid dividends totaling $122.7 million to its members, of which IBG, Inc.’s proportionate share was $15.0 million.  In March, June and September 2013, the Company paid cash dividends of $0.10 per share of Common Stock, totaling $4.7 million, $5.0 million and $5.0 million, respectively.
 
On October 15, 2013, the Company declared a cash dividend of $0.10 per common share, payable on December 13, 2013 to shareholders of record as of November 29, 2013.
 
18

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

5. Comprehensive Income
 
Comprehensive income is comprised of Net Income and Other Comprehensive Income (“OCI”). The Company’s OCI is comprised of foreign currency translation adjustments, which arise from changes in the U.S. dollar value of the net worth of the Company’s subsidiaries whose functional currency is other than U.S. dollars during respective reporting periods. The following table presents comprehensive income and earnings per share on comprehensive income (calculated using the two-class method for periods prior to June 6, 2012):
 
   
Three months ended
     
Nine months ended
 
   
September 30,
     
September 30,
 
   
2013
     
2012
     
2013
     
2012
 
                               
Comprehensive income attributable to common stockholders, net of tax
                20,077
   
                14,382
   
                29,666
   
                32,370
 
Add (deduct) net income attributable to non-fair value redemption rights
 
                         -
     
           -
     
                         -
     
                  1,108
 
                               
Comprehensive income available for common stockholders
                  20,077
   
                14,382
   
                29,666
   
            33,478
 
                               
                               
Earnings per share on comprehensive income:
                             
Basic
                  0.40
   
              0.30
   
                  0.61
   
              0.72
 
Diluted
                   0.39
   
                0.30
   
                0.59
   
                    0.71
 
                               
                               
Weighted average common shares outstanding:
                             
Basic
 
49,966,050
     
47,488,459
     
48,807,321
     
46,588,213
 
Diluted
 
50,988,214
     
47,679,818
     
49,981,664
     
46,865,770
 
 
 
19

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

6. Financial Assets and Financial Liabilities
 
Fair Value

The following tables set forth, by level within the fair value hierarchy (Note 2), financial assets and liabilities, primarily financial instruments owned and financial instruments sold, but not yet purchased at fair value as of September 30, 2013 and December 31, 2012. As required by ASC 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 September 30, 2013
                       
   
Level 1
   
Level 2
   
Level 3
   
Total
                       
Securities segregated for regulatory purposes
             2,500,627
 
                         -
 
                         -
 
        2,500,627
Financial instruments owned:
                     
Stocks
 
             1,167,306
   
                         -
   
                     181
   
        1,167,487
Options
 
             2,119,958
   
                19,426
   
                         -
   
        2,139,384
Warrants and discount certificates
 
                  55,392
   
                         -
   
                         -
   
             55,392
U.S. and foreign government obligations
 
                    1,967
   
                  2,309
   
                         -
   
               4,276
Corporate and municipal bonds
 
                  64,057
   
                20,148
   
                         -
   
             84,205
Currency forward contracts
 
                           -
   
                  4,153
   
                         -
   
               4,153
Total financial instruments owned
 
             3,408,680
   
                46,036
   
                     181
   
        3,454,897
                       
Financial instruments owned and pledged as collateral:
           
Stocks
 
                865,051
   
                         -
   
                         -
   
           865,051
Warrants
 
                       312
   
                         -
   
                         -
   
                  312
U.S. and foreign government obligations
 
                103,015
   
                         -
   
                         -
   
           103,015
Corporate and municipal bonds
 
                    1,998
   
                         -
   
                         -
   
               1,998
Total financial instruments owned and pledged as collateral
 
                970,376
   
                         -
   
                         -
   
           970,376
                       
Subtotal
 
             4,379,056
   
                46,036
   
                     181
   
        4,425,273
                       
Other fair value investments, included in other assets:
               
