Document and Entity Information
In Billions, except Share data
YearEnded
Dec. 31, 2010
Feb. 10, 2011
Jun. 30, 2010
Document and Entity Information
Document Type
10-K
Amendment Flag
FALSE
Document Period End Date
2010-12-31
Document Fiscal Year Focus
2010
Document Fiscal Period Focus
FY
Trading Symbol
ndaq
Entity Registrant Name
NASDAQ OMX GROUP, INC.
Entity Central Index Key
0001120193
Current Fiscal Year End Date
12/31
Entity Filer Category
Large Accelerated Filer
Entity Common Stock, Shares Outstanding
176,186,830
Entity Well-known Seasoned Issuer
Yes
Entity Public Float
2
Entity Current Reporting Status
Yes
Entity Voluntary Filers
No
Consolidated Balance Sheets(USD $)
In Millions
YearEnded
Dec.31,
2010
2009
Current assets:
Cash and cash equivalents
$315
$594
Restricted cash
60
30
Financial investments, at fair value
253
308
Receivables, net
298
301
Deferred tax assets
13
25
Open clearing contracts:
Derivative positions, at fair value
4,037
2,054
Resale agreements, at contract value
3,441
Other current assets
93
58
Total current assets
8,510
3,370
Non-current restricted cash
105
80
Property and equipment, net
164
164
Non-current deferred tax assets
433
504
Goodwill
5,127
4,800
Intangible assets, net
1,719
1,631
Other assets
149
173
Total assets
16,207
10,722
Current liabilities:
Accounts payable and accrued expenses
142
125
Section 31 fees payable to SEC
82
137
Accrued personnel costs
122
114
Deferred revenue
122
105
Other current liabilities
119
71
Deferred tax liabilities
26
23
Open clearing contracts:
Derivative positions, at fair value
4,037
2,054
Repurchase agreements, at contract value
3,441
Current portion of debt obligations
140
225
Total current liabilities
8,231
2,854
Debt obligations
2,181
1,867
Non-current deferred tax liabilities
698
683
Non-current deferred revenue
170
160
Other liabilities
198
199
Total liabilities
11,478
5,763
Commitments and contingencies
Series A convertible preferred stock
15
NASDAQ OMX stockholders' equity:
Common stock, $0.01 par value, 300,000,000 shares authorized, shares issued: 213,370,086 at December 31, 2010 and 211,713,186 at December 31, 2009; shares outstanding: 175,782,683 at December 31, 2010 and 211,385,464 at December 31, 2009
2
2
Preferred stock, 30,000,000 shares authorized, series A convertible preferred stock: shares issued: 1,600,000 at December 31, 2010 and December 31, 2009; shares outstanding: none at December 31, 2010 and 1,600,000 at December 31, 2009 (classified above at December 31, 2009 as temporary equity)
Additional paid-in capital
3,780
3,736
Common stock in treasury, at cost: 37,587,403 shares at December 31, 2010 and 327,722 shares at December 31, 2009
(796)
(10)
Accumulated other comprehensive loss
(272)
(406)
Retained earnings
2,004
1,610
Total NASDAQ OMX stockholders' equity
4,718
4,932
Noncontrolling interests
11
12
Total equity
4,729
4,944
Total liabilities, series A convertible preferred stock and equity
$16,207
$10,722
Consolidated Balance Sheets (Parenthetical)(USD $)
Dec. 31, 2010
Dec. 31, 2009
Consolidated Balance Sheets
Common stock, par value
$0.01
$0.01
Common stock, shares authorized
300,000,000
300,000,000
Common stock, shares issued
213,370,086
211,713,186
Common stock, shares outstanding
175,782,683
211,385,464
Preferred stock, shares authorized
30,000,000
30,000,000
Preferred stock, series A convertible preferred stock: shares issued
