As filed with
the Securities and Exchange Commission on September 3,
2010.
Registration
No. 333-
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
FXCM Inc.
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
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6220
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27-3268672
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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32 Old Slip
New York, NY 10005
Telephone:
(646) 432-2986
(Address, including zip code,
and telephone number, including area code, of Registrants
principal executive offices)
David S. Sassoon
General Counsel
FXCM Inc.
32 Old Slip
New York, NY 10005
Telephone: (646) 432-2241
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Joshua Ford Bonnie
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017-3954
Telephone: (212) 455-2000
Facsimile: (212) 455-2502
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Robert Evans III
Shearman & Sterling LLP
599 Lexington Avenue
New York, NY 10022
Telephone: (212) 848-8830
Facsimile: (646) 848-8830
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Approximate date of commencement of the proposed sale of the
securities to the public: As soon as practicable
after the Registration Statement is declared effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check
the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Amount of
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Title of Each Class of
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Aggregate
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Registration
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Securities to be Registered
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Offering Price(1)(2)
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Fee
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Class A Common Stock, par value $.01 per share
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$200,000,000
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$14,260
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(1)
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Estimated solely for the purpose of
determining the amount of the registration fee in accordance
with Rule 457(o) under the Securities Act of 1933.
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(2)
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Includes shares of Class A
common stock subject to the underwriters option to
purchase additional shares of Class A common stock.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
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SUBJECT
TO COMPLETION, DATED SEPTEMBER 3, 2010
PRELIMINARY
PROSPECTUS
Shares
FXCM
Inc.
Class A
Common Stock
This is the initial
public offering of shares of Class A common stock of FXCM
Inc. No public market currently exists for our Class A
common stock. We are offering all of
the shares
in this offering. We anticipate that the initial public offering
price will be between $ and
$ per share. We intend to apply to
list the shares of Class A common stock on the New York
Stock Exchange under the symbol FXCM.
We intend to use a
portion of the proceeds from this offering to purchase equity
interests in our business from our existing owners, including
members of our senior management.
Investing in
shares of our Class A common stock involves risks. See
Risk Factors beginning on page 14 to read about
factors you should consider before buying shares of our
Class A common stock.
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Per
Share
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Total
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Initial public offering price
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$
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$
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Underwriting discount
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$
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$
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Proceeds, before expenses, to FXCM Inc.
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$
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$
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To the extent that
the underwriters sell more
than shares
of our Class A common stock, the underwriters have the
option to purchase up to an
additional shares
of our Class A common stock from us at the initial public
offering price less the underwriting discount, within
30 days from the date of this prospectus.
Neither the
Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or
passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
The underwriters
expect to deliver the shares of our Class A common stock
against payment in New York, New York
on ,
2010.
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Credit
Suisse J.P. Morgan |
Citi |
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Sandler
ONeill + Partners, L.P.
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The date of this
prospectus
is ,
2010
We are responsible for the information contained in this
prospectus and in any free writing prospectus we may authorize
to be delivered to you. Neither we nor the underwriters have
authorized anyone to provide you with additional or different
information. We and the underwriters are offering to sell, and
seeking offers to buy, shares of our Class A common stock
only in jurisdictions where offers and sales are permitted. The
information in this prospectus is accurate only as of the date
of this prospectus, regardless of the time of delivery of this
prospectus or any sale of shares of our Class A common
stock.
Table of
Contents
Unless the context suggests otherwise, references in this
prospectus to FXCM, the Company,
we, us and our refer
(1) prior to the consummation of the Offering Transactions
described under Organizational Structure
Offering Transactions, to FXCM Holdings, LLC and its
consolidated subsidiaries and (2) after the Offering
Transactions described under Organizational
Structure Offering Transactions, to FXCM Inc.
and its consolidated subsidiaries. We refer to the owners of
FXCM Holdings, LLC prior to the Offering Transactions,
collectively, as our existing owners.
Unless indicated otherwise, the information included in this
prospectus assumes no exercise by the underwriters of the option
to purchase up to an
additional shares
of Class A common stock from us and that the shares of
Class A common stock to be sold in this offering are sold
at $ per share of Class A
common stock, which is the midpoint of the price range indicated
on the front cover of this prospectus.
i
SUMMARY
This summary highlights selected information contained
elsewhere in this prospectus and does not contain all the
information you should consider before investing in shares of
our Class A common stock. You should read this entire
prospectus carefully, including the section entitled Risk
Factors and the financial statements and the related notes
included elsewhere in this prospectus, before you decide to
invest in shares of our Class A common stock.
FXCM
Our
business
We are a leading online provider of foreign exchange, or FX,
trading and related services to over 165,000 retail and
institutional customers globally. We offer our customers access
to
over-the-counter,
or OTC, FX markets through our proprietary technology platform.
In a FX trade, a participant buys one currency and
simultaneously sells another, a combination known as a
currency pair. Our platform presents our FX
customers with the best price quotations on up to 56 currency
pairs from up to 17 global banks, financial institutions and
market makers, or FX market makers, which we believe provides
our customers with an efficient and cost-effective way to trade
FX. We utilize what is referred to as agency execution or an
agency model. When our customer executes a trade on the best
price quotation offered by our FX market makers, we act as a
credit intermediary, or riskless principal, simultaneously
entering into offsetting trades with both the customer and the
FX market maker. We earn fees by adding a markup to the price
provided by the FX market makers and generate our trading
revenues based on the volume of transactions, not trading
profits or losses. We believe we are one of the largest retail
FX brokers in the world based on transaction volume, number of
customers and annual revenue, and the largest FX broker that
operates almost exclusively using the agency model.
Our agency model is fundamental to our core business philosophy
because we believe that it aligns our interests with those of
our customers, reduces our risks and provides distinct
advantages over the principal model used by the majority of
retail FX brokers. In the principal model, the retail FX broker
sets the price it presents to the customer and may maintain its
trading position if it believes the price may move in its favor
and against the customer. We believe this creates an inherent
conflict between the interests of the customer and those of the
principal model broker. Principal model brokers revenues
typically consist primarily of trading gains or losses, and are
more affected by market volatility than those of brokers
utilizing the agency model. We also believe that regulators in
certain jurisdictions have been implementing requirements in a
manner that may be more favorable to FX brokers utilizing the
agency model as compared to those utilizing the principal model.
We operate our business through two segments: retail trading and
institutional trading. Our retail trading segment accounted for
92% and 90% of our total revenues less referring broker fees in
2009 and the six months ended June 30, 2010, respectively.
Our institutional trading segment, FXCM Pro, offers FX trading
services to banks, hedge funds and other institutional customers
on an agency model basis and accounted for 8% and 10% of our
total revenues less referring broker fees in 2009 and the six
months ended June 30, 2010, respectively. Our revenues less
referring broker fees have grown from $9.5 million in 2001
to $246.1 million in 2009, a compound annual growth rate,
or CAGR, of 50%. Our income before income taxes has grown from
$5.4 million in 2001 to $97.0 million in 2009, a CAGR
of 43.5%. Our revenues less referring broker fees were
$136.5 million and our income before income taxes were
$56.8 million in the six months ended June 30, 2010,
as compared to $127.7 million and $54.3 million,
respectively, in the six months ended June 30, 2009.
Our operating subsidiaries are regulated in a number of
jurisdictions, including the United States, the United Kingdom
(where regulatory passport rights have been exercised to operate
in a number of European Economic Area jurisdictions), Hong Kong,
Australia and Dubai. Upon the completion of our acquisition of
ODL Group Limited, or ODL, a U.K.-based FX broker, which is
expected to close in September 2010, we will also be regulated
in Japan. We maintain offices in these jurisdictions, among
others. We offer our trading software in 16 languages,
produce FX research and content in 12 languages and provide
customer support in
1
13 languages. For the six months ended June 30, 2010,
approximately 76% of our customer trading volume was derived
from customers residing outside the United States. We believe
our global footprint provides us with access to emerging
markets, diversifies our risk from regional economic conditions
and allows us to draw our employees from a broad pool of talent.
Retail FX
industry
The FX market is the largest and most liquid financial market in
the world. According to the Bank for International Settlements,
average daily turnover in the global FX market in April 2010 was
$4.0 trillion. Historically, access to the FX market was
only available to commercial banks, corporations and other large
financial institutions. In the last decade, retail investors
have gained increased access to this market, largely through the
emergence of online retail FX brokerages, like our firm.
According to 2010 analysis by the Aite Group, a financial
services market research firm, retail FX trading volumes have
grown from average daily volumes of approximately
$10 billion in 2001 to approximately $125 billion in
2009, representing a CAGR of 37%. The retail FX trading volumes
were forecasted to be $158 billion as of June 30, 2010.
While online retail trading of FX has many similarities with
online retail trading of equities, there are a number of key
differences. We believe the potential market that is addressable
by an online retail FX broker is larger than that addressable by
an online provider of retail equities trading. Trading of
equities varies by country, requiring retail equity brokers to
establish significant infrastructure in each major market.
Because retail spot FX contracts are neither traded nor cleared
through local exchanges, retail FX brokers do not need to build
unique infrastructure in each market to offer trading services.
We service our retail customers around the world from a common
technological infrastructure.
The FX market is open 24 hours a day, five days per week,
driving extensive participation and more frequent trading.
Unlike equity markets that limit investors to trading during
market hours, retail FX participants have the convenience of
trading FX at any time throughout the day, as well as the
ability to place trades immediately, rather than waiting until
the equity markets reopen the next day. The result is
effectively more than fifteen equity trading days a
week. As a result, our average account traded 3.4 times per day
in 2009 and 2.6 times per day in the first six months of 2010,
which we believe is significantly more frequent than the trades
per day of the average online equity account. Further, retail FX
brokers cannot rely on standardized and inexpensive third-party
infrastructure solutions that are available to online equities
brokers and must build a significant proportion of their own
technology. This requires large investments of time and money
but can result in points of competitive differentiation not
available to retail equity brokers. We believe this
differentiation enables retail FX brokers to compete on the
basis of the quality of their platform rather than merely on
commission per trade.
We believe that retail FX trading will continue to grow at high
rates as retail investors seek new asset choices, become more
knowledgeable about FX markets through frequent media coverage
of global economic issues and recognize the advantages of online
FX trading over online trading of other assets, such as
equities. We also believe that retail FX investors globally are
becoming more sophisticated and demanding more transparency,
better execution and better customer service. We believe our
agency model, scale, proprietary technology platform, network of
FX market makers and award-winning customer service will
continue to attract a diverse and experienced base of customers,
who use a wide range of trading strategies, trade more
frequently and generally maintain long term relationships with
our firm.
Our
opportunities
Continued
growth of the retail FX market
Despite the strong growth of the retail FX market, online retail
FX investors still represent a small fraction of the total
population of online investors. The Aite Group estimates that,
as of July 2010 there were over 110 million retail online
investors globally, but only 1.1 million retail investors
who traded FX. Overall awareness of FX continues to grow among
investors, driven in part by increased media coverage and the
central role FX plays in the global economy. Also, since retail
FX is an asset class that can be traded 24 hours per day,
five days a week, it is convenient to trade for many online
investors as they can trade at any time of
2
the day. Unlike equities, fixed income, real estate and many
other asset classes, FX markets do not experience periods where
all assets move in one direction or another. As a result, the FX
market is not necessarily correlated to other assets popular
with online investors, such as equities or options, and we
believe that, as an increasing number of investors realize this,
retail FX will attract more attention as a way to increase
portfolio diversification.
Increasing
sophistication of FX customers and awareness of the agency model
will drive increased market share for agency model brokers like
FXCM
We believe that as retail FX investors grow in sophistication,
they will recognize the advantages of placing trades with an
agency model broker with a robust technology platform. We
believe these investors value competitive prices, deep
liquidity, reliable execution and the ability to use any trading
strategy they choose without fear of price requotes, unfilled
orders or trading slowdowns that may occur when they are trading
with a principal model FX broker. For instance, we believe
sophisticated customers, such as automated traders, one of the
fastest growing and highest volume segments of the retail FX
market, value an agency model broker who will not place
restrictions on the frequency or style of trading and offers
access to deep pools of liquidity and rapid execution at
attractive prices.
Expanding
our presence in Europe, a large market for retail FX
trading
We believe the retail FX market in Europe presents a significant
growth opportunity for us due to our agency model. According to
Greenwich Associates, a financial services market research firm,
57% of global FX trading volume in 2009 was conducted in Europe.
We believe that awareness of the advantages of the agency model
is growing among European customers and regulators, despite the
current prominence of principal model brokers in Europe. We
believe we can significantly expand our share of this large
market through our existing operations in Europe and our pending
acquisition of ODL.
Regulatory
changes will continue to narrow the pool of providers authorized
to offer retail FX, enhancing the standing of the industry
overall and of the FX brokers like us that can meet the higher
regulatory standards
Regulators in the United States and other jurisdictions have
made a series of changes that impact retail FX brokers,
including substantial increases in minimum required regulatory
capital, increased oversight of third-party referring brokers
and, more recently, regulations regarding the execution of
trades. While these regulations may increase our costs, we
believe that an effect of these regulations has been to
significantly reduce the number of firms offering retail FX,
even as the number of customers and the volume traded has grown.
As the industry consolidates, scale will become increasingly
important, presenting opportunities to larger firms, such as us,
that can meet the more stringent regulatory requirements. We
also believe that regulators in certain jurisdictions have been
implementing requirements in a manner that is more favorable to
agency model retail FX brokers, like us, as compared to those
utilizing the principal model. We believe that this trend will
present additional opportunities for us to increase market share
organically or through acquisitions.
Continued
expansion in institutional market
The institutional FX market is comprised of banks, hedge funds
and corporate treasury departments that trade with each other
predominantly through electronic communication networks, or
ECNs, and single bank platforms. We believe that we can use our
agency model to continue to expand our institutional FX segment
by offering these institutions the deep liquidity of multiple FX
market makers while preserving the anonymity that they value.
3
Our
competitive strengths
Differentiated
agency model that aligns our interests with our customers
interests, produces a better customer trading experience,
generates more stable revenues and exposes us to less market,
regulatory and reputational risk
We believe our agency model aligns our interests with those of
our customers. Our list of products is largely limited to those
we are now, or in the future will be, able to offer on an agency
model basis. Because we earn our fees based on transaction
volume, we design our products and services to make it easier
for our customers to trade. For example, we offer research on
aggregate trading trends, one-click trading and price
improvements for price changes that may occur between order
placement and execution on all order types to help our customers
trade more profitably.
Further, we believe our transaction volume-based revenue is more
stable and predictable than revenue derived from trading against
customers. In addition, because we do not take market risk and
do not extend credit to our customers unless they are fully
collateralized, our regulatory capital requirements are
significantly lower than those applicable to principal model
brokers. As a result, we have more cash we can use to pursue our
growth plans. Further, we believe our exposure to regulatory and
reputational risk is reduced by avoiding the inherent conflict
between the interests of the customer and those of the principal
model broker.
Business
model and proprietary technology designed to minimize risk and
free capital for ongoing operations and expansion
One of our core business philosophies is to seek to minimize
risk. In addition to the reduction of risk exposure that we
believe results directly from utilizing an agency model, this
philosophy is exemplified by the development and implementation
of our margin monitoring technology. This technology reduces the
risk that customers trading on margin could lose more than they
deposit by checking their margins four times per second and
automatically closing open positions if a customer becomes at
risk of going into a negative account balance. In addition, our
platform receives prices from up to 17 FX market makers. By
distributing our trading activity across multiple
counterparties, we reduce the risk that the failure of an
individual market maker will significantly impact the trading
services we offer.
Proprietary
and scalable technology platform and award-winning
products
In the retail FX industry, the technology and infrastructure
required to implement the agency model from customer trading
screen through settlement is not widely available. We have built
our proprietary technology platform over the last 11 years
to handle the complete lifecycle of a FX trade, as well as
customized connections to our network of FX market makers and a
full suite of back office and administrative systems. Our
platform is scalable and can handle sudden changes in the number
of trades and increases in the number of customers. Our platform
is also flexible, enabling us to add new instruments.
We offer our customers various trading alternatives based on
customer sophistication, from beginner to expert, and modes of
access, from smart phones to web-based interfaces to
downloadable desktop applications. Our primary trading
application is award-winning Trading Station II, a desktop
application. We also offer Active Trader, an internet
application targeted at active equity traders. We have also
introduced a trading application designed for customers who
create automated trading strategies, a growing and more active
segment of the retail FX trading population. Additionally, we
offer our customers services to help them automate their trading
strategies, connect their automated trading systems to our
platform and to host their strategies on our platform.
4
Widely
recognized brand and an industry leading in-house marketing
organization driving new customer growth
We believe that we have built a
best-in-class
in-house online marketing organization that has fueled
consistent organic growth in customers at low acquisition costs
through a combination of web properties and internet
advertising. We believe that the FXCM brand is one of the most
well-known, global brands in the retail FX industry, built
through over $146 million in brand advertising expenditure
since 2005. In 2009, our web properties attracted over
2.2 million unique visitors and 19 million page views
per month, as measured by Omniture, a web analytics application
service. Among our most popular web properties is DailyFX.com,
our research and news site that is staffed by a team of nine
full time analysts who produce over 30 articles a day in three
languages which are syndicated on over 80 sites globally,
including Thomson Reuters and
Yahoo!®
Finance. DailyFX is one of the top three FX news and analysis
websites, measured by Alexa, a website which provides traffic
information for websites. We handle all aspects of the marketing
process in-house, including strategy, design, placement,
execution and performance measurement, allowing us to accurately
measure the effectiveness of each campaign and optimize the use
of our marketing and advertising expenses.
International
reach and significant scale
As measured by volume, revenue and number of customer accounts,
we believe we are the largest provider of retail FX in the
United States. Nonetheless, for the six months ended
June 30, 2010, we generated approximately 76% of our
customer trading volume from customers outside the United
States. We are continuing to expand our presence globally,
especially in Europe and the Middle East where we believe retail
FX investors are growing increasingly aware of the advantages of
the agency model.
As one of the largest retail FX firms in the world as measured
by volume, revenue and customer accounts, we believe our scale
gives us a significant competitive advantage over other retail
FX brokers. For example, we believe scale is a significant
factor in a retail FX investors choice of broker and the
amount of funds such investor is willing to deposit. As of
June 30, 2010, total customer equity was
$425.5 million, representing an increase of 38% over that
as of June 30, 2009. In addition, we are among the largest
sources of volume for many of our FX market makers, which
enables us to receive lower prices that we then pass on to our
customers. Our scale in online advertising allows us to lock up
coveted advertising inventory at favorable rates, lowering our
customer acquisition costs. Further, our balance sheet scale
enables us to meet minimum regulatory capital requirements
across all of our jurisdictions. Our technology platform enables
us to add customers organically or through acquisitions and
service them from a single infrastructure with minimal
additional costs.
Experienced
leadership team and innovative culture
Our leadership team is comprised of experienced executives that
have averaged over eight years of service with us and have been
active contributors to the growth of our company since its
founding in 1999 and to the growth of the online retail FX
industry generally. In the late 1990s, current members of our
technology leadership team played key roles in developing the
electronic trading systems for other early FX pioneers. Our
leadership team, led by co-founder and chief executive officer
Dror (Drew) Niv, has built a global presence to address the
international market for retail FX while successfully leading
the firm through the strong growth of the industry and our
transition to an agency model.
Our
Growth Strategy
Continue
to use our global brand and marketing to drive organic customer
growth
We intend to continue to use our brand and our sales and
marketing efforts to increase penetration of the growing retail
FX market. In existing markets, where we believe the FXCM brand
is widely recognized, we are increasing the effectiveness of our
campaigns and lowering the costs of acquisition per account. In
markets where our penetration is low, such as Europe, we are
increasing our marketing expenditure and expanding our physical
presence with sales offices. Since April 2009, we have opened
offices in Athens, Berlin, Dubai and Milan to accelerate our
penetration in these markets.
5
Make
selected acquisitions to expand our customer base or add
presence in markets where we have low penetration
We plan to make selected acquisitions of firms with established
presence in attractive markets and distribution channels to
accelerate our growth. We are in the process of acquiring ODL, a
leading broker of retail FX,
contracts-for-difference,
or CFDs, spread betting and equity options headquartered in
London. Our acquisition of ODL is designed to increase our
profile in the U.K. market and accelerate our growth in
continental Europe, utilizing ODLs relationships and sales
force. We expect the retail FX industry to continue to
consolidate, providing us with additional acquisition
opportunities.
Expand
our range of products to add new customers and increase revenues
from existing customers
We have an established history of introducing new products. For
instance, we introduced our Active Trader platform for our high
volume customers in February 2009, the trading of CFDs in
September 2009, mobile trading in March 2010 and Strategy Trader
in August 2010. We plan to introduce additional products in the
future. We are also making investments in our technology
platform to meet the demands of our customers that we believe
will increase our share of the trading volumes of active and
institutional FX customers.
Capture
market share from competitors who are unable to keep pace with
increasingly demanding regulatory requirements and reap benefits
from improved industry reputation and customer
confidence
Over the past three years, regulatory changes have reduced the
number of retail FX brokers and, we believe, improved the
reputation of retail FX as an asset class and the standing of
the industry as a whole. We expect that increased regulatory
compliance requirements will cause additional firms to leave
individual markets or exit the industry and believe that this
will present additional opportunities for the remaining firms,
especially agency model firms like us, to increase market share
organically or through acquisitions. For example, if proposed
regulatory changes in the United States relating to trade
execution and price improvements are implemented, we believe
that additional
non-U.S. FX
customers desiring superior execution of their trades may seek
to become customers of U.S. regulated retail FX brokers. We
believe we are the largest retail FX broker licensed in the
United States based on transaction volume, revenue and number of
customer accounts and, accordingly, would be well positioned to
capture a significant share of these new accounts.
Investment
Risks
An investment in shares of our Class A common stock
involves substantial risks and uncertainties that may adversely
affect our business, financial condition and results of
operations and cash flows. Some of the more significant
challenges and risks relating to an investment in our company
include those associated with:
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the continuously evolving regulatory requirements of the FX
industry, potentially increased costs of compliance with those
requirements, and the risks associated with the failure to
comply with any such regulations;
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the limited history of the retail FX industry and, accordingly,
a limited operating history upon which to evaluate our
performance;
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the possibility that our risk management policies may not be
effective and could expose us to unidentified or unanticipated
risks;
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our dependence on our proprietary as well as third party
technology;
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our dependence upon, and ability to continue to attract and
retain, key personnel;
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a continuing downturn in global economic conditions, which
negatively impacts our customer base;
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our dependence on FX market makers to continually provide us
with FX liquidity; and
|
|
|
|
any default by any financial institution that holds our funds
and our customers funds.
|
Please see Risk Factors for a discussion of these
and other factors you should consider before making an
investment in shares of our Class A common stock.
6
Our
Structure
Following this offering, FXCM Inc. will be a holding company and
its sole asset will be a controlling equity interest in FXCM
Holdings, LLC. FXCM Inc. will operate and control all of the
business and affairs and consolidate the financial results of
FXCM Holdings, LLC and its subsidiaries. Prior to the completion
of this offering, the limited liability company agreement of
FXCM Holdings, LLC will be amended and restated to, among other
things, modify its capital structure by reclassifying the
interests currently held by our existing owners into a single
new class of units that we refer to as Holdings
Units. We and our existing owners will also enter into an
exchange agreement under which they (or certain permitted
transferees thereof) will have the right, from and after the
first anniversary of the date of the closing of this offering
(subject to the terms of the exchange agreement), to exchange
their Holdings Units for shares of our Class A common stock
on a
one-for-one
basis, subject to customary conversion rate adjustments for
stock splits, stock dividends and reclassifications.
Following this offering, each of our existing owners will hold
one or more shares of Class B common stock. The shares of
Class B common stock have no economic rights but entitle
the holder, without regard to the number of shares of
Class B common stock held, to a number of votes on matters
presented to stockholders of FXCM Inc. that is equal to the
aggregate number of Holdings Units of FXCM Holdings, LLC held by
such holder.
The diagram below depicts our organizational structure
immediately following this offering.
See Organizational Structure.
FXCM Inc. was incorporated in Delaware on August 10, 2010.
Our principal executive offices are located at 32 Old Slip, New
York, NY 10005 and our telephone number is
(646) 432-2936.
7
The
Offering
|
|
|
Class A common stock offered by FXCM Inc.
|
|
shares. |
|
Over-allotment option
|
|
shares. |
|
Class A common stock outstanding after giving effect to
this offering
|
|
shares
(or shares
if all outstanding Holdings Units held by our existing owners
were exchanged for newly-issued shares of Class A common
stock on a
one-for-one
basis). |
|
Class B common stock outstanding after giving effect to
this offering
|
|
shares,
or one share for each holder of Holdings Units (other than FXCM
Inc.). |
|
Voting power held by holders of Class A common stock after
giving effect to this offering
|
|
% (or 100% if all outstanding
Holdings Units held by our existing owners were exchanged for
newly-issued shares of Class A common stock on a
one-for-one
basis). |
|
Voting power held by holders of Class B common stock after
giving effect to this offering
|
|
% (or 0% if all outstanding
Holdings Units held by our existing owners were exchanged for
newly-issued shares of Class A common stock on a
one-for-one
basis). |
|
Use of proceeds
|
|
We estimate that the net proceeds to FXCM Inc. from this
offering, after deducting estimated underwriting discounts and
offering expenses, will be approximately
$ (or
$ if the underwriters exercise in
full their option to purchase additional shares of Class A
common stock). |
|
|
|
FXCM Inc. intends to use $ of these
proceeds to purchase newly-issued Holdings Units from FXCM
Holdings, LLC, as described under Organizational
Structure Offering Transactions. We intend to
cause FXCM Holdings, LLC to use these proceeds to enhance our
capital, to fund acquisitions that we may identify in the future
and for general corporate purposes. |
|
|
|
FXCM Inc. intends to use the remaining net proceeds from this
offering, or $ (or
$ if the underwriters exercise in
full their option to purchase additional shares of Class A
common stock), to purchase Holdings Units from our existing
owners, including members of our senior management, as described
under Organizational Structure Offering
Transactions. Accordingly, we will not retain any of these
proceeds. See Principal Stockholders for information
regarding the proceeds from this offering that will be paid to
our directors and named executive officers. |
|
Voting rights
|
|
Each share of our Class A common stock entitles its holder
to one vote on all matters to be voted on by stockholders
generally. |
|
|
|
Following the Offering Transactions, each of our existing owners
will hold one or more shares of Class B common stock. The
shares of Class B common stock have no economic rights but
entitle the holder, without regard to the number of shares of
Class B common |
8
|
|
|
|
|
stock held, to a number of votes on matters presented to
stockholders of FXCM Inc. that is equal to the aggregate number
of Holdings Units of FXCM Holdings, LLC held by such holder. See
Description of Capital Stock Common
Stock Class B Common Stock. Holders of
our Class A common stock and Class B common stock vote
together as a single class on all matters presented to our
stockholders for their vote or approval, except as otherwise
required by applicable law. |
|
Dividend policy
|
|
Following this offering and subject to legally available funds,
we intend to pay quarterly cash dividends to the holders of our
Class A common stock initially equal to
$ per share of Class A common
stock, commencing with
the quarter
of . |
|
|
|
The declaration, amount and payment of any future dividends will
be at the sole discretion of our board of directors. Our board
of directors will take into account general economic and
business conditions, our financial condition and operating
results, our available cash and current and anticipated cash
needs, capital requirements, contractual, legal, tax and
regulatory restrictions and implications on the payment of
dividends by us to our stockholders or by our subsidiaries
(including FXCM Holdings, LLC) to us, and such other
factors as our board of directors may deem relevant. |
|
|
|
FXCM Inc. is a holding company and has no material assets other
than its ownership of Holdings Units in FXCM Holdings, LLC. We
intend to cause FXCM Holdings, LLC to make distributions to FXCM
Inc. in an amount sufficient to cover cash dividends, if any,
declared by us. If FXCM Holdings, LLC makes such distributions
to FXCM Inc., the other holders of Holdings Units will be
entitled to receive equivalent distributions. |
|
Exchange rights of holders of Holdings Units
|
|
Prior to this offering we will enter into an exchange agreement
with our existing owners so that they may (subject to the terms
of the exchange agreement) exchange their Holdings Units for
shares of Class A common stock of FXCM Inc. on a
one-for-one
basis, subject to customary conversion rate adjustments for
stock splits, stock dividends and reclassifications. |
|
Risk factors
|
|
See Risk Factors for a discussion of risks you
should carefully consider before deciding to invest in our
Class A common stock. |
|
Proposed New York Stock Exchange symbol
|
|
FXCM |
In this prospectus, unless otherwise indicated, the number of
shares of Class A common stock outstanding and the other
information based thereon does not reflect:
|
|
|
|
|
shares
of Class A common stock issuable upon exercise of the
underwriters option to purchase additional shares of
Class A common stock from us;
|
9
|
|
|
|
|
shares
of Class A common stock issuable upon exchange
of
Holdings Units (or, if the underwriters exercise in full their
option to purchase additional shares of Class A common
stock, shares
of Class A common stock issuable upon exchange
of
Holdings Units) that will be held by our existing owners
immediately following this offering; or
|
|
|
|
shares
of Class A common stock that may be granted under the FXCM
Inc. 2010 Long Term Incentive Plan, or Long Term Incentive Plan,
including shares
issuable upon the exercise of stock options that we intend to
grant to our employees at the time of this offering. See
Management Long Term Incentive Plan and
IPO Date Stock Option Awards.
|
See Pricing Sensitivity Analysis to see how some of
the information presented above would be affected by an initial
public offering price per share of Class A common stock at
the low-, mid- and high-points of the price range indicated on
the front cover of this prospectus or if the underwriters
option to purchase additional shares of Class A common
stock is exercised in full.