Stocks
 
                    7,545
   
                     407
   
                         -
   
               7,952
Corporate and municipal bonds
 
                    1,820
   
                39,120
   
                         -
   
             40,940
Mortgage backed securities
 
                           -
   
                28,081
   
                         -
   
             28,081
Other asset backed securities
 
                           -
   
                14,607
   
                         -
   
             14,607
Other
 
                           -
   
                  8,717
   
                         -
   
               8,717
                       
Total Financial Assets at Fair Value
             6,889,048
 
              136,968
 
                     181
 
        7,026,197
 
   
 Financial Liabilities At Fair Value as of September 30, 2013
                       
   
 Level 1
   
 Level 2
   
 Level 3
   
 Total
Financial instruments sold, not yet purchased:
                 
Stocks
             1,443,990
 
                         -
 
                       64
 
        1,444,054
Options
 
             2,058,289
   
                  9,084
   
                         -
   
        2,067,373
Warrants and discount certificates
 
                    1,640
   
                         -
   
                         -
   
               1,640
U.S. and foreign government obligations
 
                           -
   
                  1,229
   
                         -
   
               1,229
Corporate bonds
 
                  70,056
   
                  7,981
   
                         -
   
             78,037
Currency forward contracts
 
                           -
   
                     959
   
                         -
   
                  959
Total financial instruments sold, not yet purchased
             3,573,975
 
                19,253
 
                       64
 
        3,593,292

 
20

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

   
 Financial Assets At Fair Value as of December 31, 2012
                       
   
 Level 1
   
 Level 2
   
 Level 3
   
 Total
                       
Securities segregated for regulatory purposes
             2,297,024
 
                         -
 
                         -
 
        2,297,024
Financial instruments owned:
                     
Stocks
 
                887,031
   
                         -
   
                         -
   
           887,031
Options
 
             2,388,173
   
                         -
   
                         -
   
        2,388,173
Warrants and discount certificates
 
                147,317
   
                         -
   
                         -
   
           147,317
U.S. and foreign government obligations
 
                  30,087
   
                         -
   
                         -
   
             30,087
Corporate and municipal bonds
 
                104,387
   
                59,533
   
                         -
   
           163,920
Currency forward contracts
 
                           -
   
                  1,351
   
                         -
   
               1,351
Total financial instruments owned
 
             3,556,995
   
                60,884
   
                         -
   
        3,617,879
                       
Financial instruments owned and pledged as collateral:
           
Stocks
 
                775,222
   
                         -
   
                         -
   
           775,222
Warrants
 
                       350
   
                         -
   
                         -
   
                  350
U.S. and foreign government obligations
 
                146,953
   
                         -
   
                         -
   
           146,953
Corporate and municipal bonds
 
                    4,332
   
                         -
   
                         -
   
               4,332
Total financial instruments owned and pledged as collateral
 
                926,857
   
                         -
   
                         -
   
           926,857
                       
Subtotal
 
             4,483,852
   
                60,884
   
                         -
   
        4,544,736
                       
Other fair value investments, included in other assets:
               
Stocks
 
                  17,707
   
                  3,549
   
                         -
   
             21,256
Corporate and municipal bonds
 
                    2,249
   
                53,325
   
                         -
   
             55,574
Mortgage backed securities
 
                           -
   
                21,311
   
                         -
   
             21,311
Other asset backed securities
 
                           -
   
                17,023
   
                         -
   
             17,023
Other
 
                           -
   
                  1,068
   
                         -
   
               1,068
                       
Total Financial Assets at Fair Value
             6,800,832
 
              157,160
 
                         -
 
        6,957,992
 
   
 Financial Liabilities At Fair Value as of December 31, 2012
                       
   
 Level 1
   
 Level 2
   
 Level 3
   
 Total
Financial instruments sold, not yet purchased:
                 
Stocks
             1,787,741
 
                         -
 
                         -
 
        1,787,741
Options
 
             2,389,871
   
                         -
   
                         -
   
        2,389,871
Warrants and discount certificates
 
                    2,104
   
                         -
   
                         -
   
               2,104
U.S. and foreign government obligations