1,600,000
1,600,000
Preferred stock, series A convertible preferred stock: shares outstanding
0
1,600,000
Common stock in treasury, shares
37,587,403
327,722
Consolidated Statements of Income(USD $)
In Millions, except Per Share data
YearEnded
Dec.31,
2010
2009
2008
Revenues
Market Services
$2,700
$2,934
$3,176
Issuer Services
344
330
343
Market Technology
152
145
119
Other
1
2
12
Total revenues
3,197
3,411
3,650
Cost of revenues
Transaction rebates
(1,312)
(1,475)
(1,744)
Brokerage, clearance and exchange fees
(363)
(483)
(446)
Total cost of revenues
(1,675)
(1,958)
(2,190)
Revenues less transaction rebates, brokerage, clearance and exchange fees
1,522
1,453
1,460
Operating Expenses
Compensation and benefits
416
412
401
Marketing and advertising
20
15
19
Depreciation and amortization
103
104
93
Professional and contract services
78
76
72
Computer operations and data communications
58
58
54
Occupancy
88
81
65
Regulatory
35
32
29
Merger and strategic initiatives
4
17
25
General, administrative and other
89
55
62
Total operating expenses
891
850
820
Operating income
631
603
640
Interest income
9
13
35
Interest expense
(102)
(102)
(97)
Dividend and investment income
(3)
2
8
Loss on divestiture of businesses
(11)
Income (loss) from unconsolidated investees, net
2
(107)
27
Loss on sale of investment security
(5)
Gain on sales of businesses
12
Debt conversion expense
(25)
Asset impairment charges
(6)
(13)
(42)
Gain (loss) on foreign currency contracts, net
(58)
Income before income taxes
526
391
513
Income tax provision
137
128
198
Net income
389
263
315
Net (income) loss attributable to noncontrolling interests
6
3
(1)
Net income attributable to NASDAQ OMX
395
266
314
Basic and diluted earnings per share:
Basic earnings per share
1.94
1.3
1.65
Diluted earnings per share
$1.91
$1.25
$1.55
Consolidated Statements of Changes in Equity(USD $)
In Millions, except Share data
Common Stock [Member]
Additional Paid-in Capital [Member]
Common Stock in Treasury at Cost [Member]
Accumulated Other Comprehensive Income (loss) [Member]
Retained Earnings [Member]
Noncontrolling Interests [Member]
Total
Balance at Dec. 31, 2007
1
1,189
(8)
(5)
1,030
2,207
Balance (in shares) at Dec. 31, 2007
138,869,150
Net income (loss)
314
1
315
Change in unrealized losses on derivative financial instruments that qualify as cash flow hedges, net of tax
(7)
(7)
Foreign currency translation, net of tax
(601)
(601)
Employee benefit plan adjustments losses, net of tax
(6)
(6)
Business combination with OMX AB
1
2,266
16
2,283
Business combination with OMX AB (in shares)
60,561,515
Conversion of Convertible Securities
22
22
Conversion of Convertible Securities (in shares)
1,531,451
Adoption of new accounting guidance for 2.50% convertible senior notes
51
51
Amortization and vesting of restricted stock and PSUs
15
(2)
13
Amortization and vesting of restricted stock and PSUs (in shares)
164,507
Stock options exercised, net
23
23
Stock options exercised, net (in shares)
712,860
Other purchases of common stock, net
3
3
Other purchases of common stock, net (in shares)
57,217
Balance at Dec. 31, 2008
2
3,569
(10)
(619)
1,344
17
4,303
Balance (in shares) at Dec. 31, 2008
201,896,700
Net income (loss)
266
(3)
263
Change in unrealized losses on derivative financial instruments that qualify as cash flow hedges, net of tax
1
1
Foreign currency translation, net of tax