10
Summary
Historical Consolidated Financial and Other Data
The following summary historical consolidated financial and
other data of FXCM Holdings, LLC should be read together with
Organizational Structure, Unaudited Pro Forma
Consolidated Financial Information, Selected
Consolidated Financial Data, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the historical financial statements and
related notes included elsewhere in this prospectus. FXCM
Holdings, LLC will be considered our predecessor for accounting
purposes, and its consolidated financial statements will be our
historical financial statements following this offering.
We derived the summary historical consolidated statements of
operations and comprehensive income data of FXCM Holdings, LLC
for each of the years ended December 31, 2009, 2008 and
2007 and the summary historical consolidated statements of
financial condition data as of December 31, 2009 and 2008
from the audited consolidated financial statements of FXCM
Holdings, LLC which are included elsewhere in this prospectus,
and derived the summary historical combined statement of
operations and comprehensive income for each of the years ended
December 31, 2006 and 2005 and the summary historical
combined statement of financial condition data as of
December 31, 2006 and 2005 and the summary historical
consolidated statements of financial condition data as of
December 31, 2007 from the audited financial statements of
FXCM Holdings, LLC, which are not included in this prospectus.
The consolidated statements of operations and comprehensive
income data for the six months ended June 30, 2010 and
2009, and the consolidated statements of financial condition
data as of June 30, 2010 and 2009 have been derived from
unaudited consolidated financial statements of FXCM Holdings,
LLC included elsewhere in this prospectus. The unaudited
consolidated financial statements of FXCM Holdings, LLC have
been prepared on substantially the same basis as the audited
consolidated financial statements and include all adjustments
that we consider necessary for a fair presentation of our
consolidated financial position and results of operations for
all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007(1)
|
|
|
2006(1)(2)
|
|
|
2005(2)
|
|
|
|
(In thousands)
|
|
|
Consolidated Statements of Operations and Comprehensive
Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail trading revenue
|
|
$
|
154,823
|
|
|
$
|
155,217
|
|
|
$
|
291,668
|
|
|
$
|
281,385
|
|
|
$
|
144,935
|
|
|
$
|
131,950
|
|
|
$
|
215,672
|
|
Institutional trading revenue
|
|
|
13,589
|
|
|
|
11,012
|
|
|
|
21,107
|
|
|
|
18,439
|
|
|
|
11,695
|
|
|
|
5,610
|
|
|
|
95
|
|
Interest income
|
|
|
1,005
|
|
|
|
638
|
|
|
|
1,289
|
|
|
|
9,085
|
|
|
|
16,357
|
|
|
|
11,112
|
|
|
|
4,501
|
|
Other income
|
|
|
4,205
|
|
|
|
4,837
|
|
|
|
8,666
|
|
|
|
13,731
|
|
|
|
11,535
|
|
|
|
16,000
|
|
|
|
2,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
173,622
|
|
|
|
171,704
|
|
|
|
322,730
|
|
|
|
322,640
|
|
|
|
184,522
|
|
|
|
164,672
|
|
|
|
222,451
|
|
Referring broker fees
|
|
|
37,073
|
|
|
|
44,004
|
|
|
|
76,628
|
|
|
|
64,567
|
|
|
|
33,211
|
|
|
|
51,360
|
|
|
|
49,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
|
136,549
|
|
|
|
127,700
|
|
|
|
246,102
|
|
|
|
258,073
|
|
|
|
151,311
|
|
|
|
113,312
|
|
|
|
173,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
34,499
|
|
|
|
29,292
|
|
|
|
62,588
|
|
|
|
54,578
|
|
|
|
53,575
|
|
|
|
48,669
|
|
|
|
33,281
|
|
Advertising and marketing
|
|
|
11,315
|
|
|
|
16,911
|
|
|
|
29,355
|
|
|
|
24,629
|
|
|
|
27,846
|
|
|
|
28,223
|
|
|
|
25,595
|
|
Communication and technology
|
|
|
12,798
|
|
|
|
12,283
|
|
|
|
24,026
|
|
|
|
21,311
|
|
|
|
17,836
|
|
|
|
13,773
|
|
|
|
7,914
|
|
General and administrative
|
|
|
17,614
|
|
|
|
11,775
|
|
|
|
26,453
|
|
|
|
20,247
|
|
|
|
17,037
|
|
|
|
20,917
|
|
|
|
22,604
|
|
Depreciation and amortization
|
|
|
3,461
|
|
|
|
3,104
|
|
|
|
6,542
|
|
|
|
6,095
|
|
|
|
7,364
|
|
|
|
6,732
|
|
|
|
4,326
|
|
Interest expense
|
|
|
51
|
|
|
|
51
|
|
|
|
125
|
|
|
|
2,168
|
|
|
|
1,374
|
|
|
|
34
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
79,738
|
|
|
|
73,416
|
|
|
|
149,089
|
|
|
|
129,028
|
|
|
|
125,032
|
|
|
|
118,348
|
|
|
|
93,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
56,811
|
|
|
|
54,284
|
|
|
|
97,013
|
|
|
|
129,045
|
|
|
|
26,279
|
|
|
|
(5,036
|
)
|
|
|
79,288
|
|
Income tax provision
|
|
|
4,966
|
|
|
|
3,870
|
|
|
|
10,053
|
|
|
|
8,872
|
|
|
|
3,120
|
|
|
|
1,720
|
|
|
|
1,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
51,845
|
|
|
$
|
50,414
|
|
|
$
|
86,960
|
|
|
$
|
120,173
|
|
|
$
|
23,159
|
|
|
$
|
(6,756
|
)
|
|
$
|
77,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007(1)
|
|
|
2006(1)(2)
|
|
|
2005(2)
|
|
|
|
(In thousands)
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
$
|
(144
|
)
|
|
$
|
284
|
|
|
$
|
452
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
51,701
|
|
|
$
|
50,698
|
|
|
$
|
87,412
|
|
|
$
|
120,174
|
|
|
$
|
23,159
|
|
|
$
|
(6,756
|
)
|
|
$
|
77,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Financial Condition
Data End of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
153,010
|
|
|
$
|
125,119
|
|
|
$
|
139,858
|
|
|
$
|
179,967
|
|
|
$
|
131,799
|
|
|
$
|
67,631
|
|
|
$
|
75,605
|
|
Cash and cash equivalents, held for customers
|
|
$
|
425,549
|
|
|
$
|
307,894
|
|
|
$
|
353,825
|
|
|
$
|
253,391
|
|
|
$
|
315,440
|
|
|
$
|
253,257
|
|
|
$
|
202,554
|
|
Total assets
|
|
$
|
605,823
|
|
|
$
|
460,054
|
|
|
$
|
517,936
|
|
|
$
|
451,044
|
|
|
$
|
472,564
|
|
|
$
|
364,636
|
|
|
$
|
301,611
|
|
Customer account liabilities
|
|
$
|
425,549
|
|
|
$
|
307,894
|
|
|
$
|
353,825
|
|
|
$
|
253,391
|
|
|
$
|
315,440
|
|
|
$
|
253,257
|
|
|
$
|
202,554
|
|
Total equity
|
|
$
|
141,767
|
|
|
$
|
114,567
|
|
|
$
|
130,788
|
|
|
$
|
140,454
|
|
|
$
|
96,280
|
|
|
$
|
93,851
|
|
|
$
|
89,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands, except as noted)
|
|
|
Selected Operational Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net account additions(3)
|
|
|
24,722
|
|
|
|
19,781
|
|
|
|
33,857
|
|
|
|
58,823
|
|
|
|
11,090
|
|
|
|
6,739
|
|
|
|
10,036
|
|
Standard account
|
|
|
20,671
|
|
|
|
6,935
|
|
|
|
16,944
|
|
|
|
19,357
|
|
|
|
11,090
|
|
|
|
6,739
|
|
|
|
10,036
|
|
Micro account(4)
|
|
|
4,051
|
|
|
|
12,846
|
|
|
|
16,913
|
|
|
|
37,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tradeable accounts(5)
|
|
|
165,287
|
|
|
|
126,489
|
|
|
|
140,565
|
|
|
|
106,708
|
|
|
|
49,885
|
|
|
|
38,795
|
|
|
|
32,056
|
|
Standard account
|
|
|
106,857
|
|
|
|
76,177
|
|
|
|
86,186
|
|
|
|
69,242
|
|
|
|
49,885
|
|
|
|
38,795
|
|
|
|
32,056
|
|
Micro account(4)
|
|
|
58,430
|
|
|
|
50,312
|
|
|
|
54,379
|
|
|
|
37,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total active accounts(6)
|
|
|
131,778
|
|
|
|
109,150
|
|
|
|
116,919
|
|
|
|
86,149
|
|
|
|
59,541
|
|
|
|
69,661
|
|
|
|
55,752
|
|
Total customer trading volume (dollars in billions)
|
|
$
|
1,566
|
|
|
$
|
1,750
|
|
|
$
|
3,504
|
|
|
$
|
2,901
|
|
|
$
|
1,729
|
|
|
$
|
2,100
|
|
|
$
|
1,413
|
|
Trading days in period
|
|
|
128
|
|
|
|
128
|
|
|
|
259
|
|
|
|
260
|
|
|
|
259
|
|
|
|
260
|
|
|
|
260
|
|
Daily average trades
|
|
|
320,533
|
|
|
|
373,268
|
|
|
|
347,104
|
|
|
|
165,063
|
|
|
|
70,714
|
|
|
|
76,771
|
|
|
|
60,752
|
|
Daily average trades per active account(7)
|
|
|
2.6
|
|
|
|
3.8
|
|
|
|
3.4
|
|
|
|
2.3
|
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
1.1
|
|
Retail trading revenue per million traded
|
|
$
|
99
|
|
|
$
|
89
|
|
|
$
|
83
|
|
|
$
|
97
|
|
|
$
|
84
|
|
|
$
|
63
|
|
|
$
|
153
|
|
Total customer equity(8)
|
|
$
|
425,549
|
|
|
$
|
307,894
|
|
|
$
|
353,825
|
|
|
$
|
253,391
|
|
|
$
|
315,440
|
|
|
$
|
253,257
|
|
|
$
|
202,554
|
|
Capital in excess of regulatory requirements(9)
|
|
$
|
104,104
|
|
|
$
|
89,844
|
|
|
$
|
96,904
|
|
|
$
|
127,030
|
|
|
$
|
75,650
|
|
|
$
|
79,640
|
|
|
$
|
72,457
|
|
Customer trading volume by region (dollars in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asia
|
|
$
|
446
|
|
|
$
|
635
|
|
|
$
|
1,184
|
|
|
$
|
796
|
|
|
$
|
383
|
|
|
$
|
447
|
|
|
$
|
195
|
|
United States
|
|
|
378
|
|
|
|
573
|
|
|
|
1,038
|
|
|
|
1,008
|
|
|
|
679
|
|
|
|
800
|
|
|
|
493
|
|
EMEA
|
|
|
315
|
|
|
|
348
|
|
|
|
760
|
|
|
|
547
|
|
|
|
346
|
|
|
|
418
|
|
|
|
294
|
|
Rest of World
|
|
|
427
|
|
|
|
194
|
|
|
|
522
|
|
|
|
550
|
|
|
|
321
|
|
|
|
435
|
|
|
|
431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,566
|
|
|
$
|
1,750
|
|
|
$
|
3,504
|
|
|
$
|
2,901
|
|
|
$
|
1,729
|
|
|
$
|
2,100
|
|
|
$
|
1,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
(1) |
|
In 2005, a shareholder and white label (a firm that offers FX
trading services to their customers on our platform under their
own brand in exchange for a revenue sharing arrangement with us)
of FXCM declared bankruptcy, at the time representing
approximately 40% of total revenues, resulting in a significant
disruption in the business that led in large part to the
reduction in revenues and the loss recorded in 2006. As a
response to such bankruptcy and its effects on the business, our
senior management initiated fundamental changes to our business
model, including the decision to transition to an agency model,
which became fully operational in July 2007. |
|
(2) |
|
Financial statements at December 31, 2006 and 2005 and for
the year then ended were prepared on a combined basis. |
|
(3) |
|
Net account additions represents new accounts funded less
accounts closed by our customers. |
|
(4) |
|
Micro accounts are accounts with limited customer service and
permitted to trade in very small lot sizes; this account option
was introduced in June 2008. |
|
(5) |
|
A tradeable account represents an account that has sufficient
funds to make a trade in accordance with firm policies. |
|
(6) |
|
An active account represents an account that has traded at least
once in the previous 12 months. |
|
(7) |
|
Daily average trades per active account represents the total
daily average trades per average active account in period. |
|
(8) |
|
Total customer equity represents the total amount of cash and
unrealized profit (loss) as of that date in all our customer
accounts. |
|
(9) |
|
Capital in excess of regulatory requirements represents total
consolidated capital less the sum of the minimum requirements of
our regulated operating subsidiaries. |
13
RISK
FACTORS
An investment in shares of our Class A common stock
involves risks. You should carefully consider the following
information about these risks, together with the other
information contained in this prospectus, before investing in
shares of our Class A common stock.
Risks
Related to Our Business
The FX
market has only recently become accessible to retail investors
and, accordingly, we have a limited operating history upon which
to evaluate our performance.
The FX market has only recently become accessible to retail
investors. Prior to 1996, retail investors generally did not
directly trade in the FX market, and we believe most current
retail FX traders only recently viewed currency trading as a
practical alternative investment class. Our FX trading
operations were launched in 1999, at which time we began
offering FX trading services domestically and internationally.
Accordingly, we have a limited operating history in a relatively
new international retail FX trading market upon which you can
evaluate our prospects and future performance. Our prospects may
be materially adversely affected by the risks, expenses and
difficulties frequently encountered in the operation of a new
business in a rapidly evolving industry characterized by intense
competition and evolving regulatory oversight and rules.
Our
revenue and profitability are influenced by trading volume and
currency volatility, which are directly impacted by domestic and
international market and economic conditions that are beyond our
control.
In the past few years, there has been significant disruption and
volatility in the global financial markets and economic
conditions, and many countries, including the United States,
have been in an economic slowdown. Our revenue is influenced by
the general level of trading activity in the FX market. Our
revenue and operating results may vary significantly from period
to period due primarily to movements and trends in the
worlds currency markets and to fluctuations in trading
levels. We have generally experienced greater trading volume and
higher revenue in periods of volatile currency markets. In the
event we experience lower levels of currency volatility, our
revenue and profitability will likely be negatively affected.
Like other financial services firms, our business and
profitability are directly affected by factors that are beyond
our control, such as economic and political conditions, broad
trends in business and finance, changes in the volume of foreign
currency transactions, changes in supply and demand for
currencies, movements in currency exchange rates, changes in the
financial strength of market participants, legislative and
regulatory changes, changes in the markets in which such
transactions occur, changes in how such transactions are
processed and disruptions due to terrorism, war or extreme
weather events. Any one or more of these factors, or other
factors, may adversely affect our business and results of
operations and cash flows. A weakness in equity markets, such as
the current economic slowdown causing a reduction in trading
volume in U.S. or foreign securities and derivatives, could
result in reduced trading activity in the FX market and
therefore could have a material adverse effect on our business,
financial condition and results of operations and cash flows. As
a result, period to period comparisons of our operating results
may not be meaningful and our future operating results may be
subject to significant fluctuations or declines.
Our
risk management policies and procedures may not be effective and
may leave us exposed to unidentified or unexpected
risks.
We are dependent on our risk management policies and the
adherence to such policies by our trading staff. Our policies,
procedures and practices are used to identify, monitor and
control a variety of risks, including risks related to human
error, customer defaults, market movements, fraud and
money-laundering. Some of our methods for managing risk are
discretionary by nature and are based on internally developed
controls and observed historical market behavior, and also
involve reliance on standard industry practices. These methods
may not adequately prevent losses, particularly as they relate
to extreme market movements, which may be significantly greater
than historical changes in market prices. Our risk management
methods also may not adequately prevent losses due to technical
errors if our testing and quality control practices are not
effective in preventing software or hardware failures. In
addition, we may elect to adjust our risk
14
management policies to allow for an increase in risk tolerance,
which could expose us to the risk of greater losses. Our risk
management methods rely on a combination of technical and human
controls and supervision that are subject to error and failure.
These methods may not protect us against all risks or may
protect us less than anticipated, in which case our business,
financial condition and results of operations and cash flows may
be materially adversely affected.
We
depend on our proprietary technology. Any disruption or
corruption of our proprietary technology or our inability to
maintain technological superiority in our industry could have a
material adverse effect on our business, financial condition and
results of operations and cash flows. We may experience failures
while developing our proprietary technology.
We rely on our proprietary technology to receive and properly
process internal and external data. Any disruption for any
reason in the proper functioning, or any corruption, of our
software or erroneous or corrupted data may cause us to make
erroneous trades, accept customers from jurisdictions where we
do not possess the proper licenses, authorizations or permits,
or require us to suspend our services and could have a material
adverse effect on our business, financial condition and results
of operations and cash flows. For example, our technology
platform includes a real time margin-watcher feature to ensure
that open positions are automatically closed out if a customer
becomes at risk of going into a negative balance on his or her
account. Any disruption or corruption of this feature would
subject us to the risk that amounts owed to us by such customer
exceed the collateral in such customers account, and our
policy is generally not to pursue claims for negative equity
against our customers.
In order to remain competitive, we need to continuously develop
and redesign our proprietary technology. In doing so, there is
an ongoing risk that failures may occur and result in service
interruptions or other negative consequences, such as slower
quote aggregation, slower trade execution, erroneous trades, or
mistaken risk management information.
Our success in the past has largely been attributable to our
proprietary technology that has taken us many years to develop.
We believe our proprietary technology has provided us with a
competitive advantage relative to many FX market participants.
If our competitors develop more advanced technologies, we may be
required to devote substantial resources to the development of
more advanced technology to remain competitive. The FX market is
characterized by rapidly changing technology, evolving industry
standards and changing trading systems, practices and
techniques. We may not be able to keep up with these rapid
changes in the future, develop new technology, realize a return
on amounts invested in developing new technologies, and as such,
may not remain competitive in the future.
System
failures could cause interruptions in our services or decreases
in the responsiveness of our services which could harm our
business.
If our systems fail to perform, we could experience disruptions
in operations, slower response times or decreased customer
service and customer satisfaction. Our ability to facilitate
transactions successfully and provide high quality customer
service depends on the efficient and uninterrupted operation of
our computer and communications hardware and software systems.
Our systems also are vulnerable to damage or interruption from
human error, natural disasters, power loss, telecommunication
failures, break-ins, sabotage, computer viruses, intentional
acts of vandalism and similar events. We do not have fully
redundant capabilities. While we currently maintain a disaster
recovery plan, or DRP, which is intended to minimize service
interruptions and secure data integrity, our DRP may not work
effectively during an emergency. Any system failure that causes
an interruption in our services, decreases the responsiveness of
our services or affects access to our services could impair our
reputation, damage our brand name and materially adversely
affect our business, financial condition and results of
operations and cash flows.
15
We may
not be able to protect our intellectual property rights or may
be prevented from using intellectual property necessary for our
business.
We rely on a combination of trademark, copyright, trade secret
and fair business practice laws in the United States and other
jurisdictions to protect our proprietary technology,
intellectual property rights and our brand. We also enter into
confidentiality and invention assignment agreements with our
employees and consultants, and confidentiality agreements with
other third parties. We also rigorously control access to our
proprietary technology. It is possible that third parties may
copy or otherwise obtain and use our proprietary technology
without authorization or otherwise infringe on our rights. We
may also face claims of infringement that could interfere with
our ability to use technology that is material to our business
operations.
In the future, we may have to rely on litigation to enforce our
intellectual property rights, protect our trade secrets,
determine the validity and scope of the proprietary rights of
others or defend against claims of infringement or invalidity.
Any such litigation, whether successful or unsuccessful, could
result in substantial costs and the diversion of resources and
the attention of management, any of which could negatively
affect our business.
Our
cost structure is largely fixed. If our revenues decline and we
are unable to reduce our costs, our profitability will be
adversely affected.
Our cost structure is largely fixed. We base our cost structure
on historical and expected levels of demand for our products and
services, as well as our fixed operating infrastructure, such as
computer hardware and software, hosting facilities and security
and staffing levels. If demand for our products and services
declines and, as a result, our revenues decline, we may not be
able to adjust our cost structure on a timely basis and our
profitability may be materially adversely affected.
We
operate in a heavily regulated environment that imposes
significant compliance requirements and costs on us. Failure to
comply with the rapidly evolving laws and regulations governing
our FX and other businesses may result in regulatory agencies
taking action against us and significant legal expenses in
defending ourselves, which could adversely affect our revenues
and the way we conduct our business.
We are regulated by governmental bodies
and/or
self-regulatory organizations in a number of jurisdictions,
including the United States, the United Kingdom (where
regulatory passport rights have been exercised to operate in a
number of European Economic Area jurisdictions), Hong Kong,
Australia and Dubai. Upon the completion of our acquisition of
ODL, which is expected to close in September 2010, we will also
be regulated in Japan. We are also exposed to substantial risks
of liability under federal and state securities laws, federal
commodity futures laws, other federal and state laws and court
decisions, as well as rules and regulations promulgated by the
Securities and Exchange Commission, or SEC, the Federal Reserve
and state securities regulators.
Many of the regulations we are governed by are intended to
protect the public, our customers and the integrity of the
markets, and not necessarily our shareholders. Substantially all
of our operations involving the execution and clearing of
transactions in foreign currencies, CFDs, gold and silver and
securities are conducted through subsidiaries that are regulated
by governmental bodies or self-regulatory organizations. In the
United States, we are principally regulated by the
Commodity Futures Trading Commission, or CFTC, and the National
Futures Association, or NFA. We are also regulated in all
regions by applicable regulatory authorities and the various
exchanges of which we are members. For example, we are regulated
by the Financial Services Authority in the United Kingdom, or
FSA, the Comité des Établissements de Credit et des
Entreprises dInvestissement in France, or CECEI, the
Securities and Futures Commission in Hong Kong, or SFC, the
Australian Securities and Investment Commission in Australia, or
ASIC, and the Dubai Multi Commodities Centre in Dubai, or DMCC,
among others, and, upon the completion of our acquisition of
ODL, the Kanto Local Finance Bureau in Japan, or KLFB. These
regulators and self-regulatory organizations regulate the
conduct of our business in many ways and conduct regular
examinations of our business to monitor our compliance with
these regulations. Among other things, we are subject to
regulation with regard to:
|
|
|
|
|
our sales practices, including our interaction with and
solicitation of customers and our marketing activities;
|
16
|
|
|
|
|
the custody, control and safeguarding of our customers
assets;
|
|
|
|
account statements, record-keeping and retention;
|
|
|
|
maintaining specified minimum amounts of capital and limiting
withdrawals of funds from our regulated operating subsidiaries;
|
|
|
|
making regular financial and other reports to regulators;
|
|
|
|
anti-money laundering practices;
|
|
|
|
licensing for our operating subsidiaries and our employees;
|
|
|
|
the conduct of our directors, officers, employees and
affiliates; and
|
|
|
|
supervision of our business.
|
Compliance with these regulations is complicated, time consuming
and expensive. Even minor, inadvertent irregularities can
potentially give rise to claims that applicable laws and
regulations have been violated. Failure to comply with all
potentially applicable laws and regulations could lead to fines
and other penalties which could adversely affect our revenues
and our ability to conduct our business as planned. In addition,
we could incur significant legal expenses in defending ourselves
against and resolving actions or investigations by such
regulatory agencies.
We
accept customers from many jurisdictions in a manner which we
believe does not require local registration, licensing or
authorization. As a result, our growth may be limited by future
restrictions in these jurisdictions and we remain at risk that
we may be exposed to civil or criminal penalties or be required
to cease operations if we are found to be operating in
jurisdictions without the proper license or authorization or if
we become subject to regulation by local government
bodies.
Trading volume for 2009 with customers resident in jurisdictions
in which we are not licensed or authorized by governmental
bodies
and/or
self-regulatory organizations was in the aggregate about 55% of
our total customer trading volume. We seek to deal with
customers resident in foreign jurisdictions in a manner which
does not breach any local laws or regulations where they are
resident or require local registration, licensing or
authorization from local governmental or regulatory bodies or
self-regulatory organizations. We determine the nature and
extent of services we can provide and the manner in which we
conduct our business with customers resident in foreign
jurisdictions based on a variety of factors.
In jurisdictions where we are not licensed or authorized, we are
generally restricted from direct marketing to retail investors
including the operation of a website specifically targeted to
investors in a particular foreign jurisdiction. This restriction
may limit our ability to grow our business in such jurisdictions
or may result in increased overhead costs or lower service
quality to customers in such jurisdictions. Accordingly, we
currently have only a limited presence in a number of
significant markets and may not be able to gain a significant
presence there unless and until legal and regulatory barriers to
international firms in certain of those markets are modified.
Existing and future legal and regulatory requirements and
restrictions may adversely impact our international expansion on
an ongoing basis and we may not be able to successfully develop
our business in a number of markets, including emerging markets,
as we currently plan.
We have consulted with legal counsel in selected jurisdictions,
including each jurisdiction in which residents of such
jurisdiction account for one percent (1%) or greater of our
total retail customer trading volume, for advice regarding
whether we are operating in compliance with local laws and
regulations (including whether we are required to be licensed or
authorized) or, in some cases where licensing or authorization
requirements could be read to be applicable to foreign dealers
without a local presence, whether such requirements are
generally not enforced. We have not similarly consulted with
legal counsel in each of the other jurisdictions in which our
customers reside, and trading volume from customers resident in
these latter jurisdictions accounts for approximately 20% of our
total retail customer trading volume. We are accordingly exposed
to the risk that we may be found to be operating in
jurisdictions without required licenses or authorizations or
without being in compliance with local legal or regulatory
requirements. Furthermore,
17
where we have taken legal advice we are exposed to the risk that
our legal and regulatory analysis is subsequently determined by
a local regulatory agency or other authority to be incorrect and
that we have not been in compliance with local laws or
regulations (including local licensing or authorization
requirements) and to the risk that the regulatory environment in
a jurisdiction may change, including a circumstance where laws
or regulations or licensing or authorization requirements that
previously were not enforced become subject to enforcement. In
any of these circumstances, we may be subject to sanctions,
fines and restrictions on our business or other civil or
criminal penalties and our contracts with customers may be void
or unenforceable, which could lead to losses relating to
restitution of client funds or principal risk on open positions.