215
215
Employee benefit plan adjustments losses, net of tax
(3)
(3)
Conversion of Convertible Securities
118
118
Conversion of Convertible Securities (in shares)
8,246,680
Early extinguishment of a portion of 2.50% convertible senior notes
(3)
(3)
Amortization and vesting of restricted stock and PSUs
20
20
Amortization and vesting of restricted stock and PSUs (in shares)
260,721
Stock options exercised, net
22
22
Stock options exercised, net (in shares)
814,575
Other purchases of common stock, net
7
7
Other purchases of common stock, net (in shares)
166,788
Purchases of subsidiary shares from noncontrolling interests
(2)
(5)
(7)
Sale of subsidiary shares to noncontrolling interests and other adjustments
5
3
8
Balance at Dec. 31, 2009
2
3,736
(406)
1,610
12
4,944
Balance (in shares) at Dec. 31, 2009
211,385,464
Net income (loss)
395
(6)
389
Reclassification adjustment for loss realized in net income on cash flow hedges, net of tax
6
6
Foreign currency translation, net of tax
133
133
Employee benefit plan adjustments losses, net of tax
(3)
(3)
Net unrealized holding gains (losses) on available-for-sale securities, net of tax
(2)
(2)
Share repurchase program
(797)
(797)
Share repurchase program (in shares)
(37,831,647)
(37,587,403)
Conversion of Convertible Securities
16
(1)
15
Conversion of Convertible Securities (in shares)
845,646
Amortization and vesting of restricted stock and PSUs
23
(4)
19
Amortization and vesting of restricted stock and PSUs (in shares)
579,759
Stock options exercised, net
5
9
14
Stock options exercised, net (in shares)
708,731
Other purchases of common stock, net
1
6
7
Other purchases of common stock, net (in shares)
94,730
Purchases of subsidiary shares from noncontrolling interests
(1)
(1)
(2)
Sale of subsidiary shares to noncontrolling interests and other adjustments
6
6
Balance at Dec. 31, 2010
$2
$3,780
$(796)
$(272)
$2,004
$11
$4,729
Balance (in shares) at Dec. 31, 2010
175,782,683
Consolidated Statements of Changes in Equity (Parenthetical)(USD $)
In Millions
YearEnded
Dec.31,
2010
2009
2008
Consolidated Statements of Changes in Equity
Change in unrealized losses on derivative financial instruments that qualify as cash flow hedges, tax
$(3)
$(1)
$4
Foreign currency translation, tax
(98)
(184)
437
Employee benefit plan adjustments, tax
2
6
1
Net unrealized holding gains (losses) on available-for-sale securities, tax
1
Consolidated Statements of Comprehensive Income (Loss)(USD $)
In Millions
YearEnded
Dec.31,
2010
2009
2008
Consolidated Statements of Comprehensive Income (Loss)
Net income
$389
$263
$315
Net unrealized holding losses on available-for-sale investment securities:
Unrealized holding losses arising during the period
(3)
(5)
(35)
Income tax benefit
1
Reclassification adjustment for losses realized in net income on available-for-sale investment security
5
35
Total
(2)
Foreign currency translation gains (losses):
Net foreign currency translation gains (losses)
231
399
(1,038)
Income tax (expense) benefit
(98)
(184)
437
Total
133
215
(601)
Unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses) on cash flow hedges arising during the period
2
(11)
Income tax (expense) benefit
(1)
4
Reclassification adjustment for loss realized in net income on cash flow hedges
9
Income tax benefit recognized in net income during the period
(3)
Total
6
1
(7)
Employee benefit plans:
Employee benefit plan adjustment losses
(5)
(9)
(7)
Income tax benefit
2
6
1
Total
(3)
(3)
(6)
Total other comprehensive income (loss), net of tax
134
213
(614)
Comprehensive income (loss)
523
476
(299)
Comprehensive (income) loss attributable to noncontrolling interests
6
3
(1)
Comprehensive income (loss) attributable to NASDAQ OMX
$529
$479
$(300)
Consolidated Statements of Cash Flows(USD $)
In Millions
YearEnded
Dec.31,
2010
2009
2008
Cash flows from operating activities
Net income
$389
$263
$315
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization
103
104
93
Share-based compensation
33
35
26
Excess tax benefits related to share-based compensation
(2)
(4)
(5)
Loss on divestiture of businesses
11
Provision for bad debts
5
1
4
Charges related to debt refinancing
37
Gain on the early extinguishment of debt obligations
(4)
Deferred taxes, net
(35)
(10)
(107)
Loss on sale of investment security
5
Gain on sales of businesses
(12)
Net (income) loss from unconsolidated investees
(2)
107
(27)
Debt conversion expense
25
Asset retirements and impairment charges
6
13
42
Loss on foreign currency contracts, net
58
Accretion of 2.50% convertible senior notes
14
13
11
Other non-cash items included in net income
2
(2)
2
Net change in operating assets and liabilities, net of effects of acquisitions and divestitures:
Receivables, net
5
33
31
Other assets
(79)
130
(181)
Accounts payable and accrued expenses
4
(125)
20
Section 31 fees payable to SEC
(55)
88
(54)
Accrued personnel costs
2
(41)
21
Deferred revenue
14
4
(42)
Other current liabilities
6
(37)
(9)
Other liabilities
(18)
(4)
18
Cash provided by operating activities
440
582
216
Cash flows from investing activities
Purchases of trading securities
(237)
(607)
(164)
Purchase of equity method investment
(16)
Proceeds from sales and redemptions of trading securities
350
542
Proceeds from sales and redemptions of available-for-sale investment securities
25
15
Proceeds from sales of equity method investments
1
54
Purchases of foreign currency contracts
(13)
Settlement of foreign currency contracts
67
Acquisitions of businesses, net of cash and cash equivalents acquired and purchase accounting adjustments
(190)
(6)
(2,999)
Dispositions of businesses, net of cash and cash equivalents disposed
14
Purchases of property and equipment
(42)
(59)
(55)
Cash used in investing activities
(118)
(53)
(3,149)
Cash flows from financing activities
Proceeds from debt obligations, net of debt issuance costs
2,409
2,422
Payments of debt obligations
(2,216)
(340)
(428)
Cash paid for repurchase of common stock
(797)
Purchases of noncontrolling interests
(2)
(6)
Proceeds from contributions of noncontrolling interests
3
7
Cash inducement payment
(9)
Net proceeds from exercise of warrants
22
Issuances of common stock, net of treasury stock purchases
6
8
8
Excess tax benefits related to share-based compensation
2
4
5
Cash provided by (used in) financing activities
(595)
(336)
2,029
Effect of exchange rate changes on cash and cash equivalents
(6)
27
(47)
Increase (decrease) in cash and cash equivalents
(279)
220
(951)
Cash and cash equivalents at beginning of period
594
374
1,325
Cash and cash equivalents at end of period
315
594
374
Cash paid for:
Interest
53
71
67
Income taxes, net of refund
$148
$153
$266
Organization and Nature of Operations
Organization and Nature of Operations