Any such action in one jurisdiction could also trigger similar
actions in other jurisdictions. We may also be required to cease
the conduct of our business with customers in any such
jurisdiction
and/or we
may determine that compliance with the laws or licensing,
authorization or other regulatory requirements for continuance
of the business are too onerous to justify making the necessary
changes to continue that business. In addition, any such event
could impact our relationship with the regulators or
self-regulatory organizations in the jurisdictions where we are
subject to regulation, including our regulatory compliance or
authorizations. If sanctions, fines, restrictions on our
business or other penalties are imposed on us for failure to
comply with applicable legal requirements, guidelines or
regulations, our financial condition and results of operations,
and our reputation and ability to engage in business, may be
materially adversely affected.
We evaluate our activities in relation to jurisdictions in which
we are not currently regulated by governmental bodies
and/or
self-regulatory organizations on an ongoing basis. As a result
of these evaluations we may determine to alter our business
practices in order to comply with legal or regulatory
developments in such jurisdictions and, at any given time, are
generally in various stages of updating our business practices
in relation to various jurisdictions, including jurisdictions
which account for one percent (1%) or less of our total retail
customer trading volume. Depending on the circumstances, such
changes to our business practices may result in increased costs
or reduced revenues and negatively impact our financial results.
The
Canadian regulatory environment with respect to FX products is
complex and evolving and subject to provincial and territorial
differences. Although we are not currently subject to regulatory
proceedings, our FX trading services may not be compliant with
the regulations of all provinces and territories in Canada. We
may be required to register our business in one or more
provinces or territories, or to restructure our Canadian
activities to be in compliance. Any such restructuring could
negatively impact our profitability because, among other things,
we may be required to share a portion of our
revenue.
Approximately 6% of our total customer trading volume for the
first six months of 2010 was generated from customers located in
Canada. In Canada, the securities and derivatives industry is
governed locally by provincial or territorial legislation, and
there is no national regulator. The regulation of FX products
differs from province to province and territory to territory.
For example, the provincial laws of British Columbia would
require us to register as an investment dealer to offer our
trading services directly. We previously conducted our business
in British Columbia through an affiliate that was a registered
exchange contract dealer with the British Columbia Securities
Commission. We currently conduct our business in British
Columbia through an arrangement with a registered investment
dealer in Canada. In other provinces and territories in Canada,
where we conduct the bulk of our Canadian business, we have
historically provided our services directly from our
U.S. facilities, without registering as a dealer in Canada.
We have received letters from local regulators in Quebec and
Manitoba requesting information about our customers resident in
such provinces. We are aware that local regulators in certain
Canadian provinces and territories have begun to determine that
FX trading services must be carried out through a registered
investment dealer. Accordingly, we are evaluating the
restructuring of our Canadian activities, including possible
arrangements with registered investment dealers, to address
these regulatory developments. We anticipate that our
profitability in Canada will decrease significantly due to the
restructuring of our Canadian activities because, among other
things, we may have to share a portion of our revenue. In
addition to the potential adverse effect on our results of
operations as a result of a need to restructure our Canadian
activities, we may also be subject to enforcement actions and
penalties or customer claims in any province or territory where
our FX trading operations are deemed to have violated local
regulations in the past.
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Servicing
customers via the internet may require us to comply with the
laws and regulations of each country in which we are deemed to
conduct business. Failure to comply with such laws may
negatively impact our financial results.
Since our services are available over the internet in foreign
countries and we have customers residing in foreign countries,
foreign jurisdictions may require us to qualify to do business
in their country. We believe that the number of our customers
residing outside of the United States will increase over time.
We are required to comply with the laws and regulations of each
country in which we conduct business, including laws and
regulations currently in place or which may be enacted related
to internet services available to their citizens from service
providers located elsewhere. Any failure to develop effective
compliance and reporting systems could result in regulatory
penalties in the applicable jurisdiction, which could have a
material adverse effect on our business, financial condition and
results of operations and cash flows.
Our
failure to comply with regulatory requirements could subject us
to sanctions and could have a material adverse effect on our
business, financial condition and results of operations and cash
flows.
Many of the laws and regulations by which we are governed grant
regulators broad powers to investigate and enforce compliance
with their rules and regulations and to impose penalties and
other sanctions for non-compliance. Our ability to comply with
all applicable laws and regulations is dependent in large part
on our internal compliance function as well as our ability to
attract and retain qualified compliance personnel, which we may
not be able to do. If a regulator finds that we have failed to
comply with applicable rules and regulations, we may be subject
to censure, fines,
cease-and-desist
orders, suspension of our business, removal of personnel, civil
litigation or other sanctions, including, in some cases,
increased reporting requirements or other undertakings,
revocation of our operating licenses or criminal conviction. In
2007, the NFA filed a complaint against us and our chief
executive officer alleging, among other things, that we were
using deficient promotional material, had not established and
implemented an adequate anti-money laundering program and failed
to supervise the firms operations. Although we denied the
allegations, we were required to pay a fine. Any disciplinary
action taken against us could result in negative publicity,
potential litigation, remediation costs and loss of customers
which could have a material adverse effect on our business,
financial condition and results of operations and cash flows.
The
regulatory environment in which we operate is subject to
continual change. Changes in the regulatory environment could
have a material adverse effect on our business, financial
condition and results of operations and cash
flows.
The legislative and regulatory environment in which we operate
has undergone significant changes in the recent past and there
may be future regulatory changes in our industry. The financial
services industry in general has been subject to increasing
regulatory oversight in recent years. The governmental bodies
and self-regulatory organizations that regulate our business
have proposed and may consider additional legislative and
regulatory initiatives and may adopt new or revised laws and
regulations. As a result, in the future, we may become subject
to new regulations that may affect the way in which we conduct
our business and may make our business less profitable. For
example, a regulatory body may reduce the levels of leverage we
are allowed to offer to our customers, which may adversely
impact our business, financial condition and results of
operations and cash flows. Changes in the interpretation or
enforcement of existing laws and regulations by those entities
may also adversely affect our business.
For example, in August 2010, the CFTC released final rules
relating to retail FX regarding, among other things,
registration, disclosure, recordkeeping, financial reporting,
minimum capital and other operational standards. Most
significantly the regulations:
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impose an initial minimum security deposit amount of 2% of the
notional value for major currency pairs and 5% of the notional
value for all other retail FX transactions and provide that the
NFA will designate which currencies are major
currencies and review, at least annually, major currency
designations and security deposit requirements and adjust such
designations and requirements as necessary in light of changes
in the volatility of currencies and other economic and market
factors;
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provide that referring brokers must either meet the minimum net
capital requirements applicable to futures and commodity options
referring brokers or enter into a guarantee agreement with a
CFTC-regulated FX dealer member, along with a requirement that
such referring broker may be a party to only one guarantee
agreement at a time;
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require that the risk disclosure statement provided to every
retail FX customer include disclosure of the number of
non-discretionary accounts maintained by the futures commission
merchant, or FCM, or retail foreign exchange dealer, or RFED,
that were profitable and those that were not during the four
most recent calendar quarters;
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require that, FCMs and RFEDs are obligated when requoting prices
to do so in a symmetrical fashion so that the requoted prices do
not represent an increase in the spread from the initially
quoted prices, regardless of the direction the market
moves; and
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prohibit the making of guarantees against loss to retail FX
customers by FCMs, RFEDs and referring brokers and require that
FCMs, RFEDs and referring brokers provide retail FX customers
with enhanced written disclosure statements that, among other
things, inform customers of the risk of loss.
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The impact on us of these new regulations, which will become
effective on October 18, 2010, is uncertain. However, the
inability to offer customers who are U.S. residents
leverage in excess of 50-to-1 (as compared to 100-to-1
previously) may diminish the trading volume of these customers
which may affect our revenue and profitability.
In addition, the Dodd-Frank Wall Street Reform and Consumer
Protection Act, or the Dodd-Frank Act, enacted in July 2010 will
have broad effects on the derivatives markets generally. For
example, this legislation may affect the ability of FX market
makers to do business or affect the prices and terms on which
such market makers will do business with us. Such legislation
may also affect the structure, size, depth and liquidity of the
FX markets generally. These effects may adversely impact our
ability to provide FX transactions to our customers and could
have a material adverse affect on our business and
profitability. In addition, beginning in July 2011, the
Dodd-Frank Act will require us to ensure that our customers
resident in the United States have accounts with our
NFA-registered operating entity. As a result, some of our
customers may decide to transact their trading with a FX broker
who is not subject to this requirement.
In the European Union, new laws have been proposed to regulate
OTC derivatives. These proposals would, among other things,
require mandatory central clearing of some derivatives, higher
collateral requirements, and higher capital charges for
bilaterally cleared OTC derivatives. These proposals are still
at the consultation stage and detailed legislative proposals
have not yet been published. Accordingly, it is difficult to
ascertain what impact these proposals, once adopted, will have
on our business, financial condition and results of operations
and cash flows. If the products that we trade are subjected to
mandatory central clearing, exchange trading, higher collateral
requirements or higher capital charges, this may have an impact
upon the economics of our business and thus have a material
adverse effect on our business, financial condition and results
of operations and cash flows.
Regulators in the European Union have also proposed stringent
regulation of remuneration practices, including proposals to
require 50% of variable remuneration to be paid in the form of
shares or similar capital requirements, 40% to 60% of variable
remuneration to be deferred, bonuses to be proportionate to
fixed salary, and up-front cash bonuses to be capped at 20% of
the total bonus (30% for particularly large bonuses). The
U.K.s FSA has introduced its own proposals to widen the
application of its Remuneration Code to all firms subject to the
Capital Requirements Directive and to include certain
quantitative restrictions on bonuses in line with the European
Unions proposals. These proposals, if adopted, may
constrain our ability to operate certain remuneration practices
in relation to our operations in the U.K. and elsewhere in
Europe.
In addition, Australias ASIC is considering new
regulations which would limit any inappropriate advertising by
the industry, provide disclosure benchmarks for
over-the-counter
CFD providers, and devise a policy on customer suitability.
20
These and other future regulatory changes could have a material
adverse effect on our business and profitability and the FX
industry as a whole.
In addition, the regulatory enforcement environment has created
uncertainty with respect to certain practices or types of
transactions that, in the past, were considered permissible and
appropriate among financial services firms, but that later have
been called into question or with respect to which additional
regulatory requirements have been imposed. Legal or regulatory
uncertainty and additional regulatory requirements could result
in a loss of business.
We are
required to maintain high levels of capital, which could
constrain our growth and subject us to regulatory
sanctions.
The CFTC, NFA and other U.S. and
non-U.S. regulators
have stringent rules requiring that we maintain specific minimum
levels of regulatory capital in our operating subsidiaries that
conduct our spot foreign exchange, CFDs, including contracts for
gold, silver, oil and stock indices and securities business. As
of December 31, 2009, on a separate company basis, we would
have been required to maintain approximately $33.9 million
of minimum net capital in the aggregate across all
jurisdictions, representing a $20.4 million increase from
our minimum net capital requirement at December 31, 2008.
Regulators continue to evaluate and modify minimum capital
requirements from time to time in response to market events and
to improve the stability of the international financial system.
For example, the FSA recently increased capital requirements in
the United Kingdom and may do so again in the future. Additional
revisions to this framework or new capital adequacy rules
applicable to us may be proposed and ultimately adopted, which
could further increase our minimum capital requirements in the
future.
Even if regulators do not change existing regulations or adopt
new ones, our minimum capital requirements will generally
increase in proportion to the size of our business conducted by
our regulated subsidiaries. As a result, we will need to
increase our regulatory capital in order to expand our
operations and increase our revenue, and our inability to
increase our capital on a cost-efficient basis could constrain
our growth. In addition, in many cases, we are not permitted to
withdraw regulatory capital maintained by our subsidiaries
without prior regulatory approval or notice, which could
constrain our ability to allocate our capital resources most
efficiently throughout our global operations. In particular,
these restrictions could limit our ability to pay dividends or
make other distributions on our shares and, in some cases, could
adversely affect our ability to withdraw funds needed to satisfy
our ongoing operating expenses, debt service and other cash
needs.
Regulators monitor our levels of capital closely. We are
required to report the amount of regulatory capital we maintain
to our regulators on a regular basis, and to report any
deficiencies or material declines promptly. While we expect that
our current amount of regulatory capital will be sufficient to
meet anticipated short-term increases in requirements, any
failure to maintain the required levels of regulatory capital,
or to report any capital deficiencies or material declines in
capital could result in severe sanctions, including fines,
censure, restrictions on our ability to conduct business and
revocation of our registrations. The imposition of one or more
of these sanctions could ultimately lead to our liquidation, or
the liquidation of one or more of our subsidiaries.
The Basel Committee on Banking Supervision has proposed a new
regime for regulatory capital and liquidity, known as Basel III,
and these proposals are mirrored by proposals published by the
European Commission. The proposals include more restricted
definitions of what counts as eligible regulatory capital,
liquidity standards, and reform of counterparty credit risk
rules. These proposals, if adopted, may further increase our
regulatory capital requirements.
Procedures
and requirements of the Patriot Act and similar laws may expose
us to significant costs or penalties.
As a financial services firm, we and our subsidiaries are
subject to laws and regulations, including the Uniting and
Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001, or the Patriot
Act, that require that we know our customers and monitor
transactions
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for suspicious financial activities. The cost of complying with
the Patriot Act and related laws and regulations is significant.
We face the risk that our policies, procedures, technology and
personnel directed toward complying with the Patriot Act and
similar laws and regulations are insufficient and that we could
be subject to significant criminal and civil penalties or
reputational damage due to noncompliance. Such penalties and
subsequent remediation costs could have a material adverse
effect on our business, financial condition and results of
operations and cash flows.
Due to
the evolving nature of financial regulations in certain
jurisdictions of the world, our operations may be disrupted if a
regulatory authority deems them inappropriate and requires us to
comply with additional regulatory requirements.
The legislative and regulatory environment in which we operate
has undergone significant changes in the recent past and there
may be future regulatory changes affecting our industry. The
financial services industry in general has been subject to
increasing regulatory oversight in various jurisdictions
throughout the world. We have benefited from recent regulatory
liberalization in several emerging markets in developing regions
enabling us to increase our presence in those markets. Our
ability to continue to expand our presence in these regions,
however, will depend to a large extent upon continued evolution
of the regulatory environment in these several markets, and
there is no assurance that favorable regulatory trends will
continue. Moreover, we currently have only a limited presence in
a number of significant markets and may not be able to gain a
significant presence there unless and until regulatory barriers
to international firms in certain of those markets are modified.
Consequently, our recent success in various regions may not
continue or we may not be able to develop our business in
emerging markets as we currently plan. To the extent current
activities are deemed inappropriate, we may incur a disruption
in services offered to current customers as we are forced to
comply with additional regulations.
Attrition
of customer accounts and failure to attract new accounts could
have a material adverse effect on our business, financial
condition and results of operations and cash flows. Even if we
do attract new customers, we may fail to attract the customers
in a cost-effective manner, which could materially adversely
affect our profitability and growth.
Our customer base is primarily comprised of individual retail
customers. Although we offer products and tailored services
designed to educate, support and retain our customers, our
efforts to attract new customers or reduce the attrition rate of
our existing customers may not be successful. If we are unable
to maintain or increase our customer retention rates or generate
a substantial number of new customers in a cost-effective
manner, our business, financial condition and results of
operations and cash flows would likely be adversely affected.
For the year ended December 31, 2009, we incurred
advertising and marketing expenses of $29.4 million.
Although we have spent significant financial resources on
advertising and marketing expenses and plan to continue to do
so, these efforts may not be a cost-effective way to attract new
customers. In particular, we believe that rates for desirable
advertising and marketing placements, including online, search
engine, print and television advertising fell in 2008 and 2009
due to the overall economic slow-down and are likely to increase
in the foreseeable future. As a result, we may be disadvantaged
relative to our larger competitors in our ability to expand or
maintain our advertising and marketing commitments, which may
raise our customer acquisition costs. Additionally, our
advertising and marketing methods are subject to regulation by
the CFTC and NFA. The rules and regulations of these
organizations impose specific limitations on our sales methods,
advertising and marketing. If we do not achieve our advertising
objectives, our profitability and growth may be materially
adversely affected.
We are
subject to litigation risk which could adversely affect our
reputation, business, financial condition and results of
operations and cash flows.
Many aspects of our business involve risks that expose us to
liability under U.S. federal and state laws, as well as the
rules and enforcement efforts of our regulators and
self-regulatory organizations worldwide. These risks include,
among others, disputes over trade terms with customers and other
market participants, customer losses resulting from system delay
or failure and customer claims that we or our employees executed
22
unauthorized transactions, made materially false or misleading
statements or lost or diverted customer assets in our custody.
We may also be subject to regulatory investigation and
enforcement actions seeking to impose significant fines or other
sanctions, which in turn could trigger civil litigation for our
previous operations that may be deemed to have violated
applicable rules and regulations in various jurisdictions.
The volume of claims and the amount of damages and fines claimed
in litigation and regulatory proceedings against financial
services firms have been increasing, particularly in the current
environment of heightened scrutiny of financial institutions.
The amounts involved in the trades we execute, together with
rapid price movements in our currency pairs, can result in
potentially large damage claims in any litigation resulting from
such trades. Dissatisfied customers may make claims against us
regarding the quality of trade execution, improperly settled
trades, mismanagement or even fraud, and these claims may
increase as our business expands.
Litigation may also arise from disputes over the exercise of our
rights with respect to customer accounts. Although our customer
agreements generally provide that we may exercise such rights
with respect to customer accounts as we deem reasonably
necessary for our protection, our exercise of these rights may
lead to claims by customers that we did so improperly.
Even if we prevail in any litigation or enforcement proceedings
against us, we could incur significant legal expenses defending
against the claims, even those without merit. Moreover, because
even claims without merit can damage our reputation or raise
concerns among our customers, we may feel compelled to settle
claims at significant cost. The initiation of any claim,
proceeding or investigation against us, or an adverse resolution
of any such matter could have a material adverse effect on our
reputation, business, financial condition and results of
operations and cash flows.
We may
be subject to customer litigation, financial losses, regulatory
sanctions and harm to our reputation as a result of employee
misconduct or errors that are difficult to detect and
deter.
There have been a number of highly publicized cases involving
fraud or other misconduct by employees of financial services
firms in recent years. Our employees could execute unauthorized
transactions for our customers, use customer assets improperly
or without authorization, carry out improper activities on
behalf of customers or use confidential customer or company
information for personal or other improper purposes, as well as
misrecord or otherwise try to hide improper activities from us.
In addition, employee errors, including mistakes in executing,
recording or reporting transactions for customers, may cause us
to enter into transactions that customers disavow and refuse to
settle. Employee errors expose us to the risk of material losses
until the errors are detected and the transactions are reversed.
The risk of employee error or miscommunication may be greater
for products that are new or have non-standardized terms.
Further, such errors may be more likely to occur in the
aftermath of any acquisitions during the integration of or
migration from technological systems.
Misconduct by our employees or former employees could subject us
to financial losses or regulatory sanctions and seriously harm
our reputation. It may not be possible to deter or detect
employee misconduct and the precautions we take to prevent and
detect this activity may not be effective in all cases. Our
employees may also commit good faith errors that could subject
us to financial claims for negligence or otherwise, as well as
regulatory actions.
Misconduct by employees of our customers can also expose us to
claims for financial losses or regulatory proceedings when it is
alleged we or our employees knew or should have known that an
employee of our customer was not authorized to undertake certain
transactions. Dissatisfied customers can make claims against us,
including claims for negligence, fraud, unauthorized trading,
failure to supervise, breach of fiduciary duty, employee errors,
intentional misconduct, unauthorized transactions by associated
persons and failures in the processing of transactions.
23
Any
restriction in the availability of credit cards as a payment
option for our customers could adversely affect our business,
financial condition and results of operations and cash
flows.
We currently allow our customers to use credit cards to fund
their accounts with us, and over 81% of our customers elected to
fund their accounts in this manner during 2009. There is a risk
that in the future, new regulations or credit card issuing
institutions may restrict the use of credit and debit cards as a
means to fund accounts used to trade in investment products. The
elimination or a reduction in the availability of credit cards
as a means to fund customer accounts, particularly for our
customers residing outside the United States, could have a
material adverse effect on our business, financial condition and
results of operations and cash flows.
Our
customer accounts may be vulnerable to identity theft and credit
card fraud.
Credit card issuers have adopted credit card security guidelines
as part of their ongoing efforts to prevent identity theft and
credit card fraud. We continue to work with credit card issuers
to ensure that our services, including customer account
maintenance, comply with these rules. There can be no
assurances, however, that our services are fully protected from
unauthorized access or hacking. If there is unauthorized access
to credit card data that results in financial loss, we may
experience reputational damage and parties could seek damages
from us.
In the
current environment facing financial services firms, a
firms reputation is critically important. If our
reputation is harmed, or the reputation of the online financial
services industry as a whole or retail FX industry is harmed,
our business, financial condition and results of operations and
cash flows may be materially adversely affected.
Our ability to attract and retain customers and employees may be
adversely affected if our reputation is damaged. If we fail, or
appear to fail, to deal with issues that may give rise to
reputation risk, we could harm our business prospects. These
issues include, but are not limited to, appropriately dealing
with potential conflicts of interest, legal and regulatory
requirements, ethical issues, money-laundering, privacy,
customer data protection, record-keeping, sales and trading
practices, and the proper identification of the legal, credit,
liquidity, operational and market risks inherent in our
business. Failure to appropriately address these issues could
also give rise to additional legal risk to us, which could, in
turn, increase the size and number of claims and damages
asserted against us or subject us to regulatory enforcement
actions, fines and penalties. Any such sanction would materially
adversely affect our reputation, thereby reducing our ability to
attract and retain customers and employees.
In addition, our ability to attract and retain customers may be
adversely affected if the reputation of the online financial
services industry as a whole or retail FX industry is damaged.
In recent years, a number of financial services firms have
suffered significant damage to their reputations from highly
publicized incidents that in turn resulted in significant and in
some cases irreparable harm to their business. The perception of
instability within the online financial services industry could
materially adversely affect our ability to attract and retain
customers.
The
loss of members of our senior management could compromise our
ability to effectively manage our business and pursue our growth
strategy.
We rely on members of our senior management to execute our
existing business plans and to identify and pursue new
opportunities. Our chief executive officer, Mr. Drew Niv,
has been our chief executive officer since our founding and was
one of our founders. Certain others on our management team have
been with us for most of our history and have significant
experience in the FX industry. Our continued success is
dependent upon the retention of these and other key executive
officers and employees, as well as the services provided by our
trading staff, technology and programming specialists and a
number of other key managerial, marketing, planning, financial,
technical and operations personnel. The loss of such key
personnel could have a material adverse effect on our business.
In addition, our ability to grow our business is dependent, to a
large degree, on our ability to retain such employees.
24
Our
pending acquisition of ODL may adversely affect our business,
and new acquisitions or joint ventures that we may pursue could
present unforeseen integration obstacles.
We are in the process of acquiring ODL, a London-based broker
dealer of FX, CFDs, spread betting, stocks and options with
substantial business in U.K. and Europe. The process of
integrating ODLs operations with ours may require a
disproportionate amount of resources and management attention as
the acquisition will increase the geographic footprint of our
operations, especially in Europe and the Middle East. Any
substantial diversion of management attention or difficulties in
operating the combined business could affect our ability to
achieve operational, financial and strategic objectives. The
unsuccessful integration of ODLs operations with ours may
also have adverse short-term effects on reported operating
results and may lead to the loss of key personnel. In addition,
ODLs customers may react unfavorably to the combination of
our businesses or we may be exposed to additional liabilities of
the combined business, both of which could materially adversely
affect our revenue and results of operations.
We may also pursue new acquisitions or joint ventures that could
present integration obstacles or costs. We may not realize any
of the benefits we anticipated from the strategy and we may be
exposed to additional liabilities of any acquired business, any
of which could materially adversely affect our revenue and
results of operations. In addition, future acquisitions or joint
ventures may involve the issuance of additional Holdings Units
or shares of our Class A common stock, which would dilute
your ownership.
New
lines of business or new products and services may subject us to
additional risks.
From time to time, we may implement new lines of business or
offer new products and services within existing lines of
business. There are substantial risks and uncertainties
associated with these efforts, particularly in instances where
the markets are not fully developed. In developing and marketing
new lines of business
and/or new
products and services, we may invest significant time and
resources. Initial timetables for the introduction and
development of new lines of business
and/or new
products or services may not be achieved and price and
profitability targets may not prove feasible. External factors,
such as compliance with regulations, competitive alternatives
and shifting market preferences, may also impact the successful
implementation of a new line of business or a new product or
service. Furthermore, any new line of business
and/or new
product or service could have a significant impact on the
effectiveness of our system of internal controls. Failure to
successfully manage these risks in the development and
implementation of new lines of business or new products or
services could have a material adverse effect on our business,
results of operations and financial condition.
We may
be unable to effectively manage our rapid growth and retain our
customers.
The rapid growth of our business during our short history has
placed significant demands on our management and other
resources. If our business continues to grow at a rate
consistent with our historical growth, we may need to expand and
upgrade the reliability and scalability of our transaction
processing systems, network infrastructure and other aspects of
our proprietary technology. We may not be able to expand and
upgrade our technology systems and infrastructure to accommodate
such increases in our business activity in a timely manner,
which could lead to operational breakdowns and delays, loss of
customers, a reduction in the growth of our customer base,
increased operating expenses, financial losses, increased
litigation or customer claims, regulatory sanctions or increased
regulatory scrutiny.
In addition, due to our rapid growth, we will need to continue
to attract, hire and retain highly skilled and motivated
officers and employees. We may not be able to attract or retain
the officers and employees necessary to manage this growth
effectively.
We may
be unable to respond to customers demands for new services
and products and our business, financial condition and results
of operations and cash flows may be materially adversely
affected.
Our business is subject to rapid change and evolving industry
standards. New services and products provided by our competitors
may render our existing services and products less competitive.
Our future
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success will depend, in part, on our ability to respond to
customers demands for new services and products on a
timely and cost-effective basis and to adapt to address the
increasingly sophisticated requirements and varied needs of our
customers and prospective customers. We may not be successful in
developing, introducing or marketing new services and products.
In addition, our new service and product enhancements may not
achieve market acceptance. Any failure on our part to anticipate
or respond adequately to customer requirements or changing
industry practices, or any significant delays in the
development, introduction or availability of new services,
products or service or product enhancements could have a
material adverse effect on our business, financial condition and
results of operations and cash flows.
We
intend to enter into a credit facility. The credit agreement
governing such credit facility may restrict our current and
future operations, particularly our ability to respond to
changes or to take certain actions.
We intend to enter into a credit facility. The credit agreement
governing such credit facility may contain a number of
restrictive covenants that impose significant operating and
financial restrictions on us and may limit our ability to engage
in acts that may be in our long-term best interest. A breach of
the covenants under such credit agreement governing our credit
facility could result in an event of default under that
indebtedness. Such a default may allow the creditors to
accelerate that debt and may result in the acceleration of any
other debt to which a cross-acceleration or cross-default
provision applies. In addition, an event of default under such
credit agreement governing our credit facility may permit the
lenders under our credit facility to terminate all commitments
to extend further credit under that facility. Furthermore, if we
are unable to repay the amounts due and payable under our credit
facility, those lenders could proceed against the collateral
granted to them to secure that indebtedness. In the event our
lenders accelerate the repayment of our borrowings, we and our
subsidiaries may not have sufficient assets to repay that
indebtedness. As a result of these restrictions, we may be:
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limited in how we conduct our business;
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unable to raise additional debt or equity financing to operate
during general economic or business downturns; or
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unable to compete effectively or to take advantage of new
business opportunities.