1. Organization and Nature of Operations

 

We are a leading global exchange group that delivers trading, clearing, exchange technology, securities listing, and public company services across six continents. Our global offerings are diverse and include trading and clearing across multiple asset classes, market data products, financial indexes, capital formation solutions, financial services and market technology products and services. Our technology powers markets across the globe, supporting cash equity trading, derivatives trading, clearing, and settlement and many other functions.

 

In the U.S., we operate The NASDAQ Stock Market, a registered national securities exchange. The NASDAQ Stock Market is the largest single cash equities securities market in the U.S. in terms of listed companies and in the world in terms of share value traded. As of December 31, 2010, The NASDAQ Stock Market was home to 2,778 listed companies with a combined market capitalization of approximately $4.6 trillion. In addition, in the U.S. we operate two additional cash equities trading markets, two options markets, a futures market and a derivatives clearinghouse. We also engage in riskless principal trading of OTC power and gas contracts.

 

In Europe, we operate exchanges in Stockholm (Sweden), Copenhagen (Denmark), Helsinki (Finland), and Iceland as NASDAQ OMX Nordic, and exchanges in Tallinn (Estonia), Riga (Latvia) and Vilnius (Lithuania) as NASDAQ OMX Baltic. Collectively, the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic offer trading in cash equities, bonds, structured products and ETFs, as well as trading and clearing of derivatives and clearing of resale and repurchase agreements. Our Nordic and Baltic operations also offer alternative marketplaces for smaller companies called NASDAQ OMX First North. As of December 31, 2010, the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, together with NASDAQ OMX First North, were home to 780 listed companies with a combined market capitalization of approximately $1.1 trillion.

 

We also operate NASDAQ OMX Armenia. In addition, NASDAQ OMX Commodities operates the world's largest power derivatives exchange, one of Europe's largest carbon exchanges and N2EX, a marketplace for physical U.K. power contracts.

 

In some of the countries where we operate exchanges, we also provide clearing, settlement and depository services.

 

We manage, operate and provide our products and services in three business segments: Market Services, Issuer Services and Market Technology.

 

Market Services

 

Our Market Services segment includes our U.S. and European Transaction Services businesses, as well as our Market Data and Broker Services businesses. We offer trading on multiple exchanges and facilities across several asset classes, including cash equities, derivatives, debt, commodities, structured products and ETFs. In addition, in some of the countries where we operate exchanges, we also provide clearing, settlement and depository services.

 

U.S. Transaction Services

 

In the U.S., we offer trading in cash equity securities, derivatives and ETFs on The NASDAQ Stock Market, The NASDAQ Options Market, NASDAQ OMX PHLX, NASDAQ OMX BX, NASDAQ OMX PSX and NFX, and engage in riskless principal trading of OTC power and gas contracts through NOCC. Our transaction-based platforms in the U.S. provide market participants with the ability to access, process, display and integrate orders and quotes for cash equity securities, derivatives and ETFs. The platforms allow the routing and execution of buy and sell orders as well as the reporting of transactions for cash equity securities, derivatives and ETFs, providing fee-based revenues.

 

Cash Equities Trading

 

The NASDAQ Stock Market is the largest single pool of liquidity for trading U.S.-listed cash equities, matching an average of approximately 18.8% of all U.S. cash equities volume for 2010. In January 2009, we launched a second U.S. cash equities market called NASDAQ OMX BX. With NASDAQ OMX BX, we offer a second quote within the U.S. cash equities marketplace providing our customers enhanced trading choices and pricing flexibility within the U.S. cash equities marketplace. During the year ended December 31, 2010, NASDAQ OMX BX matched an average of approximately 3.3% of all U.S. cash equities volume.

 

In October 2010, we launched a third U.S. cash equities market, called NASDAQ OMX PSX. This new market utilizes a price-size priority model and also runs on INET technology, leveraging the speed and efficiency benefits offered throughout NASDAQ OMX globally.

 

U.S. Derivative Trading and Clearing

 

In the U.S., we operate The NASDAQ Options Market and NASDAQ OMX PHLX for the trading of equity options, ETF options, index options and currency options. As of December 31, 2010, NASDAQ OMX PHLX was the largest options market in the U.S. NASDAQ OMX PHLX operates a hybrid electronic and floor-based market as a distinct market alongside The NASDAQ Options Market. During the year ended December 31, 2010, NASDAQ OMX PHLX and The NASDAQ Options Market had an average combined market share of approximately 27.4% in the U.S. equity options market, consisting of approximately 23.4% at NASDAQ OMX PHLX and approximately 4.0% at The NASDAQ Options Market. Together, the 27.4% represented the largest share of the U.S. equity and ETF options market. Our options trading platforms provide trading opportunities to both retail investors and high frequency trading firms, who tend to prefer electronic trading, and institutional investors, who typically pursue more complex trading strategies and often prefer to trade on the floor.

 

In the U.S., we also operate NFX which offers trading for currency futures and other financial futures. Most futures traded on NFX clear at the OCC. In addition, NFX serves as the designated contract market for interest rate swap futures that are cleared through IDCH.

 

Through IDCH, our majority-owned subsidiary IDCG brings a centrally-cleared solution to the largest segment of the OTC derivatives marketplace, specifically interest rate derivative products. IDCH acts as the CCP for clearing interest rate swap futures contracts. IDCH utilizes NASDAQ OMX matching and clearing technology to clear and settle these interest rate derivative products.

 

With the purchase of the assets of North American Energy Credit and Clearing Corp. in March 2010 by our newly-established subsidiary NOCC, NASDAQ OMX expanded its presence in the OTC energy commodity markets.

 

European Transaction Services

 

Nordic Transaction Services

 

The exchanges that comprise NASDAQ OMX Nordic offer trading for cash equities and bonds, trading and clearing services for derivatives, and clearing services for resale and repurchase agreements. Our platform allows the exchanges to share the same trading system which enables efficient cross-border trading and settlement, cross membership and a single source for Nordic market data.

 

Trading is offered in Nordic securities such as cash equities and depository receipts, warrants, convertibles, rights, fund units, ETFs, bonds and other interest-related products. NASDAQ OMX Stockholm and NASDAQ OMX Copenhagen also offer trading in derivatives, such as stock options and futures, index options and futures, fixed-income options and futures and stock loans. Settlement and registration of cash trading takes place in Sweden, Finland, Denmark and Iceland via the local central securities depositories.

 

On NASDAQ OMX Stockholm, we offer clearing services for fixed-income options and futures, stock options and futures and index options and futures by serving as the CCP. In doing so, we guarantee the completion of the transaction and market participants can thereby limit their counterparty risk. We also act as the counterparty for certain OTC contracts. Beginning in October 2009, most of our cash equity trades on the exchanges that comprise NASDAQ OMX Nordic are centrally cleared by EMCF, a leading European clearinghouse in which we own a 22% equity stake.

 

In September 2010, NASDAQ OMX launched a clearing service for resale and repurchase agreements. As a result of an agreement between the Swedish Money Market Council and NASDAQ OMX, the entire Swedish Interbank resale and repurchase market will ultimately be cleared through NASDAQ OMX Stockholm.

 

For further discussion of our Nordic clearing operations, see "Derivative Positions, at Fair Value," and "Resale and Repurchase Agreements, at Contract Value," of Note 2, "Summary of Significant Accounting Policies."

 

In 2009, NASDAQ OMX expanded its trading offering to include cash equities listed in Norway and launched a new portfolio of Norwegian derivatives products. The offering is designed to provide lower trading costs and other benefits for customers seeking to trade all Nordic equity products on one platform.

 

Baltic Transaction Services

 

NASDAQ OMX Baltic operations comprise the exchanges in Tallinn (Estonia), Riga (Latvia) and Vilnius (Lithuania). During the first quarter of 2010, we acquired the remaining 7% minority holding in NASDAQ OMX Tallinn and an additional ownership stake of 0.4% in NASDAQ OMX Vilnius, both for immaterial amounts. As of December 31, 2010, NASDAQ OMX owns 100% of NASDAQ OMX Tallinn, 95% of NASDAQ OMX Vilnius and 93% of NASDAQ OMX Riga. In addition, NASDAQ OMX Tallinn owns 100% of the central securities depository in Estonia, NASDAQ OMX Riga owns 100% of the central securities depository in Latvia, and NASDAQ OMX Vilnius owns 40% of the central securities depository in Lithuania.

 

The exchanges that comprise NASDAQ OMX Baltic offer their members trading, clearing, payment and custody services. Issuers, primarily large local companies, are offered listing and a distribution network for their securities. The securities traded are mainly cash equities, bonds and treasury bills. Clearing, payment and custody services are offered through the central securities depositories in Estonia, Latvia and Lithuania. In addition, in Estonia and Latvia, NASDAQ OMX offers registry maintenance of fund units included in obligatory pension funds, and in Estonia, NASDAQ OMX offers the maintenance of shareholder registers for listed companies. The Baltic central securities depositories offer a complete range of cross-border settlement services.