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These restrictions may affect our ability to grow in accordance
with our strategy.
We
face significant competition. Many of our competitors and
potential competitors have larger customer bases, more
established brand recognition and greater financial, marketing,
technological and personnel resources than we do which could put
us at a competitive disadvantage. Additionally, some of our
competitors and many potential competitors are better
capitalized than we are and able to obtain capital more easily
which could put us at a competitive disadvantage.
We compete in the FX market based on our ability to execute our
customers trades at competitive prices, to retain our
existing customers and to attract new customers. Certain of our
competitors have larger customer bases, more established name
recognition, a greater market share in certain markets, such as
Europe, and greater financial, marketing, technological and
personnel resources than we do. These advantages may enable
them, among other things, to:
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develop products and services that are similar to ours, or that
are more attractive to customers than ours, in one or more of
our markets;
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provide products and services we do not offer;
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provide execution and clearing services that are more rapid,
reliable or efficient, or less expensive than ours;
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offer products and services at prices below ours to gain market
share and to promote other businesses, such as FX options listed
securities, CFDs, including contracts for precious metals,
energy and stock indices, and OTC derivatives;
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adapt at a faster rate to market conditions, new technologies
and customer demands;
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offer better, faster and more reliable technology;
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outbid us for desirable acquisition targets;
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more efficiently engage in and expand existing relationships
with strategic alliances;
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market, promote and sell their products and services more
effectively; and
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develop stronger relationships with customers.
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These larger and better capitalized competitors, including
commercial and investment banking firms, may have access to
capital in greater amounts and at lower costs than we do and
thus, may be better able to respond to changes in the FX
industry, to compete for skilled professionals, to finance
acquisitions, to fund internal growth and to compete for market
share generally. Access to capital is critical to our business
to satisfy regulatory obligations and liquidity requirements.
Among other things, access to capital determines our
creditworthiness, which if perceived negatively in the market
could materially impair our ability to provide clearing services
and attract customer assets, both of which are important sources
of revenue. Access to capital also determines the degree to
which we can expand our operations. Thus, if we are unable to
maintain or increase our capital on competitive terms, we could
be at a significant competitive disadvantage, and our ability to
maintain or increase our revenue and earnings could be
materially impaired. Also, new or existing competitors in our
markets could make it difficult for us to maintain our current
market share or increase it in desirable markets. In addition,
our competitors could offer their services at lower prices, and
we may be required to reduce our fees significantly to remain
competitive. A fee reduction without a commensurate reduction in
expenses would decrease our profitability. We may not be able to
compete effectively against these firms, particularly those with
greater financial resources, and our failure to do so could
materially and adversely affect our business, financial
condition and results of operations and cash flows. We may in
the future face increased competition, resulting in narrowing
bid/offer spreads which could materially adversely affect our
business, financial condition and results of operations and cash
flows.
If we
are unable to effectively compete in emerging international
markets, either directly or through joint ventures with local
firms, the future growth of our business may be adversely
affected.
We regard emerging international markets as an important area of
our future growth. Due to cultural, regulatory and other factors
relevant to those markets, however, we may be at a competitive
disadvantage in those regions relative to local firms or to
international firms that have a well established local presence.
In some regions, we may need to enter into joint ventures with
local firms in order to establish a presence in the local
market, and we may face intense competition from other
international firms over relatively scarce opportunities for
market entry. Given the intense competition from other
international firms that are also seeking to enter these
fast-growing markets, we may have difficulty finding suitable
local firms willing to enter into the types of relationships
with us that we may need to gain access to these markets. This
competition could make it difficult for us to expand our
business internationally as planned. For the six months ended
June 30, 2010, we generated approximately 76% of our
customer trading volume from customers outside the United
States. Expanding our business in emerging markets is an
important part of our growth strategy. We face significant risks
in doing business in international markets, particularly in
developing regions. These business, legal and tax risks include:
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less developed or mature local technological infrastructure and
higher costs, which could make our products and services less
attractive or accessible in emerging markets;
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difficulty in complying with the diverse regulatory requirements
of multiple jurisdictions, which may be more burdensome, not
clearly defined, and subject to unexpected changes, potentially
exposing us to significant compliance costs and regulatory
penalties;
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less developed and established local financial and banking
infrastructure, which could make our products and services less
accessible in emerging markets;
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reduced protection of intellectual property rights;
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inability to enforce contracts in some jurisdictions;
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difficulties and costs associated with staffing and managing
foreign operations, including reliance on newly hired local
personnel;
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tariffs and other trade barriers;
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currency and tax laws that may prevent or restrict the transfer
of capital and profits among our various operations around the
world; and
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time zone, language and cultural differences among personnel in
different areas of the world.
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In addition, in order to be competitive in these local markets,
or in some cases because of restrictions on the ability of
foreign firms to conduct business locally, we may seek to
operate through joint ventures with local firms as we have done,
for example, in South Korea. Doing business through joint
ventures may limit our ability to control the conduct of the
business and could expose us to reputational and greater
operational risks.
Our
business could be adversely affected if global economic
conditions continue to negatively impact our customer
base.
Our customer base is primarily comprised of individual retail
customers who view foreign currency trading as an alternative
investment class. If global economic conditions continue to
negatively impact the FX market or adverse developments in
global economic conditions continue to limit the disposable
income of our customers, our business could be materially
adversely affected as our customers may choose to curtail their
trading in the FX market which could result in reduced customer
trading volume and trading revenue.
A
systemic market event that impacts the various market
participants with whom we interact could have a material adverse
effect on our business, financial condition and results of
operations and cash flows.
We interact with various third parties through our relationships
with our prime brokers, white labels and referring brokers. Some
of these market participants could be overleveraged. In the
event of sudden, large market price movements, such market
participants may not be able to meet their obligations to
brokers who, in turn, may not be able to meet their obligations
to their counterparties. As a result, if a systemic collapse in
the financial system were to occur, defaults by one or more
counterparties could have a material adverse effect on our
business, financial condition and results of operations and cash
flows.
The
decline in short-term interest rates has had an adverse effect
on our interest income and revenues.
A portion of our revenue is derived from interest income. We
earn interest on customer balances held in customer accounts and
on our cash held in deposit accounts at various financial
institutions. As a result of the recent decline in short-term
interest rates, our interest income has declined significantly.
Short-term interest rates are highly sensitive to factors that
are beyond our control, including general economic conditions
and the policies of various governmental and regulatory
authorities. For the six months ended June 30, 2010 and for
the years ended December 31, 2009 and 2008, our interest
income was approximately $1.0 million, $1.3 million
and $9.1 million, respectively. Interest income may not
return to the amount we reported in prior years, and any further
deterioration in short-term interest rates could further
adversely affect our interest income and revenue.
In addition, this decline in interest rates has narrowed
cross-border interest rate differentials, which has adversely
affected the carry trade, a once popular investing
strategy which involves buying a currency that offers a higher
interest rate while selling a currency that offers a lower
interest rate. The decline in the carry
28
trade has resulted in a decrease in the number of retail FX
customers. Accordingly, our growth could be impeded if
cross-border interest rate differentials remain compressed.
Our
operations in certain developing regions may be subject to the
risks associated with politically unstable and less economically
developed regions of the world. Trading in the currencies of
these developing regions may expose our customers and the third
parties with whom we interact to sudden and significant
financial loss as a result of exceptionally volatile and
unpredictable price movements and could negatively impact our
business.
Our operations in some emerging markets may be subject to the
political, legal and economic risks associated with politically
unstable and less economically developed regions of the world,
including the risks of war, insurgency, terrorism and government
appropriation. For example, we do business in countries whose
currencies may be less stable than those in our primary markets.
Currency instability or government imposition of currency
restrictions in these countries could impede our operations in
the FX markets in these countries. In addition, emerging markets
may be subject to exceptionally volatile and unpredictable price
movements that can expose customers and brokers to sudden and
significant financial loss. Trading in these markets may be less
liquid, market participants may be less well capitalized and
market oversight may be less extensive, all of which could
increase trading risk, particularly in markets for derivatives,
commodities and currencies. Substantial trading losses by
customers or customer or counterparty defaults, or the prospect
of them, in turn, could drive down trading volume in these
markets.
We are
dependent on FX market makers to continually provide us with FX
market liquidity. In the event we lose access to current prices
and liquidity levels, we may be unable to provide competitive FX
trading services, which will materially adversely affect our
business, financial condition and results of operations and cash
flows.
We rely on third party financial institutions to provide us with
FX market liquidity. As of June 30, 2010, we have
established trading relationships with 17 market makers. These
FX market makers, although under contract with us, have no
obligation to provide us with liquidity and may terminate our
arrangements at any time. We also rely upon these FX market
makers to provide us with competitive FX pricing which we can
pass on to our customers. In the event we lose access to the
competitive FX pricing
and/or
liquidity levels that we currently have, we may be unable to
provide competitive FX trading services, which will materially
adversely affect our business, financial condition and results
of operations and cash flows. As a riskless principal between
our customers and our FX market makers, we provide our customers
with the best bid and offer price for each currency pair from
our FX market makers plus a fixed markup. When a customer places
a trade and opens a position, we act as the counterparty to that
trade and our system immediately opens a trade between us and
the FX market maker who provided the price that the customer
selected. In the event that an offsetting trade fails, we could
incur losses resulting from our trade with our customer.
In addition, whether as a result of exceptional volatility or
situations affecting the market, the absence of competitive
pricing from FX market makers
and/or the
suspension of liquidity would expose us to the risk of a default
by the customer and consequent trading losses. Although our
margining practices are designed to mitigate this risk, we may
be unable to close out customer positions at a level where
margin posted by the customer is sufficient to cover the
customers losses. As a result, a customer may suffer
losses greater than any margin or other funds or assets posted
by that customer or held by us on behalf of that customer. Our
policy is generally not to seek to pursue claims for negative
equity against our customers.
We are
subject to risk of default by financial institutions that hold
our funds and our customers funds.
We have significant deposits with banks and other financial
institutions. Pursuant to current guidelines set forth by the
NFA and the CFTC for our
U.S.-regulated
subsidiaries, we are not required to segregate customer funds
from our own funds. As such, we aggregate our customers
funds and our funds and hold them in collateral and deposit
accounts at various financial institutions. In the event of
insolvency of one or more of the financial institutions with
whom we have deposited these funds, both we and our customers
may not be able to recover our funds. Because our
customers funds are aggregated with our own, they are not
insured by
29
the Federal Deposit Insurance Corporation or any other similar
insurer domestically or abroad, except to the extent of the
maximum insured amount per deposit, which is unlikely to provide
significant benefits to customers. In any such insolvency we and
our customers would rank as unsecured creditors in respect of
claims to funds deposited with any such financial institution.
As a result, we may be subject to claims by customers due to the
loss of customer funds and our business would be harmed by the
loss of our own funds.
We
depend on the services of prime brokers to assist in providing
us access to liquidity through our FX market makers. The loss of
one or more of our prime brokerage relationships could lead to
increased transaction costs and capital posting requirements, as
well as having a negative impact on our ability to verify our
open positions, collateral balances and trade
confirmations.
We depend on the services of prime brokers to assist in
providing us access to liquidity through our FX market makers.
We currently have established three prime brokerage
relationships which act as central hubs through which we are
able to deal with our FX market makers. In return for paying a
transaction-based prime brokerage fee, we are able to aggregate
our trading exposures, thereby reducing our transaction costs.
Since we trade with our FX market makers through our prime
brokers, they also serve as a third party check on our open
positions, collateral balances and trade confirmations. If we
were to lose one or more of our prime brokerage relationships,
we could lose this source of third party verification of our
trading activity, which could lead to an increased number of
record-keeping or documentation errors. Although we have
relationships with FX market makers who could provide clearing
services as a
back-up for
our prime brokerage services, if we were to experience a
disruption in prime brokerage services due to a financial,
technical, regulatory or other development adversely affecting
any of our current prime brokers, our business could be
materially adversely affected to the extent that we are unable
to transfer positions and margin balances to another financial
institution in a timely fashion. In the event of the insolvency
of a prime broker, we might not be able to fully recover the
assets we have deposited (and have deposited on behalf of our
customers) with the prime broker or our unrealized profits since
we will be among the prime brokers unsecured creditors.
Failure
of third-party systems or third-party service and software
providers upon which we rely could adversely affect our
business.
We rely on certain third party computer systems or third party
service and software providers, including technology platforms,
back-office systems, internet service providers and
communications facilities. For example, for the six months ended
June 30, 2010, 8% of our trading volume was derived from
trades utilizing the Meta Trader 4 platform, a third-party
technology platform we license that is popular in the
international trading community and offers our customers an
alternative trading interface. Any interruption in these third
party services, or deterioration in their performance or
quality, could adversely affect our business. If our arrangement
with any third party is terminated, we may not be able to find
an alternative systems or services provider on a timely basis or
on commercially reasonable terms. This could have a material
adverse effect on our business, financial condition and results
of operations and cash flows.
Our
computer infrastructure may be vulnerable to security breaches.
Any such problems could jeopardize confidential information
transmitted over the internet, cause interruptions in our
operations or give rise to liabilities to third
parties.
Our computer infrastructure is potentially vulnerable to
physical or electronic computer break-ins, viruses and similar
disruptive problems and security breaches. Any such problems or
security breaches could give rise to liabilities to one or more
third parties, including our customers, and disrupt our
operations. A party able to circumvent our security measures
could misappropriate proprietary information or customer
information, jeopardize the confidential nature of information
we transmit over the internet or cause interruptions in our
operations. Concerns over the security of internet transactions
and the safeguarding of confidential personal information could
also inhibit the use of our systems to conduct FX transactions
over the internet. To the extent that our activities involve the
storage and transmission of proprietary information and personal
financial information, security breaches could expose us to a
risk of financial loss, litigation and other liabilities. Our
current insurance policies may not protect us against all of
such losses and liabilities. Any of these events,
30
particularly if they result in a loss of confidence in our
services, could have a material adverse effect on our business,
financial condition and results of operations and cash flows.
We
have relationships with referring brokers who direct new
customers to us. Failure to maintain these relationships could
have a material adverse effect on our business, financial
condition and results of operations and cash
flows.
We have relationships with NFA-registered referring brokers who
direct new customers to us and provide marketing and other
services for these customers. For the six months ended
June 30, 2010, our largest referring broker accounted for
4% of our total volume. Many of our relationships with referring
brokers are non-exclusive or may be terminated by the brokers on
short notice. In addition, under our agreements with referring
brokers, they have no obligation to provide us with new
customers or minimum levels of transaction volume. Our failure
to maintain our relationships with these referring brokers, the
failure of the referring brokers to provide us with customers or
our failure to create new relationships with referring brokers
would result in a loss of revenue, which could have a material
adverse effect on our business, financial condition and results
of operations and cash flows. To the extent any of our
competitors offers more attractive compensation terms to one of
our referring brokers, we could lose the brokers services
or be required to increase the compensation we pay to retain the
broker. In addition, we may agree to set the compensation for
one or more referring brokers at a level where, based on the
transaction volume generated by customers directed to us by such
brokers, it would have been more economically attractive to seek
to acquire the customers directly rather than through the
referring broker. To the extent we do not enter into
economically attractive relationships with referring brokers,
our referring brokers terminate their relationship with us or
our referring brokers fail to provide us with customers, our
business, financial condition and results of operations and cash
flows could be materially adversely affected.
Our
relationships with our referring brokers may also expose us to
significant reputational and legal risks as we could be harmed
by referring broker misconduct or errors that are difficult to
detect and deter.
Our reputation may be harmed by, or we may be liable for,
improper conduct by our referring brokers, even though we do not
control their activities. Referring brokers maintain customer
relationships and delegate to us the responsibilities associated
with FX and back-office operations. Furthermore, many of our
referring brokers operate websites, which they use to advertise
our services or direct customers to us. It is difficult for us
to closely monitor the contents of their websites to ensure that
the statements they make in relation to our services are
accurate and comply with applicable rules and regulations. Under
the current rules of the NFA, we are responsible for the
activities of any party that solicits or introduces a customer
to us unless such party is a member or associate of the NFA.
Although all of our referring brokers are members or associates
of the NFA, any disciplinary action taken against our referring
brokers in the United States and abroad, could have a material
adverse effect on our reputation, damage our brand name and
materially adversely affect our business, financial condition
and results of operations and cash flows, and, in any event, we
may be subject to claims by customers and others concerning the
conduct of referring brokers. In August 2010, the CFTC adopted
regulations which require that referring brokers either meet the
minimum net capital requirements applicable to futures and
commodity options referring brokers or enter into a guarantee
agreement with a CFTC-regulated FX broker, along with a
requirement that such referring broker may be a party to only
one guarantee agreement at a time. If the referring brokers with
whom we currently do business choose to enter into a guarantee
agreement, we cannot assure you that such referring brokers will
choose to enter into such a guarantee agreement with us, rather
than one of our competitors. We would be liable for the
solicitation activity and performance of our referring brokers
we guarantee. At this time, the effect of this rule change on
our operations is unclear.
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We
have relationships with white labels who direct customer trading
volume to us. Failure to maintain these relationships or develop
new white label relationships could have a material adverse
effect on our business, financial condition and results of
operations and cash flows.
We have relationships with white labels which provide FX trading
to their customers by using our technology platform and other
services and therefore provide us with an additional source of
revenue. In certain jurisdictions, we are only able to provide
our services through white label relationships. Many of our
relationships with white labels are non-exclusive or may be
terminated by them on short notice. In addition, our white
labels have no obligation to provide us with minimum levels of
transaction volume. Our failure to maintain our relationships
with these white labels, the failure of these white labels to
continue to offer online FX trading services to their customers
using our technology platform, the loss of requisite licenses by
our white labels or our inability to enter into new
relationships with white labels would result in a loss of
revenue, which could have a material adverse effect on our
business, financial condition and results of operations and cash
flows. For the six months ended June 30, 2010, revenue
generated through our white labels represented 2.7% of our total
revenue, and our largest white label relationship represented
2.5% of our total revenue. To the extent any of our competitors
offers more attractive compensation terms to one or more of our
white labels, we could lose the white label relationship or be
required to increase the compensation we pay to retain the white
label. Our relationships with our white labels also may expose
us to significant regulatory, reputational and other risks as we
could be harmed by white label misconduct or errors that are
difficult to detect and deter. If any of our white labels
provided unsatisfactory service to their customers or are deemed
to have failed to comply with applicable laws or regulations,
our reputation may be harmed or we may be subject to claims as a
result of our association with such white label. Any such harm
to our reputation or liability would have a material adverse
effect on our business, financial condition and results of
operations and cash flows.
Reduced
spreads in foreign currencies, levels of trading activity,
trading through alternative trading systems and price
competition from principal model firms could harm our
business.
Computer-generated buy and sell programs and other technological
advances and regulatory changes in the FX market may continue to
tighten spreads on foreign currency transactions. Tighter
spreads and increased competition could make the execution of
trades and market-making activities less profitable. In
addition, new and enhanced alternative trading systems have
emerged as an option for individual and institutional investors
to avoid directing their trades through retail FX brokers, which
could result in reduced revenue derived from our FX brokerage
business. We may also face price competition from our
competitors. Many competing firms using a principal model can
set their own prices as they generate income from trading with
their customers. In contrast, the prices we provide to our
customers are set by our FX market makers which vary based on
market conditions.
Risks
Related to Our Organizational Structure
FXCM
Inc.s only material asset after completion of this
offering will be its interest in FXCM Holdings, LLC, and it is
accordingly dependent upon distributions from FXCM Holdings, LLC
to pay taxes, make payments under the tax receivable agreement
or pay dividends.
FXCM Inc. will be a holding company and will have no material
assets other than its ownership of Holdings Units. FXCM Inc. has
no independent means of generating revenue. FXCM Inc. intends to
cause FXCM Holdings, LLC to make distributions to its
unitholders in an amount sufficient to cover all applicable
taxes at assumed tax rates, payments under the tax receivable
agreement and dividends, if any, declared by it. Deterioration
in the financial condition, earnings or cash flow of FXCM
Holdings, LLC and its subsidiaries for any reason could limit or
impair their ability to pay such distributions. Additionally, to
the extent that FXCM Inc. needs funds, and FXCM Holdings, LLC is
restricted from making such distributions under applicable law
or regulation or under the terms of our financing arrangements,
or is otherwise unable to provide such funds, it could
materially adversely affect our liquidity and financial
condition.
32
Payments of dividends, if any, will be at the discretion of our
board of directors after taking into account various factors,
including our business, operating results and financial
condition, current and anticipated cash needs, plans for
expansion and any legal or contractual limitations on our
ability to pay dividends. We also intend to enter into a credit
facility which may include restrictive covenants that limit our
ability to pay dividends. In addition, FXCM Holdings, LLC is
generally prohibited under Delaware law from making a
distribution to a member to the extent that, at the time of the
distribution, after giving effect to the distribution,
liabilities of FXCM Holdings, LLC (with certain exceptions)
exceed the fair value of its assets.
FXCM
Inc. is controlled by our existing owners, whose interests may
differ from those of our public shareholders.
Immediately following this offering and the application of net
proceeds from this offering, our existing owners will control
approximately % of the combined
voting power of our Class A and Class B common stock
(or % if the underwriters exercise
in full their option to purchase additional shares of
Class A common stock). Accordingly, our existing owners
will have the ability to elect all of the members of our board
of directors, and thereby to control our management and affairs.
In addition, they will be able to determine the outcome of all
matters requiring shareholder approval, including mergers and
other material transactions, and will be able to cause or
prevent a change in the composition of our board of directors or
a change in control of our company that could deprive our
shareholders of an opportunity to receive a premium for their
Class A common stock as part of a sale of our company and
might ultimately affect the market price of our Class A
common stock.
In addition, immediately following this offering and the
application of the net proceeds therefrom, our existing owners
will own % of the Holdings Units
(or % if the underwriters exercise
in full their option to purchase additional shares of
Class A common stock). Because they hold their ownership
interest in our business through FXCM Holdings, LLC, rather than
through the public company, these existing owners may have
conflicting interests with holders of shares of our Class A
common stock. For example, our existing owners may have
different tax positions from us which could influence their
decisions regarding whether and when to dispose of assets,
especially in light of the existence of the tax receivable
agreement that we will enter in connection with this offering,
whether and when to incur new or refinance existing
indebtedness, and whether and when FXCM Inc. should terminate
the tax receivable agreement and accelerate its obligations
thereunder. In addition, the structuring of future transactions
may take into consideration these existing owners tax or
other considerations even where no similar benefit would accrue
to us. See Certain Relationships and Related Person
Transactions Tax Receivable Agreement.
Our
existing owners could take steps so that we would qualify for
exemptions from certain corporate governance requirements
available to a controlled company within the meaning
of the New York Stock Exchange rules.
Upon completion of the offering of our Class A common
stock, our existing owners will continue to control a majority
of the combined voting power of all classes of our voting stock.
Under the New York Stock Exchange corporate governance
standards, a company of which more than 50% of the voting power
for the election of directors is held by an individual, a group
or another company is a controlled company and may
elect not to comply with certain corporate governance
requirements of the New York Stock Exchange, including
(1) the requirement that a majority of the board of
directors consist of independent directors, (2) the
requirement that we have a corporate governance and nominating
committee that is composed entirely of independent directors
with a written charter addressing the committees purpose
and responsibilities and (3) the requirement that we have a
compensation committee that is composed entirely of independent
directors with a written charter addressing the committees
purpose and responsibilities. While we do not currently intend
to take advantage of the exemptions available to a
controlled company under the New York Stock Exchange
corporate governance standards, if we were to do so we would not
be required to have a majority of independent directors and our
compensation and corporate governance and nominating committees
would not be required to consist entirely of independent
directors. Accordingly, you may not have the same protections
afforded to stockholders of companies that are subject to all of
the corporate governance requirements of the New York Stock
Exchange.
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FXCM
Inc. will be required to pay our existing owners for certain tax
benefits it may claim arising in connection with this offering
and related transactions, and the amounts it may pay could be
significant.
As described in Organizational Structure
Offering Transactions, FXCM Inc. intends to use a portion
of the proceeds from this offering to purchase Holdings Units
from our existing owners, including members of our senior
management.
We will enter into a tax receivable agreement with our existing
owners that will provide for the payment by FXCM Inc. to our
existing owners of 85% of the benefits, if any, that FXCM Inc.
is deemed to realize as a result of the increases in tax basis
resulting from our purchases or exchanges of Holdings Units and
certain other tax benefits related to our entering into the tax
receivable agreement, including tax benefits attributable to
payments under the tax receivable agreement. See Certain
Relationships and Related Person Transactions Tax
Receivable Agreement.
We expect that the payments that FXCM Inc. may make under the
tax receivable agreement will be substantial. Assuming no
material changes in the relevant tax law, and that we earn
sufficient taxable income to realize all tax benefits that are
subject to the tax receivable agreement, we expect future
payments under the tax receivable agreement relating to the
purchase by FXCM Inc. of Holdings Units as part of the Offering
Transactions to aggregate
$ million (or
$ million if the underwriters
exercise their option to purchase additional shares) and to
range over the next 15 years from approximately
$ million to
$ million per year (or
approximately $ million to
$ million per year if the
underwriters exercise their option to purchase additional
shares) and decline thereafter. Future payments to our existing
owners in respect of subsequent exchanges would be in addition
to these amounts and are expected to be substantial as well. The
foregoing numbers are merely estimates, and the actual payments
could differ materially. It is possible that future transactions
or events could increase or decrease the actual tax benefits
realized and the corresponding tax receivable agreement
payments. There may be a material negative effect on our
liquidity if, as a result of timing discrepancies or otherwise,
the payments under the tax receivable agreement exceed the
actual benefits we realize in respect of the tax attributes
subject to the tax receivable agreement
and/or
distributions to FXCM Inc. by FXCM Holdings, LLC are not
sufficient to permit FXCM Inc. to make payments under the tax
receivable agreement after it has paid taxes. The payments under
the tax receivable agreement are not conditioned upon our
existing owners continued ownership of us.
In
certain cases, payments under the tax receivable agreement to
our existing owners may be accelerated and/or significantly
exceed the actual benefits FXCM Inc. realizes in respect of the
tax attributes subject to the tax receivable
agreement.
The tax receivable agreement provides that upon certain mergers,
asset sales, other forms of business combinations or other
changes of control, or if, at any time, FXCM Inc. elects an
early termination of the tax receivable agreement, FXCM
Inc.s (or its successors) obligations with respect
to exchanged or acquired Holdings Units (whether exchanged or
acquired before or after such transaction) would be based on
certain assumptions, including that FXCM Inc. would have
sufficient taxable income to fully utilize the deductions
arising from the increased tax deductions and tax basis and
other benefits related to entering into the tax receivable
agreement. As a result, (1) FXCM Inc. could be required to
make payments under the tax receivable agreement that are
greater than or less than the specified percentage of the actual
benefits FXCM Inc. realizes in respect of the tax attributes
subject to the tax receivable agreement and (2) if FXCM
Inc. elects to terminate the tax receivable agreement early,
FXCM Inc. would be required to make an immediate payment equal
to the present value of the anticipated future tax benefits,
which upfront payment may be made years in advance of the actual
realization of such future benefits. Upon a subsequent actual
exchange, any additional increase in tax deductions, tax basis
and other benefits in excess of the amounts assumed at the
change in control will also result in payments under the tax
receivable agreement. In these situations, our obligations under
the tax receivable agreement could have a substantial negative
impact on our liquidity. There can be no assurance that we will
be able to finance our obligations under the tax receivable
agreement.
Payments under the tax receivable agreement will be based on the
tax reporting positions that we determine. Although we are not
aware of any issue that would cause the Internal Revenue
Service, or the IRS,
34
to challenge a tax basis increase, FXCM Inc. will not be
reimbursed for any payments previously made under the tax
receivable agreement. As a result, in certain circumstances,
payments could be made under the tax receivable agreement in
excess of the benefits that FXCM Inc. actually realizes in
respect of the increases in tax basis resulting from our
purchases or exchanges of Holdings Units and certain other tax
benefits related to our entering into the tax receivable
agreement, including tax benefits attributable to payments under
the tax receivable agreement.
The
requirements of being a public company may strain our resources
and distract our management.
As a public company, we will be subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended,
or the Exchange Act, and requirements of the Sarbanes-Oxley Act
of 2002, or the Sarbanes-Oxley Act. These requirements may place
a strain on our systems and resources. The Exchange Act requires
that we file annual, quarterly and current reports with respect
to our business and financial condition. The Sarbanes-Oxley Act
requires that we maintain effective disclosure controls and
procedures and internal controls over financial reporting. To
maintain and improve the effectiveness of our disclosure
controls and procedures, we will need to commit significant
resources, hire additional staff and provide additional
management oversight. We will be implementing additional
procedures and processes for the purpose of addressing the
standards and requirements applicable to public companies. In
addition, sustaining our growth also will require us to commit
additional management, operational and financial resources to
identify new professionals to join our firm and to maintain
appropriate operational and financial systems to adequately
support expansion. These activities may divert managements
attention from other business concerns, which could have a
material adverse effect on our business, financial condition,
results of operations and cash flows. We expect to incur
significant additional annual expenses related to these steps
and, among other things, additional directors and officers
liability insurance, director fees, reporting requirements,
transfer agent fees, hiring additional accounting, legal and
administrative personnel, increased auditing and legal fees and
similar expenses.
Our
internal controls over financial reporting currently do not meet
all of the standards contemplated by Section 404 of the
Sarbanes-Oxley Act, and failure to achieve and maintain
effective internal controls over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act could
have a material adverse effect on our business and common stock
price.
Our internal controls over financial reporting currently do not
meet all of the standards contemplated by Section 404 of
the Sarbanes-Oxley Act that eventually we will be required to
meet. Because currently we do not have comprehensive
documentation of our internal controls and have not yet tested
our internal controls in accordance with Section 404, we
cannot conclude in accordance with Section 404 that we do
not have a material weakness in our internal controls or a
combination of significant deficiencies that could result in the
conclusion that we have a material weakness in our internal
controls. If we are not able to complete our initial assessment
of our internal controls and otherwise implement the
requirements of Section 404 in a timely manner or with
adequate compliance, our independent registered public
accounting firm may not be able to certify as to the adequacy of
our internal controls over financial reporting.
Matters impacting our internal controls may cause us to be
unable to report our financial information on a timely basis and
thereby subject us to adverse regulatory consequences, including
sanctions by the SEC or violations of applicable stock exchange
listing rules, which may result in a breach of the covenants
under our financing arrangements. There also could be a negative
reaction in the financial markets due to a loss of investor
confidence in us and the reliability of our financial
statements. Confidence in the reliability of our financial
statements also could suffer if we or our independent registered
public accounting firm were to report a material weakness in our
internal controls over financial reporting. This could
materially adversely affect us and lead to a decline in the
price of our Class A common stock.
35
Anti-takeover
provisions in our charter documents and Delaware law might
discourage or delay acquisition attempts for us that you might
consider favorable.
Our certificate of incorporation and bylaws will contain
provisions that may make the acquisition of our company more
difficult without the approval of our board of directors. Among
other things, these provisions:
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authorize the issuance of undesignated preferred stock, the
terms of which may be established and the shares of which may be
issued without stockholder approval, and which may include super
voting, special approval, dividend, or other rights or
preferences superior to the rights of the holders of
Class A common stock;
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prohibit stockholder action by written consent, which requires
all stockholder actions to be taken at a meeting of our
stockholders;
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provide that the board of directors is expressly authorized to
make, alter, or repeal our bylaws and that our stockholders may
only amend our bylaws with the approval of 80% or more of all of
the outstanding shares of our capital stock entitled to
vote; and
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establish advance notice requirements for nominations for
elections to our board or for proposing matters that can be
acted upon by stockholders at stockholder meetings.
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These anti-takeover provisions and other provisions under
Delaware law could discourage, delay or prevent a transaction
involving a change in control of our company, including actions
that our stockholders may deem advantageous, or negatively
affect the trading price of our Class A common stock. These
provisions could also discourage proxy contests and make it more
difficult for you and other stockholders to elect directors of
your choosing and to cause us to take other corporate actions
you desire.
Risks
Related to this Offering
A
significant portion of the proceeds from this offering will be
used to purchase Holdings Units from our existing owners,
including members of our senior management.
We intend to use $ of the proceeds
from this offering (or $ if the
underwriters exercise in full their option to purchase
additional shares) to purchase Holdings Units from our existing
owners, including members of our senior management, as described
under Organizational Structure Offering
Transactions. Accordingly, we will not retain any of these
proceeds.
There
may not be an active trading market for shares of our
Class A common stock, which may cause shares of our
Class A common stock to trade at a discount from the
initial offering price and make it difficult to sell the shares
of Class A common stock you purchase.
Prior to this offering, there has not been a public trading
market for shares of our Class A common stock. It is
possible that after this offering an active trading market will
not develop or continue or, if developed, that any market will
be sustained which would make it difficult for you to sell your
shares of Class A common stock at an attractive price or at
all. The initial public offering price per share of Class A
common stock will be determined by agreement among us and the
representatives of the underwriters, and may not be indicative
of the price at which shares of our Class A common stock
will trade in the public market after this offering.
The
market price of our Class A common stock may decline due to
the large number of shares of Class A common stock eligible for
exchange and future sale.
The market price of shares of our Class A common stock
could decline as a result of sales of a large number of shares
of Class A common stock in the market after the offering or
the perception that such sales could occur. These sales, or the
possibility that these sales may occur, also might make it more
difficult for us to sell shares of Class A common stock in
the future at a time and at a price that we deem appropriate.
See Shares Eligible for Future Sale.
36
In addition, we and our existing owners will enter into an
exchange agreement under which they (or certain permitted
transferees thereof) will have the right, from and after the
first anniversary of the date of the closing of this offering
(subject to the terms of the exchange agreement), to exchange
their Holdings Units for shares of our Class A common stock
on a
one-for-one
basis, subject to customary conversion rate adjustments. The
market price of shares of our Class A common stock could
decline as a result of the exchange or the perception that an
exchange could occur. These exchanges, or the possibility that
these exchanges may occur, also might make it more difficult for
holders of our Class A common stock to sell such stock in
the future at a time and at a price that they deem appropriate.
See Certain Relationships and Related Person
Transactions Exchange Agreement.
If
securities or industry analysts do not publish research or
reports about our business, or if they downgrade their
recommendations regarding our Class A common stock, our
stock price and trading volume could decline.
The trading market for our Class A common stock will be
influenced by the research and reports that industry or
securities analysts publish about us or our business. If any of
the analysts who covers us downgrades our Class A common
stock or publishes inaccurate or unfavorable research about our
business, our Class A common stock price may decline. If
analysts cease coverage of us or fail to regularly publish
reports on us, we could lose visibility in the financial
markets, which in turn could cause our Class A common stock
price or trading volume to decline and our Class A common
stock to be less liquid.
The
market price of shares of our Class A common stock may be
volatile, which could cause the value of your investment to
decline.
Even if a trading market develops, the market price of our
Class A common stock may be highly volatile and could be
subject to wide fluctuations. Securities markets worldwide
experience significant price and volume fluctuations. This
market volatility, as well as general economic, market or
political conditions, could reduce the market price of shares of
our Class A common stock in spite of our operating
performance. In addition, our operating results could be below
the expectations of public market analysts and investors due to
a number of potential factors, including variations in our
quarterly operating results or dividends, if any, to
stockholders, additions or departures of key management
personnel, failure to meet analysts earnings estimates,
publication of research reports about our industry, litigation
and government investigations, changes or proposed changes in
laws or regulations or differing interpretations or enforcement
thereof affecting our business, adverse market reaction to any
indebtedness we may incur or securities we may issue in the
future, changes in market valuations of similar companies or
speculation in the press or investment community, announcements
by our competitors of significant contracts, acquisitions,
dispositions, strategic partnerships, joint ventures or capital
commitments, adverse publicity about the industries we
participate in or individual scandals, and in response the
market price of shares of our Class A common stock could
decrease significantly. You may be unable to resell your shares
of Class A common stock at or above the initial public
offering price.
In the past few years, stock markets have experienced extreme
price and volume fluctuations. In the past, following periods of
volatility in the overall market and the market price of a
companys securities, securities class action litigation
has often been instituted against public companies. This
litigation, if instituted against us, could result in
substantial costs and a diversion of our managements
attention and resources.
Investors
in this offering will suffer immediate and substantial
dilution
The initial public offering price per share of Class A
common stock will be substantially higher than our pro forma net
tangible book value per share immediately after this offering.
As a result, you will pay a price per share of Class A
common stock that substantially exceeds the per share book value
of our tangible assets after subtracting our liabilities. In
addition, you will pay more for your shares of Class A
common stock than the amounts paid for the Holdings Units by our
existing owners. Assuming an offering price of
$ per share of Class A common
stock, which is the midpoint of the range on the front cover of
this prospectus, you will incur immediate and substantial
dilution in an amount of $ per
share of Class A common stock. See Dilution.
37
You
may be diluted by the future issuance of additional Class A
common stock in connection with our incentive plans,
acquisitions or otherwise.
After this offering we will have
approximately shares
of Class A common stock authorized but unissued, including
approximately shares
of Class A common stock issuable upon exchange of Holdings
Units that will be held by our existing owners. Our certificate
of incorporation authorizes us to issue these shares of
Class A common stock and options, rights, warrants and
appreciation rights relating to Class A common stock for
the consideration and on the terms and conditions established by
our board of directors in its sole discretion, whether in
connection with acquisitions or otherwise. We have
reserved shares
for issuance under our Long Term Incentive Plan,
including shares
issuable upon the exercise of stock options that we intend to
grant to our employees at the time of this offering. See
Management Long Term Incentive Plan and
IPO Date Stock Option Awards. Any
Class A common stock that we issue, including under our
Long Term Incentive Plan or other equity incentive plans that we
may adopt in the future, would dilute the percentage ownership
held by the investors who purchase Class A common stock in
this offering.
38
FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking statements, which
reflect our current views with respect to, among other things,
our operations and financial performance. You can identify these
forward-looking statements by the use of words such as
outlook, believes, expects,
potential, continues, may,
will, should, seeks,
approximately, predicts,
intends, plans, estimates,
anticipates or the negative version of these words
or other comparable words. Such forward-looking statements are
subject to various risks and uncertainties. Accordingly, there
are or will be important factors that could cause actual
outcomes or results to differ materially from those indicated in
these statements. We believe these factors include but are not
limited to those described under Risk Factors. These
factors should not be construed as exhaustive and should be read
in conjunction with the other cautionary statements that are
included in this prospectus. We undertake no obligation to
publicly update or review any forward-looking statement, whether
as a result of new information, future developments or
otherwise, except as required by law.
MARKET
DATA
This prospectus includes market and industry data and forecasts
that we have derived from independent consultant reports,
publicly available information, various industry publications,
other published industry sources and our internal data and
estimates. Independent consultant reports, industry publications
and other published industry sources generally indicate that the
information contained therein was obtained from sources believed
to be reliable.
Our internal data and estimates are based upon information
obtained from trade and business organizations and other
contacts in the markets in which we operate and our
managements understanding of industry conditions. Although
we believe that such information is reliable, we have not had
this information verified by any independent sources.
39
ORGANIZATIONAL
STRUCTURE
The diagram below depicts our organizational structure
immediately following this offering.
Reclassification
Prior to the completion of this offering, the limited liability
company agreement of FXCM Holdings, LLC will be amended and
restated to, among other things, modify its capital structure by
creating a single new class of units that we refer to as
Holdings Units. We refer to this as the
Reclassification. Immediately following the
Reclassification but prior to the Offering Transactions
described below, there will
be
Holdings Units issued and outstanding.
Incorporation
of FXCM Inc.
FXCM Inc. was incorporated as a Delaware corporation on
August 10, 2010. FXCM Inc. has not engaged in any business
or other activities except in connection with its formation. The
certificate of incorporation of
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FXCM Inc. authorizes two classes of common stock, Class A
common stock and Class B common stock, each having the
terms described in Description of Capital Stock.
Following this offering, each of our existing owners will hold
one or more shares of Class B common stock of FXCM Inc.,
each of which provides its owner with no economic rights but
entitles the holder, without regard to the number of shares of
Class B common stock held by such holder, to one vote on
matters presented to stockholders of FXCM Inc. for each Holdings
Unit held by such holder, as described in Description of
Capital Stock Common Stock Class B
Common Stock. Holders of our Class A common stock and
Class B common stock vote together as a single class on all
matters presented to our stockholders for their vote or
approval, except as otherwise required by applicable law.
We and our existing owners will enter into an exchange agreement
under which they (or certain permitted transferees thereof) will
have the right, from and after the first anniversary of the date
of the closing of this offering (subject to the terms of the
exchange agreement), to exchange their Holdings Units for shares
of our Class A common stock on a
one-for-one
basis, subject to customary conversion rate adjustments for
stock splits, stock dividends and reclassifications. See
Certain Relationships and Related Person
Transactions Exchange Agreement.
Offering
Transactions
At the time of this offering, FXCM Inc. intends to purchase
Holdings Units from FXCM Holdings, LLC and from our existing
owners, including members of our senior management, at a
purchase price per unit equal to the initial public offering
price per share of Class A common stock in this offering
net of underwriting discounts. Assuming that the shares of
Class A common stock to be sold in this offering are sold
at $ per share, which is the
midpoint of the range on the front cover of this prospectus, at
the time of this offering, FXCM Inc. will purchase from FXCM
Holdings,
LLC newly-issued
Holdings Units for an aggregate of
$ million and purchase from
our existing
owners
Holdings Units for an aggregate of
$ million (or Holdings Units
for an aggregate of $ million
if the underwriters exercise in full their option to purchase
additional shares of Class A common stock). FXCM Holdings,
LLC will bear or reimburse FXCM Inc. for all of the expenses of
this offering.
See Principal Stockholders for information regarding
the proceeds from this offering that will be paid to our
directors and executive officers.
As described above, we intend to use a portion of the proceeds
from this offering to purchase Holdings Units from our existing
owners, including members of our senior management. In addition,
the unitholders of FXCM Holdings, LLC (other than FXCM Inc.) may
(subject to the terms of the exchange agreement) exchange their
Holdings Units for shares of Class A common stock of FXCM
Inc. on a
one-for-one
basis. The purchase of Holdings Units and subsequent exchanges
are expected to result in increases in the tax basis of the
assets of FXCM Holdings, LLC that otherwise would not have been
available. These increases in tax basis may reduce the amount of
tax that FXCM Inc. would otherwise be required to pay in the
future. These increases in tax basis may also decrease gains (or
increase losses) on future dispositions of certain capital
assets to the extent tax basis is allocated to those capital
assets. We will enter into a tax receivable agreement with our
existing owners that will provide for the payment by FXCM Inc.
to our existing owners of 85% of the amount of the benefits, if
any, that FXCM Inc. is deemed to realize as a result of these
increases in tax basis and certain other tax benefits related to
our entering into the tax receivable agreement, including tax
benefits attributable to payments under the tax receivable
agreement. These payment obligations are obligations of FXCM
Inc. and not of FXCM Holdings, LLC. See Certain
Relationships and Related Person Transactions Tax
Receivable Agreement.
In connection with its acquisition of Holdings Units, FXCM Inc.
will become the sole managing member of FXCM Holdings, LLC and,
through FXCM Holdings, LLC and its subsidiaries, operate our
business. Accordingly, although FXCM Inc. will initially have a
minority economic interest in FXCM Holdings, LLC, FXCM Inc. will
have 100% of the voting power and control the management of FXCM
Holdings, LLC.
We refer to the foregoing transactions as the Offering
Transactions.
41
As a result of the transactions described above:
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the investors in this offering will collectively
own shares
of our Class A common stock
(or shares
of Class A common stock if the underwriters exercise in
full their option to purchase additional shares of Class A
common stock) and FXCM Inc. will
hold
Holdings Units
(or
Holdings Units if the underwriters exercise in full their option
to purchase additional shares of Class A common stock);
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our existing owners will
hold
Holdings Units
(or
Holdings Units if the underwriters exercise in full their option
to purchase additional shares of Class A common stock);
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the investors in this offering will collectively
have % of the voting power in FXCM
Inc. (or % if the underwriters
exercise in full their option to purchase additional shares of
Class A common stock); and
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our existing owners, through their holdings of our Class B
common stock, will collectively
have % of the voting power in FXCM
Inc. (or % if the underwriters
exercise in full their option to purchase additional shares of
Class A common stock).
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Our post-offering organizational structure will allow our
existing owners to retain their equity ownership in FXCM
Holdings, LLC, an entity that is classified as a partnership for
United States federal income tax purposes, in the form of
Holdings Units. Investors in this offering will, by contrast,
hold their equity ownership in FXCM Inc., a Delaware corporation
that is a domestic corporation for United States federal income
tax purposes, in the form of shares of Class A common
stock. We believe that our existing owners generally find it
advantageous to hold their equity interests in an entity that is
not taxable as a corporation for United States federal income
tax purposes. Our existing owners, like FXCM Inc., will incur
United States federal, state and local income taxes on their
proportionate share of any taxable income of FXCM Holdings, LLC.
We do not believe that our organizational structure gives rise
to any significant benefit or detriment to our business or
operations.
As noted above, we will enter into an exchange agreement with
our existing owners that will entitle them, from and after the
first anniversary of the date of the closing of this offering,
to exchange their Holdings Units for shares of our Class A
common stock on a
one-for-one
basis, subject to customary conversion rate adjustments. The
exchange agreement provides, however, that such exchanges must
be for a minimum of the lesser of 1,000 Holdings Units or all of
the vested Holdings Units held by such existing owner. The
exchange agreement also provides that an existing owner will not
have the right to exchange Holdings Units if FXCM Inc.
determines that such exchange would be prohibited by law or
regulation or would violate other agreements with FXCM Inc. to
which the existing owner may be subject. FXCM Inc. may impose
additional restrictions on exchange that it determines to be
necessary or advisable so that FXCM Holdings, LLC is not treated
as a publicly traded partnership for United States
federal income tax purposes.
Our existing owners will also hold shares of Class B common
stock of FXCM Inc. Although these shares have no economic
rights, they will allow our existing owners to exercise voting
power at FXCM Inc., the managing member of FXCM Holdings, LLC,
at a level that is consistent with their overall equity
ownership of our business. Under the certificate of
incorporation of FXCM Inc., each holder of Class B common
stock shall be entitled, without regard to the number of shares
of Class B common stock held by such holder, to one vote
for each Holdings Unit held by such holder. Accordingly, as our
existing owners sell Holdings Units to FXCM Inc. as part of the
Offering Transactions or subsequently exchange Holdings Units
for shares of Class A common stock of FXCM Inc. pursuant to
the exchange agreement, the voting power afforded to them by
their shares of Class B common stock is automatically and
correspondingly reduced.
Holding
Company Structure
FXCM Inc. will be a holding company, and its sole material asset
will be a controlling equity interest in FXCM Holdings, LLC. As
the sole managing member of FXCM Holdings, LLC, FXCM Inc. will
operate and control all of the business and affairs of FXCM
Holdings, LLC and, through FXCM Holdings, LLC and its
subsidiaries, conduct our business.
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FXCM Inc. will consolidate the financial results of FXCM
Holdings, LLC and its subsidiaries, and the ownership interest
of the other members of FXCM Holdings, LLC will be reflected as
a non-controlling interest in FXCM Inc.s consolidated
financial statements.
Pursuant to the limited liability company agreement of FXCM
Holdings, LLC, FXCM Inc. has the right to determine when
distributions will be made to the members of FXCM Holdings, LLC
and the amount of any such distributions. If FXCM Inc.
authorizes a distribution, such distribution will be made to the
members of FXCM Holdings, LLC pro rata in accordance with the
percentages of their respective limited liability company
interests.
The holders of limited liability company interests in FXCM
Holdings, LLC, including FXCM Inc., will incur United States
federal, state and local income taxes on their proportionate
share of any taxable income of FXCM Holdings, LLC. Net profits
and net losses of FXCM Holdings, LLC will generally be allocated
to its members (including FXCM Inc.) pro rata in accordance with
the percentages of their respective limited liability company
interests. The limited liability company agreement provides for
cash distributions to the holders of limited liability company
interests of FXCM Holdings, LLC if FXCM Inc. determines that the
taxable income of FXCM Holdings, LLC will give rise to taxable
income for its members. In accordance with the limited liability
company agreement, we intend to cause FXCM Holdings, LLC to make
cash distributions to the holders of limited liability company
interests of FXCM Holdings, LLC for purposes of funding their
tax obligations in respect of the income of FXCM Holdings, LLC
that is allocated to them. Generally, these tax distributions
will be computed based on our estimate of the taxable income of
FXCM Holdings, LLC allocable to such holder of limited liability
company interests multiplied by an assumed tax rate equal to the
highest effective marginal combined United States federal, state
and local income tax rate prescribed for an individual or
corporate resident in New York, New York (taking into account
the nondeductibility of certain expenses and the character of
our income).
See Certain Relationships and Related Person
Transactions FXCM Holdings, LLC Limited
Liability Company Agreement.
Regulated
Subsidiaries
We operate our business through our operating subsidiaries, some
of which are subject to the requirements of various regulatory
bodies. Our operating subsidiaries are regulated in a number of
jurisdictions, including the United States, the United Kingdom
(where regulatory passport rights have been exercised to operate
in a number of European Economic Area jurisdictions), Hong Kong,
Australia and Dubai. Upon the completion of our acquisition of
ODL, which is expected to close in September 2010, we will also
be regulated in Japan. For further information regarding our
regulated subsidiaries, see Business
Regulation.
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USE OF
PROCEEDS
We estimate that the proceeds to FXCM Inc. from this offering,
after deducting estimated underwriting discounts and offering
expenses, will be approximately
$ million (or
$ million if the underwriters
exercise in full their option to purchase additional shares of
Class A common stock).
FXCM Inc. intends to use
$ million of these proceeds
to purchase newly-issued Holdings Units from FXCM Holdings, LLC,
as described under Organizational Structure
Offering Transactions. We intend to cause FXCM Holdings,
LLC to use these proceeds to enhance our capital, to fund
acquisitions that we may identify in the future and for general
corporate purposes.
FXCM Inc. intends to use all of the remaining proceeds from this
offering, or $ million (or
$ million if the underwriters
exercise in full their option to purchase additional shares of
Class A common stock), to purchase Holdings Units from our
existing owners, including members of our senior management, as
described under Organizational Structure
Offering Transactions. Accordingly, we will not retain any
of these proceeds. See Principal Stockholders for
information regarding the proceeds from this offering that will
be paid to our directors and named executive officers.
Pending specific application of these proceeds, we expect to
invest them primarily in short-term demand deposits at various
financial institutions.
See Pricing Sensitivity Analysis to see how the
information presented above would be affected by an initial
public offering price per share of class A common stock at
the low-, mid- and high-points of the price range indicated on
the front cover of this prospectus or if the underwriters
option to purchase additional shares of Class A common
stock is exercised in full.
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DIVIDEND
POLICY
Following this offering and subject to legally available funds,
we intend to pay quarterly cash dividends to the holders of our
Class A common stock initially equal to
$ per share of Class A common
stock, commencing with
the
quarter
of .
The declaration, amount and payment of any future dividends on
shares of Class A common stock will be at the sole
discretion of our board of directors. Our board of directors may
take into account general and economic conditions, our financial
condition and operating results, our available cash and current
and anticipated cash needs, capital requirements, contractual,
legal, tax and regulatory restrictions and implications on the
payment of dividends by us to our stockholders or by our
subsidiaries to us, and such other factors as our board of
directors may deem relevant.
FXCM Inc. is a holding company and has no material assets other
than its ownership of Holdings Units in FXCM Holdings, LLC. We
intend to cause FXCM Holdings, LLC to make distributions to us
in an amount sufficient to cover cash dividends, if any,
declared by us. If FXCM Holdings, LLC makes such distributions
to FXCM Inc., the other holders of Holdings Units will be
entitled to receive equivalent distributions.
Other than tax-related distributions, FXCM Holdings, LLC has not
made any distributions to our existing owners during 2008, 2009
and through June 30, 2010. Distributions aggregated
$76.0 million in 2008, $97.1 million in 2009 and
$41.0 million to date in 2010.
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CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of June 30, 2010:
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on a historical basis for FXCM Holdings, LLC; and
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on a pro forma basis for FXCM Inc. giving effect to the
transactions described under Unaudited Pro Forma
Consolidated Financial Information, including the
application of the proceeds from this offering as described in
Use of Proceeds.
|
You should read this table together with the information
contained in this prospectus, including Organizational
Structure, Use of Proceeds, Unaudited
Pro Forma Consolidated Financial Information,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the historical
financial statements and related notes included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
|
(In thousands,
|
|
|
|
except share and
|
|
|
|
per share amounts)
|
|
|
Cash and cash equivalents
|
|
$
|
153,010
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
$
|
|
|
Total members equity
|
|
$
|
141,767
|
|
|
|
|
|
Class A common stock, par value $0.01 per share,
3,000,000,000 shares
authorized, shares
issued and outstanding on a pro forma basis
|
|
|
|
|
|
|
|
|
Class B common stock, par value $0.01 per share,
1,000,000 shares
authorized, shares
issued
and shares
outstanding on a pro forma basis
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
Total members equity/Total stockholders equity
attributable to FXCM Inc.
|
|
|
141,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
141,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
141,767
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
See Pricing Sensitivity Analysis to see how the
information presented above would be affected by an initial
public offering price per share of Class A common stock at
the low-, mid- and high-points of the price range indicated on
the front cover of this prospectus or if the underwriters
option to purchase additional shares of Class A common
stock is exercised in full.
46
DILUTION
If you invest in shares of our Class A common stock, your
interest will be diluted to the extent of the difference between
the initial public offering price per share of Class A
common stock and the pro forma net tangible book value per share
of Class A common stock after this offering. Dilution
results from the fact that the per share offering price of the
shares of Class A common stock is substantially in excess
of the pro forma net tangible book value per share attributable
to our existing owners.
Our pro forma net tangible book value as of June 30, 2010
was approximately $ , or
$ per share of Class A common
stock. Pro forma net tangible book value represents the amount
of total tangible assets less total liabilities, and pro forma
net tangible book value per share of Class A common stock
represents pro forma net tangible book value divided by the
number of shares of Class A common stock outstanding, after
giving effect to the Reclassification and assuming that all of
the holders of Holdings Units in FXCM Holdings, LLC (other than
FXCM Inc.) exchanged their Holdings Units for newly-issued
shares of Class A common stock on a
one-for-one
basis.
After giving effect to the transactions described under
Unaudited Pro Forma Financial Information, including
the application of the proceeds from this offering as described
in Use of Proceeds, our pro forma net tangible book
value as of June 30, 2010 would have been
$ , or
$ per share of Class A common
stock. This represents an immediate increase in net tangible
book value of $ per share of
Class A common stock to our existing owners and an
immediate dilution in net tangible book value of
$ per share of Class A common
stock to investors in this offering.