 

Pan-European Transaction Services

 

In the second quarter of 2010, we made a strategic decision to close the business of NEURO. We retained our London office and data hub, where we support trading and market data clients, run the U.K. power exchange N2EX, and manage our overseas listings operation. As a result of this decision, we recorded a loss of $6 million in the second quarter of 2010. This charge was included in loss on divestiture of businesses in the Consolidated Statements of Income for the year ended December 31, 2010. Our decision to close the business of NEURO will not have a significant impact on our future results of operations.

 

Commodities Trading and Clearing

 

NASDAQ OMX Commodities offers derivatives and carbon products, operates a clearing business and offers consulting services to commodities markets globally. With our acquisition of Nord Pool, NASDAQ OMX Commodities' offering now includes the world's largest power derivatives exchange and one of Europe's largest carbon exchanges.

 

NASDAQ OMX Commodities has 361 members across a wide range of energy producers and consumers, as well as financial institutions. NASDAQ OMX Commodities' offering is designed for banks, brokers, hedge funds and other financial institutions, as well as power utilities, industrial, manufacturing and oil companies. NASDAQ OMX Commodities offers clearing services for energy derivative and carbon product contracts by serving as the CCP. In doing so, we guarantee the completion of the transaction and market participants can thereby limit their counterparty risk. We also act as the counterparty for certain trades on OTC derivative contracts.

 

In January 2010, NASDAQ OMX Commodities and Nord Pool Spot launched N2EX, a marketplace for physical UK power contracts.

 

For further discussion of our NASDAQ OMX Commodities clearing operations, see "Derivative Positions, at Fair Value," of Note 2, "Summary of Significant Accounting Policies."

 

Access Services

 

We provide market participants with several alternatives for accessing our markets for a fee. We provide co-location services to market participants whereby firms may lease space for equipment within our data center. These participants are charged monthly fees for cabinet space, connectivity and support. We also earn revenues from annual and monthly exchange membership and registration fees.

 

Market Data

 

We earn Market Data revenues from U.S. tape plans and U.S. and European proprietary market data products.

 

Net U.S. Tape Plans

 

The NASDAQ Stock Market operates as the exclusive Securities Information Processor of the UTP Plan for the collection and dissemination of best bid and offer information and last transaction information from markets that quote and trade in NASDAQ-listed securities. The NASDAQ Stock Market, NASDAQ OMX BX and NASDAQ OMX PSX are participants in the UTP Plan and share in the net distribution of revenue according to the plan on the same terms as the other plan participants. In the role as the Securities Information Processor, The NASDAQ Stock Market collects and disseminates quotation and last sale information for all transactions in NASDAQ-listed securities whether traded on The NASDAQ Stock Market or other exchanges. We sell this information to market participants and to data distributors, who then provide the information to subscribers. After deducting costs associated with our role as an exclusive Securities Information Processor, as permitted under the revenue sharing provision of the UTP Plan, we distribute the tape revenues to the respective UTP Plan participants, including The NASDAQ Stock Market, NASDAQ OMX BX and NASDAQ OMX PSX, based on a formula required by Regulation NMS that takes into account both trading and quoting activity. In addition, all quotes and trades in NYSE- and NYSE Amex-listed securities are reported and disseminated in real time, and as such, we share in the tape revenues for information on NYSE- and NYSE Amex-listed securities.

 

U.S. Market Data Products

 

Our market data products enhance transparency and provide critical information to professional and non-professional investors. We collect, process and create information and earn revenues as a distributor of our own, as well as select third-party content. We provide varying levels of quote and trade information to market participants and to data distributors, who in turn provide subscriptions for this information. Our systems enable distributors to gain direct access to our market depth, index values, mutual fund valuation, order imbalances, market sentiment and other analytical data. We earn revenues primarily based on the number of data subscribers and distributors of our data.

 

European Market Data Products

 

The exchanges that comprise NASDAQ OMX Nordic, NASDAQ OMX Baltic and NASDAQ OMX Commodities offer European market data products and services. These data products and services provide critical market transparency to professional and non-professional investors who participate in European marketplaces and, at the same time, give investors greater insight into these markets.