The following table illustrates this dilution on a per share of
Class A common stock basis assuming the underwriters do not
exercise their option to purchase additional shares of
Class A common stock:
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share of Class A
common stock
|
|
|
|
|
|
$
|
|
|
Pro forma net tangible book value per share of Class A
common stock as of June 30, 2010
|
|
$
|
|
|
|
|
|
|
Increase in pro forma net tangible book value per share of
Class A common stock attributable to investors in this
offering
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value per share of Class A
common stock after the offering
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Dilution in pro forma net tangible book value per share of
Class A common stock to investors in this offering
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Because our existing owners do not own any Class A common
stock or other economic interests in FXCM Inc., we have
presented dilution in pro forma net tangible book value per
share of Class A common stock to investors in this offering
assuming that all of the holders of Holdings Units in FXCM
Holdings, LLC (other than FXCM Inc.) exchanged their Holdings
Units for newly-issued shares of Class A common stock on a
one-for-one
basis in order to more meaningfully present the dilutive impact
on the investors in this offering.
See Pricing Sensitivity Analysis to see how some of
the information presented above would be affected by an initial
public offering price per share of Class A common stock at
the low-, mid- and high-points of the price range indicated on
the front cover of this prospectus or if the underwriters
exercise in full their option to purchase additional shares of
Class A common stock.
47
The following table summarizes, on the same pro forma basis as
of June 30, 2010, the total number of shares of
Class A common stock purchased from us, the total cash
consideration paid to us and the average price per share of
Class A common stock paid by our existing owners and by new
investors purchasing shares of Class A common stock in this
offering, assuming that all of the holders of Holdings Units in
FXCM Holdings, LLC (other than FXCM Inc.) exchanged their
Holdings Units for shares of our Class A common stock on a
one-for-one
basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Shares of Class A
|
|
|
Total
|
|
|
Price per
|
|
|
|
Common Stock Purchased
|
|
|
Consideration
|
|
|
Share of Class A
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Common Stock
|
|
|
|
(In thousands)
|
|
|
Existing owners
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
Investors in this offering
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated statements of operations
for the year ended December 31, 2009 and for the six months
ended June 30, 2010 present our consolidated results of
operations giving pro forma effect to the probable acquisition
by FXCM Holdings, LLC of ODL described under
Managements Discussion and Analysis of Financial
Condition and Results of Operations Acquisition of
ODL and to the Offering Transactions described under
Organizational Structure and the use of the
estimated net proceeds from this offering as described under
Use of Proceeds, as if such transactions occurred on
January 1, 2009. The unaudited pro forma consolidated
statement of financial condition as of June 30, 2010
presents our consolidated financial position giving pro forma
effect to the Offering Transactions described under
Organizational Structure and the use of the
estimated net proceeds from this offering as described under
Use of Proceeds, as if such transactions occurred on
June 30, 2010. The pro forma adjustments are based on
available information and upon assumptions that our management
believes are reasonable in order to reflect, on a pro forma
basis, the impact of these transactions on the historical
financial information of FXCM Holdings, LLC.
The unaudited pro forma consolidated financial information
should be read together with Organizational
Structure, Managements Discussion and Analysis
of Financial Condition and Results of Operations and the
historical financial statements and related notes included
elsewhere in this prospectus.
The unaudited pro forma consolidated financial information is
included for informational purposes only and does not purport to
reflect the results of operations or financial position of FXCM
Inc. that would have occurred had we operated as a public
company during the periods presented. The unaudited pro forma
consolidated financial information should not be relied upon as
being indicative of our results of operations or financial
position had the Offering Transactions described under
Organizational Structure and the use of the
estimated net proceeds from this offering as described under
Use of Proceeds occurred on the dates assumed. The
unaudited pro forma consolidated financial information also does
not project our results of operations or financial position for
any future period or date.
The pro forma adjustments principally give effect to:
|
|
|
|
|
the probable acquisition by FXCM Holdings, LLC of ODL as
described under Managements Discussion and Analysis
of Financial Condition and Results of Operations
Acquisition of ODL;
|
|
|
|
the purchase by FXCM Inc. of Holdings Units from FXCM Holdings,
LLC and from our existing owners with the proceeds of this
offering and the related effects of the tax receivable
agreement. See Organizational Structure
Offering Transactions and Certain Relationships and
Related Person Transactions Tax Receivable
Agreement; and
|
|
|
|
in the case of the unaudited pro forma consolidated statements
of income, a provision for corporate income taxes on the income
of FXCM Inc. at an effective rate
of %, which includes a provision
for United States federal income taxes and assumes the highest
statutory rates apportioned to each state, local
and/or
foreign jurisdiction.
|
The unaudited pro forma consolidated financial information
presented assumes no exercise by the underwriters of the option
to purchase up to an
additional shares
of Class A common stock from us and that the shares of
Class A common stock to be sold in this offering are sold
at $ per share of Class A
common stock, which is the midpoint of the price range indicated
on the front cover of this prospectus. See Pricing
Sensitivity Analysis to see how certain aspects of the
Offering Transactions would be affected by an initial public
offering price per share of Class A common stock at the
low-, mid- and high-points of the price range indicated on the
front cover of this prospectus or if the underwriters
option to purchase additional shares of Class A common
stock is exercised in full.
49
FXCM
Inc.
Unaudited
Pro Forma Consolidated Statement of Financial Condition
As of
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ODL
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
FXCM
|
|
|
ODL
|
|
|
Acquisition
|
|
|
|
|
|
Offering and
|
|
|
|
|
|
|
Holdings
|
|
|
Actual
|
|
|
Related
|
|
|
|
|
|
Other
|
|
|
FXCM Inc.
|
|
|
|
LLC Actual
|
|
|
(U.S. GAAP)
|
|
|
Adjustments(1)
|
|
|
Sub Total
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
(In thousands)
|
|
|
Assets
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
153,010
|
|
|
$
|
3,727
|
|
|
$
|
|
|
|
$
|
156,737
|
|
|
$
|
|
(3)
|
|
|
|
|
Cash and cash equivalents, held for customers
|
|
|
425,549
|
|
|
|
167,087
|
|
|
|
|
|
|
$
|
592,636
|
|
|
|
|
|
|
|
|
|
Due from brokers
|
|
|
741
|
|
|
|
2,461
|
|
|
|
|
|
|
|
3,202
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
5,608
|
|
|
|
14,254
|
|
|
|
|
|
|
|
19,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
584,908
|
|
|
|
187,529
|
|
|
|
|
|
|
|
772,437
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
|
360
|
|
|
|
5,957
|
|
|
|
|
|
|
|
6,317
|
|
|
|
|
(4)
|
|
|
|
|
Office, communication and computer equipment, net
|
|
|
10,658
|
|
|
|
8,520
|
|
|
|
|
|
|
|
19,178
|
|
|
|
|
|
|
|
|
|
Intangible assets and goodwill
|
|
|
1,363
|
|
|
|
|
|
|
|
33,880
|
|
|
|
35,243
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
8,534
|
|
|
|
290
|
|
|
|
|
|
|
|
8,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
605,823
|
|
|
$
|
202,296
|
|
|
$
|
33,880
|
|
|
$
|
841,999
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer account liabilities
|
|
$
|
425,549
|
|
|
$
|
188,470
|
|
|
$
|
|
|
|
$
|
614,019
|
|
|
$
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
21,669
|
|
|
|
7,599
|
|
|
|
|
|
|
|
29,268
|
|
|
|
|
|
|
|
|
|
Due to brokers
|
|
|
7,838
|
|
|
|
1,277
|
|
|
|
|
|
|
|
9,115
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
461,056
|
|
|
|
197,346
|
|
|
|
|
|
|
|
658,402
|
|
|
|
|
|
|
|
|
|
Payable to related parties pursuant to tax receivable agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
|
|
|
|
Deferred tax liability
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration for acquisition
|
|
|
|
|
|
|
|
|
|
|
15,073
|
|
|
|
15,073
|
|
|
|
|
|
|
|
|
|
Long term lease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
464,056
|
|
|
|
197,346
|
|
|
|
15,073
|
|
|
|
676,475
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value per share
|
|
|
|
|
|
|
3,047
|
|
|
|
(3,047
|
)
|
|
|
|
|
|
|
|
(5)
|
|
|
|
|
Total members capital
|
|
|
141,458
|
|
|
|
|
|
|
|
35,171
|
|
|
|
176,629
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
27,109
|
|
|
|
(27,109
|
)
|
|
|
|
|
|
|
|
(5)
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
(25,206
|
)
|
|
|
13,791
|
|
|
|
(11,415
|
)
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
605,823
|
|
|
$
|
202,296
|
|
|
$
|
33,879
|
|
|
$
|
841,998
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
On May 1, 2010, we signed a purchase agreement to acquire a
100% voting and equity interest in ODL subject to certain
conditions precedent, with the acquisition expected to close
September 2010. The purchase price shall be a 3.5% equity
interest in FXCM Holdings, LLC (Initial
Consideration) and an additional equity interest in FXCM
Holdings, LLC if ODL earns greater than $20.0 million up to
a maximum of a 3.5% additional equity interest in FXCM Holdings,
if ODL earns $40.0 million in the twelve month period
ending June 30, 2011 (Contingent Consideration).
The purchase price has been allocated to the assets acquired and
liabilities assumed based on managements preliminary
estimate of their respective fair values. Independent valuation
specialists assisted FXCMs management in the acquisition
in determining the preliminary fair values of the net assets
acquired and the intangible assets. The work performed by the
independent valuation specialists has been considered by
management in determining the fair value reflected in these
unaudited pro forma financial statements. The valuations are
based on the estimated assets acquired and liabilities assumed
as of June 30, 2010 and managements consideration of
the independent specialists valuation work. All balances
are preliminary as the transaction is expected to close in
September 2010 and final closing balance and closing date are
currently not known.
The total preliminary purchase price is estimated at
$50.2 million, comprised of $35.1 million of Initial
Consideration, and $15.1 million of Contingent
Consideration. The value of the Initial Consideration was
managements estimate of the fair value of consideration
given based on a dividend discount approach, a comparable public
company approach and a comparable private market transactions
approach. The value of Contingent Consideration was estimated
based on managements estimate of consideration given using
the aforementioned valuation approaches combined with
managements estimate of the probability of ODL achieving
its performance targets.
Statement of financial condition data as of June 30, 2010
have been translated at the period-end exchange rate of 1.495
British pounds to the U.S. dollar. Statement of operations data
for the twelve months ended December 31, 2009 and the six
months ended June 30, 2010 have been translated at the
average exchange rates for the period of 1.566 and 1.526 British
pounds to the U.S. dollar, respectively. ODL financial data has
been converted from U.K. to U.S. GAAP and reclassified to
conform to FXCMs financial statement presentation.
The following is a summary of the preliminary allocation of the
purchase price in the ODL acquisition as reflected in the
unaudited pro forma consolidated statement of financial
condition as of June 30, 2010:
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
|
Fair value of net tangible assets acquired:
|
|
$
|
2,201
|
|
Fair value of identifiable intangible assets:
|
|
|
|
|
Customer relationships
|
|
|
16,985
|
|
Non-compete agreements
|
|
|
6,108
|
|
Trade name
|
|
|
589
|
|
|
|
|
|
|
Total fair value of identifiable intangible assets
|
|
|
23,682
|
|
Residual goodwill created from the ODL acquisition
|
|
|
24,361
|
|
|
|
|
|
|
Total preliminary purchase price
|
|
$
|
50,244
|
|
|
|
|
|
|
51
The preliminary allocations to adjust the book value of ODL
assets to their estimated fair value and record amortization
expense on ODL intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Average
|
|
|
Estimated Annual
|
|
|
Six Month
|
|
|
|
|
|
|
Remaining
|
|
|
Depreciation and
|
|
|
Depreciation and
|
|
|
|
|
|
|
Useful Life
|
|
|
Amortization
|
|
|
Amortization
|
|
|
|
Value
|
|
|
(in Years)
|
|
|
Expense for 2009
|
|
|
Expense for 2010
|
|
|
|
|
|
|
|
|
|
(U.S. dollars in thousands)
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
16,985
|
|
|
|
3-5 years
|
|
|
$
|
5,140
|
|
|
$
|
2,179
|
|
Non-compete agreements
|
|
|
6,108
|
|
|
|
2-3 years
|
|
|
|
2,175
|
|
|
|
1,087
|
|
Trade name
|
|
|
589
|
|
|
|
3 years
|
|
|
|
196
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization expense
|
|
|
|
|
|
|
|
|
|
$
|
7,511
|
|
|
$
|
3,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
23,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Customer
Relationships
|
The fair value of ODLs retail and institutional customer
relationships was valued separately and estimated using the
excess earnings method. This valuation approach relied on
assumptions regarding projected revenues, attrition rates, and
operating cash flows for its customers, which were projected up
to 2 years. The useful life is based on the period the
customer relationships are expected to contribute to future cash
flows as determined by the companys historical experience.
The cash flows were then tax-effected at a rate of 28%, the U.K.
statutory rate, and were discounted at 18%.
|
|
b.
|
Non-Compete
Agreements
|
The fair value of the non-compete agreements being entered into
with certain key employees of ODL were estimated using the
income approach. This approach estimates the present worth of
the profits that would be lost if these employees were to
compete. Such loss would arise from their ability to divert
existing and future business from ODL. Based upon our knowledge
of ODL and the market, we estimated the likelihood and impact of
competition and the solicitation of other executives for each
covenanter. In estimating the fair value of the non-compete
agreements, two scenarios were analyzed. The first scenario was
one in which the non-compete agreement was in place and no
profits were expected to be lost due to competition and the
second scenario represented a situation whereby there was no
non-compete agreement in place and, consequently, some profits
were lost due to competition. We calculated the present value of
those cash flows using an 18% discount rate and the resulting
difference between the cash flows under the two scenarios
provided an estimate of the fair value of the non-compete
agreements.
The fair value of ODLs trade name was estimated using the
relief-from-royalty method where it is assumed that the trade
name is owned by a third party and that the true owner would be
required to pay a royalty for the privilege of using the trade
name. Under the relief-from-royalty approach, we estimated the
fair value of the ODL trade name by considering the benefits of
ownership of the trade name in the form of future cash flows. To
develop future cash flows attributable to a trade name, we
started with a projection of future revenues from the business
operations of ODL. From the projected revenue, the annual
royalty savings was estimated by applying an estimated royalty
rate of 1% to the projected revenue stream. The annual royalty
savings was then adjusted to reflect taxes at a 28% rate to
arrive at the after-tax cash flow savings associated with
ownership of the trade name. The resulting cash flows were
discounted to a present value based on an 18% discount rate and
then summed.
|
|
|
(2) |
|
Reflects a $ million current
deferred tax liability and a
$ million non-current
deferred tax liability (a total deferred tax liability of
$ million) that has been set
up against the $ million
value of ODLs assets outlined in the above table. The
deferred tax liabilities represent the tax effect of the |
52
|
|
|
|
|
difference between the estimated assigned fair value of the
acquired intangible assets
($ million) and the tax basis
($ million) of such assets.
The estimated amount of
$ million is determined by
multiplying the difference of
$ million by the pro forma
U.S. effective tax rate of %. |
|
(3) |
|
Reflects the net effect on cash and cash equivalents of the
receipt of net offering proceeds of
$ million and the uses of
proceeds described in Use of Proceeds. |
|
(4) |
|
Reflects adjustments to give effect to the tax receivable
agreement (as described in Certain Relationships and
Related Person Transactions Tax Receivable
Agreement) based on the following assumptions: |
|
|
|
we will record an increase of
$ million in deferred tax
assets for estimated income tax effects of the increase in the
tax basis of the purchased interests, based on an effective
income tax rate of % (which
includes a provision for U.S. federal, state, local and/or
foreign income taxes);
|
|
|
|
we will record
$ million, representing 85%
of the estimated realizable tax benefit resulting from
(i) the tax basis in the intangible assets of FXCM
Holdings, LLC on the date of the offering, (ii) the
increase in the tax basis of the purchased interests as noted
above and (iii) certain other tax benefits related to
entering into the tax receivable agreement, including tax
benefits attributable to payments under the tax receivable
agreement as an increase to the liability due to existing owners
under the tax receivable agreement;
|
|
|
|
we will record an increase to additional paid-in
capital of $ million, which
is an amount equal to the difference between the increase in
deferred tax assets and the increase in liability due to
existing owners under the tax receivable agreement; and
|
|
|
|
there are no material changes in the relevant tax
law and we earn sufficient taxable income in each year to
realize the full tax benefit of the amortization of our assets.
|
|
(5) |
|
Reflects net proceeds from the sale by us
of shares
of Class A common stock pursuant to this offering at the
initial public offering price of $
per share, less underwriting discounts and commission and
estimated expenses payable in connection with this offering. |
|
(6) |
|
As described in Organizational Structure, FXCM Inc.
has become the sole managing member of FXCM Holdings, LLC. FXCM
Inc. will initially own less than 100% of the economic interest
in FXCM Holdings, LLC, but will have 100% of the voting power
and control the management of FXCM Holdings, LLC. As a result,
we will consolidate the financial results of FXCM Holdings, LLC
and will record non-controlling interest on our consolidated
statements of financial condition. Immediately following this
offering, the non-controlling interest, based on the assumptions
to the pro forma financial information, will be
$ million. Pro forma
non-controlling interest
represents % of the pro forma
equity of FXCM Holdings, LLC of
$ million, which differs from
the pro forma equity of FXCM Inc. as the former is not affected
by the adjustments relating to the tax receivable agreement
described above in note (3). |
Pursuant to an agreement dated August 26, 2010, a former
employee of ours is, upon a change of control (CIC)
of FXCM Holdings, LLC, entitled to a payment of (i) 1.00%
of the implied value placed upon 100% of us in the event of the
CIC, excluding any amount of capital invested as part of the
CIC, any expenses related to the execution of the CIC and any
undistributed capital invested in us prior to the CIC or
(ii) if we have an initial public offering
(IPO) prior to the CIC, 0.75% of the implied value
placed upon 100% of us in the event of such IPO, excluding the
amount of capital raised in the IPO, any expenses related to the
execution of the IPO and any undistributed capital invested in
us prior to the IPO. Pursuant to ASC 718 Compensation
Arrangements, any expense relating to this arrangement
should be accrued when probable and we have not accrued any
expense relating to this arrangement to date.
53
FXCM
Inc.
Unaudited
Pro Forma Consolidated Statements of Operations
For the
Fiscal Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ODL
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
FXCM
|
|
|
ODL
|
|
|
Acquisition
|
|
|
|
|
|
Offering
|
|
|
|
|
|
|
Holdings
|
|
|
Actual
|
|
|
Related
|
|
|
|
|
|
and Other
|
|
|
FXCM Inc.
|
|
|
|
LLC Actual
|
|
|
(U.S. GAAP)
|
|
|
Adjustments(1)
|
|
|
Sub Total
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
(In thousands except share and per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail trading revenues
|
|
$
|
291,668
|
|
|
$
|
58,977
|
|
|
$
|
|
|
|
$
|
350,645
|
|
|
$
|
|
|
|
|
|
|
Institutional trading revenues
|
|
|
21,107
|
|
|
|
1,940
|
|
|
|
|
|
|
|
23,047
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,289
|
|
|
|
3,164
|
|
|
|
|
|
|
|
4,453
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
8,666
|
|
|
|
405
|
|
|
|
|
|
|
|
9,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
322,730
|
|
|
|
64,486
|
|
|
|
|
|
|
|
387,216
|
|
|
|
|
|
|
|
|
|
Referring broker fees
|
|
|
76,628
|
|
|
|
20,240
|
|
|
|
|
|
|
|
96,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
|
246,102
|
|
|
|
44,246
|
|
|
|
|
|
|
|
290,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
62,588
|
|
|
|
22,814
|
|
|
|
|
|
|
|
85,402
|
|
|
|
|
|
|
|
|
|
Advertising and marketing
|
|
|
29,355
|
|
|
|
4,520
|
|
|
|
|
|
|
|
33,875
|
|
|
|
|
|
|
|
|
|
Communication and technology
|
|
|
24,026
|
|
|
|
12,327
|
|
|
|
|
|
|
|
36,353
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
26,453
|
|
|
|
23,493
|
|
|
|
|
|
|
|
49,946
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,542
|
|
|
|
4,830
|
|
|
|
7,610
|
|
|
|
18,982
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
125
|
|
|
|
207
|
|
|
|
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
149,089
|
|
|
|
68,191
|
|
|
|
7,610
|
|
|
|
224,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
97,013
|
|
|
|
(23,943
|
)
|
|
|
(7,610
|
)
|
|
|
65,460
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit)
|
|
|
(10,053
|
)
|
|
|
6,136
|
|
|
|
|
|
|
|
3,917
|
|
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the controlling and the
non-controlling interests
|
|
$
|
86,960
|
|
|
$
|
(17,807
|
)
|
|
$
|
(7,610
|
)
|
|
$
|
61,543
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to the non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to FXCM Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income available per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
On May 1, 2010, we signed a purchase agreement to acquire a
100% voting and equity interest in ODL subject to certain
conditions precedent, with the acquisition expected to close in
September 2010. For additional information, see Unaudited
Pro Forma Consolidated Statement of Financial Condition as of
June 30, 2010.
|
|
|
(2) |
|
Following this offering we will be subject to U.S. federal
income taxes, in addition to state, local and international
taxes with respect to our allocable share of any net taxable
income of FXCM Holdings, LLC, which will result in higher income
taxes. As a result the pro forma statements of income reflect an
adjustment to our provision for corporate income taxes to
reflect an effective rate of %,
which includes a provision for U.S. federal income taxes and
assumes the highest statutory rates apportioned to each state,
local and/or foreign jurisdiction. |
|
(3) |
|
As described in Organizational Structure, FXCM Inc.
will become the sole managing member of FXCM Holdings, LLC. FXCM
Inc. will initially own less than 100% of the economic interest
in FXCM Holdings, LLC, but will have 100% of the voting power
and control the management of FXCM Holdings, LLC. Immediately
following this offering, the non-controlling interest will
be %. Net income attributable to
the non-controlling interest
represents %
($ ) of income before income taxes
($ ). These amounts have been
determined based on an assumption that the underwriters
option to purchase additional shares is not exercised. If the
underwriters option to purchase additional shares is
exercised, the ownership percentage held by the non-controlling
interest would decrease to %. |
Pursuant to an agreement dated August 26, 2010, a former
employee of ours is, upon a CIC of FXCM Holdings, LLC, entitled
to a payment of (i) 1.00% of the implied value placed upon 100%
of us in the event of the CIC, excluding any amount of capital
invested as part of the CIC, any expenses related to the
execution of the CIC and any undistributed capital invested in
us prior to the CIC or (ii) if we have an IPO prior to the CIC,
0.75% of the implied value placed upon 100% of us in the event
of such IPO, excluding the amount of capital raised in the IPO,
any expenses related to the execution of the IPO and any
undistributed capital invested in us prior to the IPO. Pursuant
to ASC 718 Compensation Arrangements, any expense
relating to this arrangement should be accrued when probable and
we have not accrued any expense relating to this arrangement to
date.
55
FXCM
Inc.
Unaudited
Pro Forma Consolidated Statements of Operations
For the
Six Months Ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ODL
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
FXCM
|
|
|
ODL
|
|
|
Acquisition
|
|
|
|
|
|
Offering and
|
|
|
|
|
|
|
Holdings
|
|
|
Actual
|
|
|
Related
|
|
|
|
|
|
Other
|
|
|
FXCM Inc.
|
|
|
|
LLC Actual
|
|
|
(U.S. GAAP)
|
|
|
Adjustments(1)
|
|
|
Sub Total
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
|
|
|
(In thousands except share and per share data)
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail trading revenues
|
|
$
|
154,823
|
|
|
$
|
27,332
|
|
|
$
|
|
|
|
$
|
182,155
|
|
|
$
|
|
|
|
|
|
|
Institutional trading revenues
|
|
|
13,589
|
|
|
|
3,117
|
|
|
|
|
|
|
|
16,706
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,005
|
|
|
|
1,097
|
|
|
|
|
|
|
|
2,102
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
4,205
|
|
|
|
1,129
|
|
|
|
|
|
|
|
5,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
173,622
|
|
|
|
32,675
|
|
|
|
|
|
|
|
206,297
|
|
|
|
|
|
|
|
|
|
Referring broker fees
|
|
|
37,073
|
|
|
|
7,806
|
|
|
|
|
|
|
|
44,879
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
|
136,549
|
|
|
|
24,869
|
|
|
|
|
|
|
|
161,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
34,499
|
|
|
|
9,065
|
|
|
|
|
|
|
|
43,564
|
|
|
|
|
|
|
|
|
|
Advertising and marketing
|
|
|
11,315
|
|
|
|
1,269
|
|
|
|
|
|
|
|
12,584
|
|
|
|
|
|
|
|
|
|
Communication and technology
|
|
|
12,798
|
|
|
|
4,831
|
|
|
|
|
|
|
|
17,629
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
17,614
|
|
|
|
21,795
|
|
|
|
|
|
|
|
39,409
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,461
|
|
|
|
1,582
|
|
|
|
3,805
|
|
|
|
8,848
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
51
|
|
|
|
183
|
|
|
|
|
|
|
|
234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
79,738
|
|
|
|
38,725
|
|
|
|
3,805
|
|
|
|
122,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
56,811
|
|
|
|
(13,856
|
)
|
|
|
3,805
|
|
|
|
39,150
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
4,966
|
|
|
|
(2,767
|
)
|
|
|
|
|
|
|
2,199
|
|
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to the controlling and the
non-controlling interests
|
|
$
|
51,845
|
|
|
$
|
(11,089
|
)
|
|
$
|
(3,805
|
)
|
|
$
|
36,951
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to the non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to FXCM Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income available per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
On May 1, 2010, we signed a purchase agreement to acquire a
100% voting and equity interest in ODL subject to certain
conditions precedent, with the acquisition expected to close in
September 2010. For additional information, see Unaudited
Pro Forma Consolidated Statements of Financial Condition as of
June 30, 2010.
|
|
|
(2) |
|
Following this offering, we will be subject to U.S. federal
income taxes, in addition to state, local and international
taxes with respect to our allocable share of any net taxable
income of FXCM Holdings, LLC, which will result in higher income
taxes. As a result the pro forma statements of income reflect an
adjustment to our provision for corporate income taxes to
reflect an effective rate of %,
which includes a provision for U.S. federal income taxes and
assumes the highest statutory rates apportioned to each state,
local and/or foreign jurisdiction. |
|
(3) |
|
As described in Organizational Structure, FXCM Inc.
will become the sole managing member of FXCM Holdings, LLC. FXCM
Inc. will initially own less than 100% of the economic interest
in FXCM Holdings, LLC, but will have 100% of the voting power
and control the management of FXCM Holdings, LLC. Immediately
following this offering, the non-controlling interest will
be %. Net income attributable to
the non-controlling interest
represents %
($ ) of income before income taxes
($ ). These amounts have been
determined based on an assumption that the underwriters
option to purchase additional shares is not exercised. If the
underwriters option to purchase additional shares is
exercised, the ownership percentage held by the non-controlling
interest would decrease to %. |
Pursuant to an agreement dated August 26, 2010, a former
employee of ours is, upon a CIC of FXCM Holdings, LLC, entitled
to a payment of (i) 1.00% of the implied value placed upon
100% of us in the event of the CIC, excluding any amount of
capital invested as part of the CIC, any expenses related to the
execution of the CIC and any undistributed capital invested in
us prior to the CIC or (ii) if we have an IPO prior to the
CIC, 0.75% of the implied value placed upon 100% of us in the
event of such IPO, excluding the amount of capital raised in the
IPO, any expenses related to the execution of the IPO and any
undistributed capital invested in us prior to the IPO. Pursuant
to ASC 718 Compensation Arrangements, any expense
relating to this arrangement should be accrued when probable and
we have not accrued any expense relating to this arrangement to
date.
57
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data of
FXCM Holdings, LLC should be read together with
Organizational Structure, Unaudited Pro Forma
Consolidated Financial Information,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the historical
financial statements and related notes included elsewhere in
this prospectus. FXCM Holdings, LLC will be considered our
predecessor for accounting purposes, and its consolidated
financial statements will be our historical consolidated
financial statements following this offering.
We derived the selected historical consolidated statements of
operations and comprehensive income data of FXCM Holdings, LLC
for each of the years ended December 31, 2009, 2008 and
2007 and the selected historical consolidated statements of
financial condition data as of December 31, 2009 and 2008
from the audited consolidated financial statements of FXCM
Holdings, LLC which are included elsewhere in this prospectus,
and derived the selected historical combined statement of
operations and comprehensive income for each of the years ended
December 31, 2006 and 2005 and the selected historical
combined statement of financial condition data as of
December 31, 2006 and 2005 and the summary historical
consolidated statements of financial condition data as of
December 31, 2007 from the audited financial statements of
FXCM Holdings, LLC which are not included in this prospectus.
The consolidated statements of operations and comprehensive
income data for the six months ended June 30, 2010 and
2009, and the consolidated statement of financial condition data
as of June 30, 2010 and 2009 have been derived from
unaudited consolidated financial statements of FXCM Holdings,
LLC included elsewhere in this prospectus. The unaudited
consolidated financial statements of FXCM Holdings, LLC have
been prepared on substantially the same basis as the audited
consolidated financial statements and include all adjustments
that we consider necessary for a fair presentation of our
consolidated financial position and results of operations for
all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007(1)
|
|
|
2006(1)(2)
|
|
|
2005(2)
|
|
|
|
(In thousands)
|
|
|
Consolidated Statements of Operations and Comprehensive
Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail trading revenue
|
|
$
|
154,823
|
|
|
$
|
155,217
|
|
|
$
|
291,668
|
|
|
$
|
281,385
|
|
|
$
|
144,935
|
|
|
$
|
131,950
|
|
|
$
|
215,672
|
|
Institutional trading revenue
|
|
|
13,589
|
|
|
|
11,012
|
|
|
|
21,107
|
|
|
|
18,439
|
|
|
|
11,695
|
|
|
|
5,610
|
|
|
|
95
|
|
Interest income
|
|
|
1,005
|
|
|
|
638
|
|
|
|
1,289
|
|
|
|
9,085
|
|
|
|
16,357
|
|
|
|
11,112
|
|
|
|
4,501
|
|
Other income
|
|
|
4,205
|
|
|
|
4,837
|
|
|
|
8,666
|
|
|
|
13,731
|
|
|
|
11,535
|
|
|
|
16,000
|
|
|
|
2,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
173,622
|
|
|
|
171,704
|
|
|
|
322,730
|
|
|
|
322,640
|
|
|
|
184,522
|
|
|
|
164,672
|
|
|
|
222,451
|
|
Referring broker fees
|
|
|
37,073
|
|
|
|
44,004
|
|
|
|
76,628
|
|
|
|
64,567
|
|
|
|
33,211
|
|
|
|
51,360
|
|
|
|
49,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
|
136,549
|
|
|
|
127,700
|
|
|
|
246,102
|
|
|
|
258,073
|
|
|
|
151,311
|
|
|
|
113,312
|
|
|
|
173,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
34,499
|
|
|
|
29,292
|
|
|
|
62,588
|
|
|
|
54,578
|
|
|
|
53,575
|
|
|
|
48,669
|
|
|
|
33,281
|
|
Advertising and marketing
|
|
|
11,315
|
|
|
|
16,911
|
|
|
|
29,355
|
|
|
|
24,629
|
|
|
|
27,846
|
|
|
|
28,223
|
|
|
|
25,595
|
|
Communication and technology
|
|
|
12,798
|
|
|
|
12,283
|
|
|
|
24,026
|
|
|
|
21,311
|
|
|
|
17,836
|
|
|
|
13,773
|
|
|
|
7,914
|
|
General and administrative
|
|
|
17,614
|
|
|
|
11,775
|
|
|
|
26,453
|
|
|
|
20,247
|
|
|
|
17,037
|
|
|
|
20,917
|
|
|
|
22,604
|
|
Depreciation and amortization
|
|
|
3,461
|
|
|
|
3,104
|
|
|
|
6,542
|
|
|
|
6,095
|
|
|
|
7,364
|
|
|
|
6,732
|
|
|
|
4,326
|
|
Interest expense
|
|
|
51
|
|
|
|
51
|
|
|
|
125
|
|
|
|
2,168
|
|
|
|
1,374
|
|
|
|
34
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
79,738
|
|
|
|
73,416
|
|
|
|
149,089
|
|
|
|
129,028
|
|
|
|
125,032
|
|
|
|
118,348
|
|
|
|
93,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
56,811
|
|
|
|
54,284
|
|
|
|
97,013
|
|
|
|
129,045
|
|
|
|
26,279
|
|
|
|
(5,036
|
)
|
|
|
79,288
|
|
Income tax provision
|
|
|
4,966
|
|
|
|
3,870
|
|
|
|
10,053
|
|
|
|
8,872
|
|
|
|
3,120
|
|
|
|
1,720
|
|
|
|
1,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
51,845
|
|
|
|
50,414
|
|
|
|
86,960
|
|
|
|
120,173
|
|
|
|
23,159
|
|
|
|
(6,756
|
)
|
|
|
77,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
(144
|
)
|
|
|
284
|
|
|
|
452
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
51,701
|
|
|
$
|
50,698
|
|
|
$
|
87,412
|
|
|
$
|
120,174
|
|
|
$
|
23,159
|
|
|
$
|
(6,756
|
)
|
|
$
|
77,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
June 30,
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007(1)
|
|
|
2006(1)(2)
|
|
|
2005(2)
|
|
|
|
(In thousands)
|
|
|
Consolidated Statements of Financial Condition
Data End of Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
153,010
|
|
|
$
|
125,119
|
|
|
$
|
139,858
|
|
|
$
|
179,967
|
|
|
$
|
131,799
|
|
|
$
|
67,631
|
|
|
$
|
75,605
|
|
Cash and cash equivalents, held for customers
|
|
$
|
425,549
|
|
|
$
|
307,894
|
|
|
$
|
353,825
|
|
|
$
|
253,391
|
|
|
$
|
315,440
|
|
|
$
|
253,257
|
|
|
$
|
202,554
|
|
Total assets
|
|
$
|
605,823
|
|
|
$
|
460,054
|
|
|
$
|
517,936
|
|
|
$
|
451,044
|
|
|
$
|
472,564
|
|
|
$
|
364,636
|
|
|
$
|
301,611
|
|
Customer account liabilities
|
|
$
|
425,549
|
|
|
$
|
307,894
|
|
|
$
|
353,825
|
|
|
$
|
253,391
|
|
|
$
|
315,440
|
|
|
$
|
253,257
|
|
|
$
|
202,554
|
|
Total equity
|
|
$
|
141,767
|
|
|
$
|
114,567
|
|
|
$
|
130,788
|
|
|
$
|
140,454
|
|
|
$
|
96,280
|
|
|
$
|
93,851
|
|
|
$
|
89,902
|
|
|
|
|
(1) |
|
In 2005, a shareholder and white label relationship of FXCM
declared bankruptcy, at the time representing 40% of total
revenues, resulting in a significant disruption in the business
that led in large part to the reduction in revenues and the loss
recorded in 2006. As a response to such bankruptcy and its
effects on the business, our senior management initiated
fundamental changes to our business model, including the
decision to transition to an agency model, which became fully
operational in July 2007. |
|
(2) |
|
Financial statements at December 31, 2006 and 2005 and for
the year then ended were prepared on a combined basis. |
59
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements in this discussion regarding industry trends,
our expectations regarding the future performance of our
business, and the other non-historical statements in this
discussion are forward-looking statements. These forward-looking
statements are subject to numerous risks and uncertainties,
including, but not limited to, the risks and uncertainties
described in the Risk Factors section. You should
read the following discussion together with the section entitled
Risk Factors and our consolidated financial
statements and notes thereto included elsewhere in this
prospectus.
The historical financial information discussed in this
Managements Discussion and Analysis of Financial
Condition and Results of Operations reflects the
historical results of operations and financial position of FXCM
Holdings, LLC. This historical financial information does not
give effect to our acquisition of ODL or to the completion of
this offering. See Organizational Structure,
Unaudited Pro Forma Financial Information and
Acquisition of ODL.
OVERVIEW
Business
We are a leading online provider of foreign exchange, or FX,
trading and related services to over 165,000 retail and
institutional customers globally. We offer our customers access
to
over-the-counter,
or OTC, FX markets through our proprietary technology platform.
In a FX trade, a participant buys one currency and
simultaneously sells another, a combination known as a
currency pair. Our platform presents our FX
customers with the best price quotations on up to 56 currency
pairs from up to 17 global banks, financial institutions
and market makers, or FX market makers, which we believe
provides our customers with an efficient and cost-effective way
to trade FX. We utilize what is referred to as agency execution
or an agency model. When our customer executes a trade on the
best price quotation offered by our FX market makers, we act as
a credit intermediary, or riskless principal, simultaneously
entering into offsetting trades with both the customer and the
FX market maker. We earn fees by adding a markup to the price
provided by the FX market makers and generate our trading
revenues based on the volume of transactions, not trading
profits or losses. We believe we are one of the largest retail
FX brokers in the world based on transaction volume, number of
customers and annual revenue, and the largest FX broker that
operates almost exclusively using the agency model.
Industry
Trends
Economic Environment Customer FX trading
volumes are impacted by the volatility levels in markets
including foreign currency and cash equities. Over the past
12 months to June 30, 2010, we have experienced
periods of low and high volatility. The recent fiscal crises in
Greece and other European Union (E.U.) nations elevated FX
market volatility levels across multiple markets, resulting in
an increase in our trading activity during the second quarter of
2010. It is difficult to predict volatility in the FX market.
Competitive Environment The retail FX trading
market is fragmented and highly competitive. Our competitors in
the retail market can be grouped into several broad categories
based on size, business model, product offerings, target
customers and geographic scope of operations. These include
U.S. based retail FX brokers, international multi-product
trading firms, other online trading firms, and international
banks and other financial institutions with significant FX
operations. We expect competition to continue to remain strong
for the foreseeable future.
Regulatory Environment Our business and
industry are highly regulated. Our operating subsidiaries are
regulated in a number of jurisdictions, including the United
States, the United Kingdom (where regulatory passport rights
have been exercised to operate in a number of European Economic
Area jurisdictions), Hong Kong, Australia and Dubai. Upon
the completion of our acquisition of ODL, which is expected to
close in September 2010, we will also be regulated in Japan.
These government regulators and self-regulatory organizations
oversee the conduct of our business in many ways and several
conduct regular examinations to
60
monitor our compliance with applicable statutes and regulations.
For example, recently, in the United States and other
jurisdictions there have been a series of changes to how retail
FX firms are regulated. These changes included substantial
increases in minimum regulatory capital requirements, increased
oversight of third-party solicitors (such as referring brokers)
and increased transparency in the execution of trades. We
believe that regulators across major international markets will
continue to increase the minimum regulatory requirements for
capital, protection of customer assets and transparency of
trading. Examples of recently adopted or currently proposed
regulations from various jurisdictions include limits on the
amount of leverage a customer may use, requiring referring
brokers to be registered, and precluding providers of trading
services from using customer funds to support open positions.
We expect that increased regulatory compliance requirements will
cause some competing firms to leave individual markets or exit
the FX industry and believe that this will present additional
opportunities for the remaining firms, especially agency model
firms like us, to increase market share organically or through
acquisitions. As the industry consolidates, scale will become
increasingly important and may present advantages to larger
firms, such as us, that can meet the stricter requirements,
invest in better technology and promote their brand. However, to
the extent the regulatory environment is less beneficial for us
or our customers or that we cannot capitalize on opportunities,
our business, financial condition and operating results could be
negatively affected.
Business
Strategy
We believe that we can build on our competitive strengths by
implementing the following strategies:
|
|
|
|
|
Continue to use our global brand and marketing to drive organic
customer growth;
|
|
|
|
Make selected acquisitions to expand our customer base or add
presence in markets where we currently have low penetration;
|
|
|
|
Expand our range of products to add new customers and increase
revenues from existing customers; and
|
|
|
|
Capture market share from competitors who are unable to keep
pace with the changing and demanding regulatory landscape while
capitalizing on the long-term benefits associated with a more
transparent financial marketplace and improved industry
reputation among retail investing communities.
|
Primary
Sources of Revenues
Most of our revenues are derived from fees charged as a
commission or markup when our retail or institutional customers
execute trades on our platform with our FX market makers. This
revenue is primarily a function of the number of active
accounts, the volume those accounts trade and the fees we earn
on that volume.
Retail Trading Revenue Retail trading revenue
is our largest source of revenue and is primarily driven by:
(i) the number of active accounts and the mix of those
accounts, such as low versus high volume accounts; (ii) the
volume these accounts trade which is driven by the amount of
funds customers have on deposit and the overall volatility of
the FX market; (iii) the size of the markup we receive
which is a function of the mix of currency pairs traded, the
spread we add to the prices supplied by our FX market makers and
the interest differential between major currencies and the
markup we receive on interest paid and received on customer
positions held overnight; and (iv) the amount of additional
retail revenues earned, including revenues from contracts-for
difference (CFD) trading, fees earned through white label
relationships and payments we receive for order flow from FX
market makers.
Institutional Trading Revenue We generate
revenue by executing spot foreign currency trades on behalf of
institutional customers through our institutional trading
segment, FXCM Pro, enabling them to obtain optimal prices
offered by our FX market makers. The counterparties to these
trades are external financial institutions that hold customer
account balances and settle these transactions. We receive
commissions for these services without incurring credit or
market risk.
61
Other We are engaged in various ancillary FX
related services and joint ventures, including use of our
platform and trading facilities, providing technical expertise,
and earning fees from data licensing.
Referring Broker Fees Referring broker fees
consist primarily of compensation paid to our referring brokers
and white labels. We generally provide white labels access to
our platform, systems and back-office services necessary for
them to offer FX trading services to their customers. We also
establish relationships with referring brokers that identify and
direct potential FX trading customers to our platform. Referring
brokers and white labels generally incur advertising, marketing
and other expenses associated with attracting the customers they
direct to our platform. Accordingly, we do not incur any
incremental sales or marketing expense in connection with
trading revenue generated by customers provided through our
referring brokers
and/or white
labels. We do, however, pay a portion of the FX trading revenue
generated by the customers of our referring brokers
and/or white
labels and record this under referring broker fees.
Primary
Expenses
Compensation and Benefits Compensation and
benefits expense includes employee and member salaries, bonuses,
benefits and employer taxes. Changes in this expense are driven
by fluctuations in the number of employees, increases in wages
as a result of inflation or labor market conditions, changes in
rates for employer taxes and other cost increases affecting
benefit plans. In addition, this expense is affected by the
composition of our work force. The expense associated with our
bonus plans can also have a significant impact on this expense
category and may vary from year to year.
As described in Management IPO Date Stock
Option Awards to Employees, at the time of this offering
we intend to grant awards of stock options to purchase an
aggregate
of shares
of our Class A common stock pursuant to the Long-Term
Incentive Plan to certain of our employees. Each stock option to
purchase our Class A common stock will have an exercise
price equal to the initial public offering price per share in
this offering and, subject to the option holders continued
employment, vest in equal annual installments over a four year
period. As a result, we expect to record deferred stock-based
compensation equal to the grant-date fair value of the stock
options issued of $ million,
which will be recognized over the four year vesting period and
recorded into the expense category in accordance with the manner
in which the option holders other compensation is recorded.
Advertising and Marketing Advertising and
marketing expense consists primarily of electronic media, print
and other advertising costs, as well as costs associated with
our brand campaign and product promotion.
Communications and Technology Communications
and technology expense consists primarily of costs for network
connections to our electronic trading platforms;
telecommunications costs; and fees paid for access to external
market data. This expense is affected primarily by the growth of
electronic trading, our network/platform capacity requirements
and by changes in the number of telecommunication hubs and
connections which provide our customers with direct access to
our electronic trading platforms.
General and Administrative We incur general
and administrative costs to support our operations, including:
|
|
|
|
|
Professional fees and outside services
expenses consisting primarily of legal,
accounting and outsourcing fees;
|
|
|
|
Bank processing fees consisting of service
fees charged by banks primarily related to our customer deposits
and withdrawals;
|
|
|
|
Regulatory fees consisting primarily of fees
from regulators overseeing our businesses which are largely tied
to our overall trading revenues; and
|
|
|
|
Occupancy and building operations expense
consisting primarily of costs related to leased
and/or owned
property including rent, maintenance, real estate taxes,
utilities and other related costs. Our
|
62
|
|
|
|
|
company headquarters are located in New York, NY, with other
U.S. offices in Plano, TX and San Francisco, CA.
Outside the United States, we have offices in London, Paris,
Berlin, Hong Kong, Dubai, and Sydney. Following the completion
of our acquisition of ODL, which is expected to close in
September 2010, we will have office space in Tokyo.
|
We expect that our general and administrative expenses will
increase as a result of the additional legal, accounting,
insurance and other expenses associated with being a public
company. Among other things, we expect that compliance with the
Sarbanes-Oxley Act and related rules and regulations will result
in a significant increase in legal and accounting costs.
Depreciation and Amortization Depreciation
and amortization expense results from the depreciation of
long-lived assets purchased and internally developed software
that has been capitalized. Amortization of purchased intangibles
primarily includes amortization of intangible assets obtained in
our acquisitions of customer relationships from our competitors.
Income Taxes We are currently, and will until
consummation of the Offering Transactions be, treated as a
partnership for the purposes of U.S. federal and most
applicable state and local income tax. As a partnership, our
taxable income or loss is currently passed through to, and
included in the tax returns of our members. Accordingly, the
accompanying consolidated financial statements of FXCM Holdings,
LLC do not include a provision for federal and most state and
local income taxes. However, we generally make distributions to
our members, as required by the terms of our limited liability
company agreement, related to such taxes. We are subject to
entity level taxation in New York City, and certain foreign
subsidiaries are subject to entity level foreign income taxes.
As a result, the accompanying consolidated statements of income
include tax expense related jurisdictions where those
subsidiaries operate.
After consummation of the Offering Transactions, FXCM Inc. will
become subject to U.S. federal, state, local and foreign
income taxes with respect to its allocable share of any taxable
income of FXCM Holdings, LLC at the prevailing corporate tax
rates.
Other
Non-Controlling Interest After consummation
of the Offering Transactions, FXCM Inc. will be a holding
company, and its sole material asset will be a controlling
equity interest in FXCM Holdings, LLC. As the sole managing
member of FXCM Holdings, LLC, FXCM Inc. will operate and control
all of the business and affairs of FXCM Holdings, LLC and,
through FXCM Holdings, LLC and its subsidiaries, conduct our
business. FXCM Inc. will consolidate the financial results of
FXCM Holdings, LLC and its subsidiaries, and the ownership
interest of the other members of FXCM Holdings, LLC will be
reflected as a non-controlling interest in the consolidated
financial statements of FXCM Inc.
Segment
Information
The FASB establishes standards for reporting information about
operating segments. Operating segments are defined as components
of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating
decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. FXCMs
operations relate to foreign exchange trading and related
services and operate in two segments retail and
institutional, with different target markets with separate sales
forces, customer support and trading platforms.
63
RESULTS
OF OPERATIONS
Consolidated
Results
Six
Months Ended June 30, 2010 and 2009
The following table sets forth our consolidated statement of
operations and comprehensive income for the six months ended
June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Retail trading revenue
|
|
$
|
154,823
|
|
|
$
|
155,217
|
|
Institutional trading revenue
|
|
|
13,589
|
|
|
|
11,012
|
|
Interest income
|
|
|
1,005
|
|
|
|
638
|
|
Other income
|
|
|
4,205
|
|
|
|
4,837
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
173,622
|
|
|
|
171,704
|
|
Referring broker fees
|
|
|
37,073
|
|
|
|
44,004
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
|
136,549
|
|
|
|
127,700
|
|
Expenses
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
34,499
|
|
|
|
29,292
|
|
Advertising and marketing
|
|
|
11,315
|
|
|
|
16,911
|
|
Communications and technology
|
|
|
12,798
|
|
|
|
12,283
|
|
General and administrative
|
|
|
17,614
|
|
|
|
11,775
|
|
Depreciation and amortization
|
|
|
3,461
|
|
|
|
3,104
|
|
Interest expense
|
|
|
51
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
79,738
|
|
|
|
73,416
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
56,811
|
|
|
|
54,284
|
|
Income tax provision
|
|
|
4,966
|
|
|
|
3,870
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
51,845
|
|
|
|
50,414
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
Foreign currency translation gain (loss)
|
|
|
(144
|
)
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
51,701
|
|
|
$
|
50,698
|
|
|
|
|
|
|
|
|
|
|
Highlights
|
|
|
|
|
For the six months ended June 30, 2010 compared to the six
months ended June 30, 2009, we experienced strong growth in
customer balances with a 38% increase in customer equity to
$425.5 million and a 21% increase in active accounts to
131,778. Retail trading volume declined 11%, however, primarily
from lower trading activity from South Korean referring brokers
as a result of regulatory changes in that market that occurred
in 2009.
|
|
|
|
Total revenues less referring broker fees increased 7% to
$136.5 million for the six months ended June 30, 2010
compared to the six months ended June 30, 2009. This
increase was due primarily to increases in institutional trading
revenue and decreases in referring broker fees, partially offset
by a small decrease in retail trading revenue. Retail trading
revenues were slightly lower based on the decline in volume that
was largely offset by the inclusion of CFD trading, a new
product offering introduced in September 2009, increased
payments for order flow and higher fees from our white labels.
|
64
|
|
|
|
|
Net income increased 3% to $51.8 million for the six months
ended June 30, 2010 compared to the six months ended
June 30, 2009 as increases in revenues were partially
offset by increases in total expenses and our effective tax rate.
|
|
|
|
In May 2010, we signed a stock purchase agreement to acquire
ODL, a leading broker of retail FX, CFDs, spread betting, and
equity options headquartered in the U.K. Our acquisition of ODL
is intended to increase our profile in the U.K. market and
accelerate our growth in continental Europe, utilizing
ODLs relationships and sales force. We expect to close our
acquisition of ODL in September 2010.
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Retail trading revenue
|
|
$
|
154,823
|
|
|
$
|
155,217
|
|
Institutional trading revenue
|
|
|
13,589
|
|
|
|
11,012
|
|
Interest income
|
|
|
1,005
|
|
|
|
638
|
|
Other income
|
|
|
4,205
|
|
|
|
4,837
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
173,622
|
|
|
|
171,704
|
|
|
|
|
|
|
|
|
|
|
Referring broker fees
|
|
|
37,073
|
|
|
|
44,004
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
$
|
136,549
|
|
|
$
|
127,700
|
|
|
|
|
|
|
|
|
|
|
Customer equity
|
|
$
|
425,549
|
|
|
$
|
307,894
|
|
Tradeable accounts
|
|
|
165,287
|
|
|
|
126,489
|
|
Active accounts
|
|
|
131,778
|
|
|
|
109,150
|
|
Total retail trading volume(1) (billions)
|
|
$
|
1,566
|
|
|
$
|
1,750
|
|
Retail trading revenue per million traded(1)
|
|
$
|
99
|
|
|
$
|
89
|
|
|
|
|
(1) |
|
Volumes translated into equivalent U.S. dollars |
Retail trading revenue decreased $0.4 million or 0.3% to
$154.8 million for the six months ended June 30, 2010
compared to the six months ended June 30, 2009. Retail
trading volume decreased by 11%, 90% of the decline was due to
lower trading activity from our South Korean referring brokers.
In April 2009, new regulations were introduced that required
South Korean referring brokers to trade with at least two FX
brokers or market makers resulting in less trading activity from
referring brokers with which we had previously an exclusive
relationship. In September 2009 margin requirements were
increased, which also had a negative impact on volume. As a
percentage of total volume traded, South Korean customers, which
had accounted for 18% of our volume for the six months ended
June 30, 2009, declined to 11% for the six months ended
June 30, 2010.
This decline in trading volume was almost completely offset by
an 10% increase in markup or retail trading revenue per million
traded, due primarily to the inclusion of revenues from CFD
trading, a new product offering introduced in September 2009,
increased payments for order flow and higher fees from our white
label relationships.
Institutional trading revenue increased $2.6 million or 23%
to $13.6 million for the six months ended June 30,
2010 compared to the six months ended June 30, 2009. Our
institutional business grew through continuing expansion of its
customer base and a reduction in the number of competitors in
2009.
Interest income increased by $0.4 million or 58% to
$1.0 million for the six months ended June 30, 2010
compared to the six months ended June 30, 2009 due
primarily to cash balances which increased by 38% at
June 30, 2010 versus June 30, 2009. In addition, the
average interest rate received on our cash balances
65
increased to 0.4% for the six months ended June 30, 2010
compared to 0.3% for the six months ended June 30, 2009.
Other income decreased by $0.6 million or 13% to
$4.2 million for the six months ended June 30, 2010
compared to the six months ended June 30, 2009 due
primarily to the elimination of $1.0 million in trading
execution and support fees from FXCM Japan, Inc., or FXCM Japan,
a third party, partially offset by $0.6 million in
increased data licensing fees. Effective June 2009, we
renegotiated our business arrangement with FXCM Japan from a
fixed fee arrangement to a variable fee arrangement.
Referring broker fees decreased $6.9 million or 16% to
$37.1 million for the six months ended June 30, 2010
compared to the six months ended June 30, 2009. In the
first six months of 2010, there was a decrease in the proportion
of volume attributable to South Korean referring brokers which
typically are large and have higher-cost commission arrangements.
Expenses
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
34,499
|
|
|
$
|
29,292
|
|
Advertising and marketing
|
|
|
11,315
|
|
|
|
16,911
|
|
Communications and technology
|
|
|
12,798
|
|
|
|
12,283
|
|
General and administrative
|
|
|
17,614
|
|
|
|
11,775
|
|
Depreciation and amortization
|
|
|
3,461
|
|
|
|
3,104
|
|
Interest expense
|
|
|
51
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
79,738
|
|
|
$
|
73,416
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits expense increased by $5.2 million
or 18% to $34.5 million for the six months ended
June 30, 2010 compared to the six months ended
June 30, 2009, due primarily to an 11% increase in
headcount from 652 to 726 employees, mostly in our sales
and operations departments reflecting our higher level of
business activity.
Advertising and marketing expense decreased by $5.6 million
or 33% to $11.3 million for the six months ended
June 30, 2010 compared to the six months ended
June 30, 2009 as advertising purchases returned to more
normalized levels. In the six months ended June 30, 2009,
we incurred higher advertising and marketing expense as we took
advantage of attractive pricing of electronic media as well as
initiated a campaign to increase customer account balances that
had declined in the second half of 2008 with the difficult
trading environment resulting from the global financial crisis.
Communications and technology expense increased by
$0.5 million or 4% to $12.8 million for the six months
ended June 30, 2010 compared to the six months ended
June 30, 2009 due to enhanced network capacity requirements.
General and administrative expense increased by
$5.8 million or 50% to $17.6 million for the six
months ended June 30, 2010 compared to the six months ended
June 30, 2009, due primarily to $2.5 million of
professional fees and other expenses resulting from our
acquisition of ODL, $0.8 million of expenses relating to
the write-off of advances made to a software developer,
$0.5 million due to the expansion of operations support
activities, and $0.4 million due to increased rent and
occupancy expenses resulting from additional branch office
openings in Europe and the move of our Hong Kong office.
Depreciation and amortization expense increased by
$0.4 million or 12% to $3.5 million for the six months
ended June 30, 2010 compared to the six months ended
June 30, 2009 as we financed a portion of our server and
technology upgrades through capital expenditures as opposed to
financing through operating leases.
66
Interest expense was primarily unchanged at $0.1 million
for the six months ended June 30, 2010 compared to the six
months ended June 30, 2009 as interest bearing customer
accounts remained nominal.
Income
Taxes
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
June 30,
|
|
|
2010
|
|
2009
|
|
|
(In thousands, except percentages)
|
|
Income before income taxes
|
|
$
|
56,811
|
|
|
$
|
54,284
|
|
Income tax provision
|
|
$
|
4,966
|
|
|
$
|
3,870
|
|
Effective tax rate
|
|
|
8.7
|
%
|
|
|
7.1
|
%
|
Income tax provision increased $1.1 million or 28% to
$5.0 million for the six months ended June 30, 2010
compared to the six months ended June 30, 2009, due to a 5%
increase in our income before taxes and an increase in our
effective tax rate from 7.1% to 8.7%. The effective tax rate
increased for the six months ended June 30, 2010 compared
to June 30, 2009 respectively, due to a shift throughout
2009 and the first half of 2010 of trading activity from the
United States to the U.K., increasing the level of business
activity in the U.K. and the provision for income taxes in the
U.K. We are currently treated as a partnership for
U.S. federal and certain state income tax purposes.
Accordingly, shifts in the proportion of income derived in the
United States, generally not subject to federal, state or local
income taxes with the exception of certain unincorporated
business taxes, to the U.K. with a 28% statutory rate, result in
increases in our effective tax rate.
Acquisition
of ODL
In May 2010, we signed a stock purchase agreement to acquire
ODL, a leading broker of retail FX, CFDs, spread betting and
equity options headquartered in the U.K. Our acquisition of ODL
is intended to increase our profile in the U.K. market and
accelerate our growth in continental Europe, utilizing
ODLs relationships and sales force. As consideration we
will issue upon closing to ODL shareholders a 3.5% interest in
FXCM Holdings, LLC and a potential to earn an additional 3.5%
interest in FXCM Holdings, LLC subject to performance to be
measured in the twelve month period ending June, 2011. The
closing of the acquisition is expected to occur in September
2010. To improve ODLs capital, we expect to invest
approximately $11 million shortly thereafter.
We will be recording the assets acquired, measured at their fair
values as pursuant to Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC)
No. 820, Fair Value Measurements and Disclosures
(ASC 820). We expect the acquisition will result in a
significant increase in goodwill and intangible assets in our
statement of financial condition. Intangible assets that we will
be acquiring as part of the transaction include non-compete
agreements, retail customer relationships, institutional
customer relationships, trade name and other items. We expect
the acquisition will result in a significant increase in
amortization of intangible assets in our statement of operations
as these intangible assets are amortized over their estimated
useful lives.
67
Year
Ended December 31, 2009 and 2008
The following table sets forth FXCMs consolidated
statement of operations and comprehensive income for the years
ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Retail trading revenue
|
|
$
|
291,668
|
|
|
$
|
281,385
|
|
Institutional trading revenue
|
|
|
21,107
|
|
|
|
18,439
|
|
Interest income
|
|
|
1,289
|
|
|
|
9,085
|
|
Other income
|
|
|
8,666
|
|
|
|
13,731
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
322,730
|
|
|
$
|
322,640
|
|
Referring broker fees
|
|
|
76,628
|
|
|
|
64,567
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
|
246,102
|
|
|
|
258,073
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
62,588
|
|
|
|
54,578
|
|
Advertising and marketing
|
|
|
29,355
|
|
|
|
24,629
|
|
Communications and technology
|
|
|
24,026
|
|
|
|
21,311
|
|
General and administrative
|
|
|
26,453
|
|
|
|
20,247
|
|
Depreciation and amortization
|
|
|
6,542
|
|
|
|
6,095
|
|
Interest expense
|
|
|
125
|
|
|
|
2,168
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
149,089
|
|
|
|
129,028
|
|
Income before income taxes
|
|
|
97,013
|
|
|
|
129,045
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
10,053
|
|
|
|
8,872
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
86,960
|
|
|
|
120,173
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
452
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
87,412
|
|
|
$
|
120,174
|
|
|
|
|
|
|
|
|
|
|
Highlights
|
|
|
|
|
The year ended December 31, 2009 experienced strong growth
in customer balances with a 40% increase in customer equity to
$353.8 million and a 36% increase in active accounts to
116,919, in large part due to a successful marketing campaign in
the first half of 2009. Total volume in 2009 increased 21%
despite the comparison to the volume levels of 2008 which
benefited from extraordinarily high volatilities and the
significant increases in customer trading volumes brought on by
the global financial crisis of the second half of 2008.
|
|
|
|
Total revenues less referring broker fees decreased 5% to
$246.1 million for the year ended December 31, 2009
compared to the year ended December 31, 2008 due primarily
to increases in retail trading revenues and institutional
trading revenues being more than offset by decreases in interest
income, other income and increases in referring broker fees. The
year ended December 31, 2009 saw continuing declines in
short term interest rates and our referring broker expense
increased due to a shift in the year in volumes derived by some
of our larger referring brokers with higher-cost commission
arrangements.
|
|
|
|
For the year ended December 31, 2009, net income declined
by 28% to $87.0 million due to lower revenues, higher
expenses and a higher effective tax rate.
|
68
Revenues
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Retail trading revenue
|
|
$
|
291,668
|
|
|
$
|
281,385
|
|
Institutional trading revenue
|
|
|
21,107
|
|
|
|
18,439
|
|
Interest income
|
|
|
1,289
|
|
|
|
9,085
|
|
Other income
|
|
|
8,666
|
|
|
|
13,731
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
322,730
|
|
|
|
322,640
|
|
Referring broker fees
|
|
|
76,628
|
|
|
|
64,567
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
$
|
246,102
|
|
|
$
|
258,073
|
|
|
|
|
|
|
|
|
|
|
Customer equity
|
|
$
|
353,825
|
|
|
$
|
253,391
|
|
Tradeable accounts
|
|
|
140,565
|
|
|
|
106,708
|
|
Active accounts
|
|
|
116,919
|
|
|
|
86,149
|
|
Total retail trading volume(1) (billions)
|
|
$
|
3,504
|
|
|
$
|
2,901
|
|
Retail trading revenue per million traded(1)
|
|
$
|
83
|
|
|
$
|
97
|
|
|
|
|
(1) |
|
Volumes translated into equivalent U.S. dollars |
During the year ended December 31, 2009 compared to the
year ended December 31, 2008, retail trading revenue
increased $10.3 million or 4% to $291.7 million as
volumes increased 21%, partially offset by a 14% decline in
retail trading revenue per million traded or retail trading
revenue per million. For the year ended December 31, 2009,
trading volume growth was led by a 40% increase in customer
equity and a 36% increase in active accounts as we initiated a
significant marketing campaign in the first half of 2009 to grow
customer accounts and balances. The decline in markup was due
primarily to declines in income we earn on rollover as the
carry trade, a strategy of buying a currency that
offers a higher interest rate while selling a currency that
offers a lower interest rate, significantly declined with the
narrowing of interest rate differentials globally as well as
lower volatilities in 2009 as compared to 2008.
Institutional trading revenues rose by $2.7 million or 14%
to $21.1 million for the year ended December 31, 2009
compared to the year ended December 31, 2008. Our
institutional business benefited from increases in institutional
demand for trading FX as well as continuing momentum from 2008
where a number of competitors experienced significant
disruptions as they had been using American International Group
(AIG) or Lehman Brothers as their sole prime broker, both of
which faltered in second half of 2008. Our institutional
business maintains multiple prime brokerage relationships for
risk management purposes.
The low interest rate environment caused interest income to fall
$7.8 million or 86% to $1.3 million for the year ended
December 31, 2009 compared to the year ended
December 31, 2008 as short term interest rates continued
their declines to near-zero levels precipitated by the global
financial crisis of the second half of 2008. The average annual
interest rate received on our cash balances declined to 0.3% for
the year ended December 31, 2009 compared to 2.2% for the
year ended December 31, 2008.
Other income decreased 37% or $5.1 million to
$8.7 million for the year ended December 31, 2009
compared to the year ended December 31, 2008 due primarily
to the renegotiation of our arrangement with FXCM Japan,
resulting in $2.0 million lower trading execution and
support fees from, and a one-time recovery of $2.1 million
in bad debt from a former shareholder and white label of FXCM in
2008.
Referring broker fees increased $12.1 million or 19% to
$76.6 million for the year ended December 31, 2009
compared to the year ended December 31, 2008 due to a 4%
increase in retail trading revenue and a shift in volumes during
the year ended December 31, 2009 to some of our larger
referring brokers which have higher-cost commission arrangements.
69
Expenses
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
62,588
|
|
|
$
|
54,578
|
|
Advertising and marketing
|
|
|
29,355
|
|
|
|
24,629
|
|
Communications and technology
|
|
|
24,026
|
|
|
|
21,311
|
|
General and administrative
|
|
|
26,453
|
|
|
|
20,247
|
|
Depreciation and amortization
|
|
|
6,542
|
|
|
|
6,095
|
|
Interest expense
|
|
|
125
|
|
|
|
2,168
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
149,089
|
|
|
$
|
129,028
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits expense increased $8.0 million or
15% to $62.6 million for the year ended December 31,
2009 compared to the year ended December 31, 2008 due
primarily to an increase in staffing levels of 13% from 610 to
687 employees, mostly in our sales and operations
departments reflecting our higher level of business activity as
well as our expansion into new markets including Australia and
France.
Advertising and marketing expense increased $4.7 million or
19% to $29.4 million for the year ended December 31,
2009 compared to the year ended December 31, 2008 as we
took advantage of attractive pricing of electronic media as well
as initiated a campaign to increase customer account balances
that had declined in the second half of 2008 with the difficult
trading environment resulting from the global financial crisis.
Communications and technology expense increased
$2.7 million or 13% to $24.0 million for the year
ended December 31, 2009 compared to the year ended
December 31, 2008 due principally to $1.1 million in
higher service provider fees relating to the growth in our
institutional trading volumes and $1.0 million in expense
relating to capacity increases of our relational database
software.
General and administrative expense increased $6.2 million
or 31% to $26.5 million for the year ended
December 31, 2009 compared to the year ended
December 31, 2008. This was due primarily to
$1.9 million in the write-off of advances made to a
software developer, $1.5 million increase in prime
brokerage fees relating to new prime broker relationships
entered into during the year to enhance our risk and cash
management processes, a $1.1 million increase in bank fees,
$0.8 million for the expansion of operations support
activities of our Israel office and $0.4 million in
increased rent expense attributable to the expansion of our
office in New York and the opening of offices in Dubai and
Australia.
Depreciation and amortization expense rose $0.5 million or
7% to $6.5 million during the year ended December 31,
2009 compared to the year ended December 31, 2008 as we
financed a portion of our server and technology upgrades through
capital expenditures as opposed to financing through operating
leases.
Interest expense declined $2.0 million or 94% to
$0.1 million during the year ended December 31, 2009
compared to the year ended December 31, 2008, due primarily
to the repayment of a note payable to a member as well as lower
interest rates.
Income
Taxes
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
|
(In thousands, except percentages)
|
|
Income before income taxes
|
|
$
|
97,013
|
|
|
$
|
129,045
|
|
Income tax provision
|
|
$
|
10,053
|
|
|
$
|
8,872
|
|
Effective tax rate
|
|
|
10.4
|
%
|
|
|
6.9
|
%
|
Income tax provision increased $1.2 million or 13% to
$10.1 million for the year ended December 31, 2009
compared to the year ended December 31, 2008. While income
before taxes decreased 25%, our effective
70
tax rate increased from 6.9% to 10.4% due primarily to a shift
throughout 2009 of trading activity from the United States to
the U.K., increasing the level of business activity in the U.K.
and the provision for income taxes in the U.K. We are currently
treated as a partnership for U.S. federal and certain state
income tax purposes. Accordingly, changes in the proportion of
income derived in the United States, generally not subject to
federal, state or local income taxes with the exception of
certain unincorporated business taxes, to the U.K. with a 28%
statutory rate, result in increases in our effective tax rate.
Year
Ended December 31, 2008 and 2007
The following table sets forth our consolidated statement of
operations and comprehensive income for the years ended
December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Retail trading revenue
|
|
$
|
281,385
|
|
|
$
|
144,935
|
|
Institutional trading revenue
|
|
|
18,439
|
|
|
|
11,695
|
|
Interest income
|
|
|
9,085
|
|
|
|
16,357
|
|
Other income
|
|
|
13,731
|
|
|
|
11,535
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
322,640
|
|
|
|
184,522
|
|
Referring broker fees
|
|
|
64,567
|
|
|
|
33,211
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
|
258,073
|
|
|
|
151,311
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
54,578
|
|
|
|
53,575
|
|
Advertising and marketing
|
|
|
24,629
|
|
|
|
27,846
|
|
Communications and technology
|
|
|
21,311
|
|
|
|
17,836
|
|
General and administrative
|
|
|
20,247
|
|
|
|
17,037
|
|
Depreciation and amortization
|
|
|
6,095
|
|
|
|
7,364
|
|
Interest expense
|
|
|
2,168
|
|
|
|
1,374
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
129,028
|
|
|
|
125,032
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
129,045
|
|
|
|
26,279
|
|
Income tax provision
|
|
|
8,872
|
|
|
|
3,120
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
120,173
|
|
|
|
23,159
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Foreign currency translation gain
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
120,174
|
|
|
$
|
23,159
|
|
|
|
|
|
|
|
|
|
|
Highlights
|
|
|
|
|
The global financial crisis of the second half of 2008 resulted
in a highly favorable operating environment for us with
extraordinarily high volatilities and significant increases in
customer trading volumes. In contrast, 2007 was a transition
year for us as we completed our migration to the agency model
from the principal model.
|
|
|
|
During the year ended December 31, 2008, total revenues
increased by 75%, due primarily to a 94% increase in retail
trading revenues and a 58% increase in institutional trading
revenues. Total revenues less referring broker fees increased
71% for the year ended December 31, 2008.
|
71
|
|
|
|
|
Net income increased by 419% during the year ended
December 31, 2008 compared to the year ended
December 31, 2007, due primarily to the 71% increase in
total revenues less referring broker fees as compared to only a
3% increase in total expenses.
|
|
|
|
Customer balances declined by 20% to $253.4 million during
the year ended December 31, 2008 in large part due to the
difficult trading environment brought on by the global financial
crisis.
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Retail trading revenue
|
|
$
|
281,385
|
|
|
$
|
144,935
|
|
Institutional trading revenue
|
|
|
18,439
|
|
|
|
11,695
|
|
Interest income
|
|
|
9,085
|
|
|
|
16,357
|
|
Other income
|
|
|
13,731
|
|
|
|
11,535
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
322,640
|
|
|
|
184,522
|
|
Referring broker fees
|
|
|
64,567
|
|
|
|
33,211
|
|
|
|
|
|
|
|
|
|
|
Total revenues less referring broker fees
|
|
$
|
258,073
|
|
|
$
|
151,311
|
|
|
|
|
|
|
|
|
|
|
Customer equity
|
|
$
|
253,391
|
|
|
$
|
315,440
|
|
Tradeable accounts
|
|
|
106,708
|
|
|
|
49,885
|
|
Active accounts
|
|
|
86,149
|
|
|
|
59,541
|
|
Total retail trading volume(1) (billions)
|
|
$
|
2,901
|
|
|
$
|
1,729
|
|
Retail trading revenue per million traded(1)
|
|
$
|
97
|
|
|
$
|
84
|
|
|
|
|
(1) |
|
Volumes translated into equivalent U.S. dollars |
Retail trading revenues increased by $136.5 million or 94%
to $281.4 million for the year ended December 31, 2008
compared to the year ended December 31, 2007. Trading
revenues significantly increased in the latter part of 2008 as a
result of the high volatility brought on by the global financial
crisis. In addition, 2007 revenues were depressed in the first
half of the year as the firm was completing its migration from
the principal model to the agency model.
Institutional trading revenues increased by $6.7 million or
58% to $18.4 million for the year ended December 31,
2008 compared to the year ended December 31, 2007. Our
institutional platform gained significant momentum in 2008 as it
benefited from the large volume increases brought on by the
global financial crisis as well as disruptions a number of
competitors experienced who had been using AIG or Lehman
Brothers as their sole FX prime brokers, both of which faltered
in the second half of 2008. Our institutional business maintains
multiple prime brokerage relationships for risk management
purposes.
Interest income decreased by $7.3 million or 44% to
$9.1 million for the year ended December 31, 2008
compared to the year ended December 31, 2007 as a result of
declines in short term interest rates. The average annual
interest rate received on our cash balances declined to 2.1% for
the year ended December 31, 2008 compared to 4.3% for the
year ended December 31, 2007.
Other income increased by 19% or $2.2 million to
$13.7 million for the year ended December 31, 2008
compared to the year ended December 31, 2007 due to the
one-time recovery in 2008 of $2.1 million in bad debt from
a former shareholder and white label of FXCM.
72
Expenses
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
54,578
|
|
|
$
|
53,575
|
|
Advertising and marketing
|
|
|
24,629
|
|
|
|
27,846
|
|
Communications and technology
|
|
|
21,311
|
|
|
|
17,836
|
|
General and administrative
|
|
|
20,247
|
|
|
|
17,037
|
|
Depreciation and amortization
|
|
|
6,095
|
|
|
|
7,364
|
|
Interest expense
|
|
|
2,168
|
|
|
|
1,374
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
129,028
|
|
|
$
|
125,032
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits expense increased $1.0 million or
2% to $54.6 million for the year ended December 31,
2008 compared to the year ended December 31, 2007. Though
we experienced a 19% increase in general staffing levels from
514 to 610 employees during the year, mostly in our sales,
operations, finance and administration departments reflecting
our higher level of business activity, the increase was largely
offset by a reduction in the compensation for certain of our
senior management. Additionally, we transitioned more back
office operations and sales functions to our Texas office which
operates in a lower cost environment.
Advertising and marketing expense decreased $3.2 million or
12% to $24.6 million in the year ended December 31,
2008 compared to the year ended December 31, 2007 as
certain marketing campaign inefficiencies were identified during
the year and reliance on larger, more expensive digital sites
was reduced.
Communications and technology expense increased
$3.5 million or 19% to $21.3 million for the year
ended December 31, 2008 compared to the year ended
December 31, 2007 principally due to enhanced capacity and
infrastructure.
General and administrative expense increased $3.2 million
or 19% to $20.2 million for the year ended
December 31, 2008 compared to the year ended
December 31, 2007 due primarily to $1.6 million in
increased bank charges as we initiated acceptance of credit
cards resulting in growth in customer deposits and a
$1.2 million increase in NFA fees due to the inception late
in 2007 of regulatory fees by the agency based on customer
volume.
Depreciation and amortization expense decreased
$1.3 million or 17% to $6.1 million for the year ended
December 31, 2008 compared to the year ended
December 31, 2007 due primarily to the termination of a
capital lease and associated amortization relating to our
relational database software.
Interest expense increased $0.8 million or 58% to
$2.2 million for the year ended December 31, 2008
compared to the year ended December 31, 2007 due primarily
to an increase in the interest rate of a promissory note held by
one of the founding members that was amended in 2008.
Income
Taxes
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands,
|
|
|
|
except percentages)
|
|
|
Income before income taxes
|
|
$
|
129,045
|
|
|
$
|
26,279
|
|
Income tax provision
|
|
$
|
8,872
|
|
|
$
|
3,120
|
|
Effective tax rate
|
|
|
6.9
|
%
|
|
|
11.9
|
%
|
Income tax provision increased $5.8 million or 184% to
$8.9 million for the year ended December 31, 2008
compared to the year ended December 31, 2007. This was due
to an increase of $102.8 million or 391% in income before
taxes, partially offset by a reduction in the effective tax rate
from 11.9% to 6.9%. The decrease in the effective tax rate was
due to a higher proportion of our income in 2008 compared to
2007
73
from our U.S. operations relative to our foreign
operations, principally in the U.K. and Hong Kong. We are
currently treated as a partnership for U.S. federal and
certain state income tax purposes. Accordingly, changes in the
proportion of income derived in the United States, generally not
subject to federal, state or local income taxes with the
exception of certain unincorporated business taxes, from the
U.K. and Hong Kong with a 28% and 17% statutory rate
respectively, result in decreases in our effective tax rate.
Segment
Results
Six
Months Ended June 30, 2010 and 2009
Retail Trading Retail Trading is our largest
segment and consists of providing FX trading and related
services to over 165,000 retail customers globally as of
June 30, 2010.
Revenues less referring broker fees, operating expenses and
income before income taxes of the Retail Trading segment for the
six months ended June 30, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Revenues less referring broker fees
|
|
$
|
123,212
|
|
|
$
|
116,933
|
|
Operating expenses
|
|
|
39,164
|
|
|
|
37,243
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
84,048
|
|
|
$
|
79,690
|
|
|
|
|
|
|
|
|
|
|
Revenues less referring broker fees for our Retail Trading
segment increased $6.3 million or 5% to $123.2 million
for the six months ended June 30, 2010 compared to the six
months ended June 30, 2009. While retail trading volume
decreased by 11%, due primarily to decreases in trading from our
South Korean referring brokers as a result of changes in
regulations, declines in volume were offset in part by an 11%
increase in markup or retail trading revenue per million traded,
due primarily to the inclusion of revenues from CFD trading, a
new product segment that was introduced September 2009,
increased payments for order flow and higher fees from our white
labels. In addition, referring broker fees decreased
$7.0 million or 16% to $36.8 million for the six
months ended June 30, 2010 compared to the six months ended
June 30, 2009 as there was a decrease in the proportion of
volume attributable to large referring brokers which typically
have higher-cost commission arrangements.
Operating expenses for our Retail Trading segment increased
$1.9 million or 5% to $39.2 million for the six months
ended June 30, 2010 compared to the six months ended
June 30, 2009 due primarily to higher compensation and
benefits expense partly offset by lower advertising and
marketing expense. Income before income taxes for the Retail
Trading segment increased $4.4 million or 6% to
$84.0 million for the six months ended June 30, 2010
compared to the six months ended June 30, 2009.
Institutional Trading Our Institutional
Trading segment operates under the name FXCM Pro and generates
revenue by executing spot foreign currency trades on behalf of
institutional customers, enabling them to obtain optimal prices
offered by our FX market makers. The counterparties to these
trades are external financial institutions that hold customer
account balances and settle these transactions. We receive
commissions for these services without incurring credit or
market risk.
Revenues less referring broker fees, operating expenses and
income before income taxes of the Institutional Trading segment
for the six months ended June 30, 2010 and 2009 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Revenues less referring broker fees
|
|
$
|
13,265
|
|
|
$
|
10,767
|
|
Operating expenses
|
|
|
8,642
|
|
|
|
8,106
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
4,623
|
|
|
$
|
2,661
|
|
|
|
|
|
|
|
|
|
|
74
Institutional Trading revenue increased $2.5 million or 23%
to $13.3 million for the six months ended June 30,
2010 compared to the six months ended June 30, 2009. The
Institutional Trading segment grew through continuing expansion
of its customer base and an increase in institutional FX trading
volumes.
Operating expenses increased $0.5 million or 7% to
$8.6 million for the six months ended June 30, 2010
compared to the six months ended June 30, 2009 due
primarily to higher compensation and benefits expense resulting
from the increase in business profitability. A significant
portion of compensation and benefits of our Institutional
Trading business is linked to unit profitability.
Corporate Loss before income taxes of the
Corporate segment for the six months ended June 30, 2010
and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Revenues less referring broker fees
|
|
$
|
72
|
|
|
$
|
|
|
Operating expenses
|
|
|
31,932
|
|
|
|
28,067
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
31,860
|
|
|
$
|
28,067
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes increased $3.8 million or 14% to
$31.9 million for the six months ended June 30, 2010
compared to the six months ended June 30, 2009 due
primarily to higher general and administrative costs resulting
from $2.5 million of professional fees and other expenses
relating to our acquisition of ODL, $0.8 million of
expenses relating to expenses relating to the write-off of
advances made to a software developer, $0.5 million due to
the expansion of operations support activities of our Israel
office, and $0.4 million due to increased rent and
occupancy expenses resulting from additional branch office
openings in Europe and the move of our Hong Kong office.
Years
Ended December 31, 2009, 2008 and 2007
Retail Trading Revenues less referring broker
fees, operating expenses and income before income taxes of the
Retail Trading segment for the years ended December 31,
2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Revenues less referring broker fees
|
|
$
|
225,492
|
|
|
$
|
240,505
|
|
Operating expenses
|
|
|
75,723
|
|
|
|
62,714
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
149,769
|
|
|
$
|
177,791
|
|
|
|
|
|
|
|
|
|
|
Revenues less referring broker fees for the Retail Trading
segment declined $15.0 million or 6% for the year ended
December 31, 2009 compared to the year ended
December 31, 2008 as volumes increased 21% but were more
than offset by a 14% decline in markup from $97 per million to
$83 per million as well as an increase in referring broker fees.
For the year ended December 31, 2009, trading volume growth
was led by a 40% increase in customer equity and a 36% increase
in active accounts as the Company initiated a significant
marketing campaign in the first half of 2009 to grow customer
accounts and balances. The decline in markup was due primarily
to declines in income we earn on rollover as the carry
trade significantly declined with the narrowing of
interest rate differentials globally as well as lower
volatilities in 2009 as compared to 2008. The increase in
referring broker fees was due to a shift in volumes during the
year ended December 31, 2009 compared to the year ended
December 31, 2008 to some of our larger referring brokers
which have higher-cost commission arrangements.
Operating expenses increased $13.0 million or 21% to
$75.7 million for the year ended December 31, 2009
compared to the year ended December 31, 2008 due primarily
to an increase in compensation and benefits, as our sales and
operations departments grew with our higher level of business
activity, as well as increases in advertising and marketing
expense as we took advantage of attractive pricing of electronic
media as well as initiated a major campaign to increase customer
account balances. Income before tax provision
75
decreased $28.0 million or 16% to $149.8 million for
the year ended December 31, 2009 compared to the year ended
December 31, 2008 due to the 6% higher revenues less
referring broker fees being more than offset by the 16% increase
in operating expenses.
Revenues less referring broker fees, operating expenses and
income before income taxes of the Retail Trading segment for the
years ended December 31, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Revenues less referring broker fees
|
|
$
|
240,505
|
|
|
$
|
140,055
|
|
Operating expenses
|
|
|
62,714
|
|
|
|
66,531
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
177,791
|
|
|
$
|
73,524
|
|
|
|
|
|
|
|
|
|
|
Revenues less referring broker fees for the Retail Trading
segment increased by $100.5 million or 72% to
$240.5 million for the year ended December 31, 2008
compared to the year ended December 31, 2007. Trading
revenues significantly increased in the latter part of 2008 as a
result of the high volatility brought on by the global financial
crisis. In addition, 2007 revenues were depressed in the first
half of the year as the firm was completing its migration from
the principal model to the agency model.
Operating expenses decreased $3.8 million or 6% to
$62.7 million for the year ended December 31, 2008
compared to the year ended December 31, 2007 due primarily
to decreases in advertising and marketing as certain marketing
campaign inefficiencies were identified during the year and
reliance on larger, more expensive digital sites was reduced.
Income before tax provision increased $104.3 million or
142% to $177.8 million for the year ended December 31,
2008 compared to the year ended December 31, 2007 due to
the increase in revenues coupled with a decrease in operating
expenses.
Institutional Trading Revenues less
referring broker fees, operating expenses and income before
income taxes of the Institutional Trading segment for the years
ended December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Revenues less referring broker fees
|
|
$
|
20,610
|
|
|
$
|
17,568
|
|
Operating expenses
|
|
|
12,594
|
|
|
|
10,717
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
&nbs |