 

European market data products and services are based on the trading information from the exchanges that comprise NASDAQ OMX Nordic, NASDAQ OMX Baltic and NASDAQ OMX Commodities for four classes of assets: cash equities, bonds, derivatives and commodities. We provide varying levels of quote and trade information to market participants and to data distributors, who in turn provide subscriptions for this information. Revenues from European market data are subscription-based and are generated primarily based on the number of data subscribers and distributors of our data.

 

Broker Services

 

Our Broker Services operations offer technology and customized securities administration solutions to financial participants in the Nordic market. Broker Services provide services through a registered securities company which is regulated by the SFSA. The primary services consist of flexible back-office systems, which allow customers to entirely or partly outsource their company's back-office functions.

 

We offer customer and account registration, business registration, clearing and settlement, corporate action handling for reconciliations and reporting to authorities. Available services also include direct settlement with the Nordic central securities depositories, real-time updating and communication via SWIFT to deposit banks. Revenues are based on a fixed basic fee for back-office brokerage services, such as administration or licensing, maintenance and operations, and a variable portion that depends on the number of transactions completed.

 

Acquisition of FTEN

 

In December 2010, we completed our acquisition of FTEN, a leading provider of RTRM solutions for the financial securities market. As a market leader in RTRM, FTEN is well positioned to grow as the industry is becoming more focused on solutions for effectively managing risk. Market participants are seeking tools that provide real-time, low latency enterprise-wide risk management, market awareness and control. FTEN's technology provides broker-dealers and their clients the ability to manage risk more effectively in real-time, which leads to better utilization of capital as well as improved regulatory compliance. We will offer FTEN solutions to our global base of broker-dealers and the international exchange community. For further discussion of our FTEN acquisition, see Note 3, "Acquisitions and Strategic Initiatives."

 

Issuer Services

 

Our Issuer Services segment includes our Global Listing Services and Global Index Group businesses.

 

We operate a variety of listing platforms around the world to provide multiple global capital raising solutions for private and public companies. Our main listing markets are The NASDAQ Stock Market and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic. We offer a consolidated global listing application to companies to enable them to apply for listing on The NASDAQ Stock Market and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, as well as NASDAQ Dubai.

 

Global Listing Services

 

Our Global Listing Services business includes our U.S. Listings, European Listings and Corporate Solutions businesses.

 

U.S. Listings

 

Companies listed on The NASDAQ Stock Market represent a diverse array of industries including health care, consumer products, telecommunication services, information technology, financial services, industrials and energy. There are three types of fees applicable to companies that list on The NASDAQ Stock Market: an annual renewal fee, a listing of additional shares fees and an initial listing fee. Annual renewal fees for securities listed on The NASDAQ Stock Market are based on total shares outstanding. The fee for listing of additional shares is also based on the total shares outstanding, which we review quarterly, and the initial listing fee for securities listed on The NASDAQ Stock Market includes a listing application fee and a total shares outstanding fee.

 

European Listings

 

We also offer listings on our Nordic and Baltic exchanges and NASDAQ OMX First North. Revenues are generated through annual fees paid by companies listed on these exchanges, which are measured in terms of the listed company's market capitalization on a trailing 12-month basis. Our European listing customers are organizations such as companies, funds or governments that issue and list securities on the exchanges of NASDAQ OMX Nordic and NASDAQ OMX Baltic. Customers issue securities in the forms of cash equities, depository receipts, warrants, ETFs, convertibles, rights, options, bonds and fixed-income related products.

 

For smaller companies and growth companies, we offer access to the financial markets through the NASDAQ OMX First North alternative marketplaces.

 

Corporate Solutions

 

Our Corporate Solutions business provides customer support services, products and programs to companies, including companies listed on our exchanges. Through our Corporate Solutions offerings, companies gain access to innovative products and services that ease transparency, mitigate risk, maximize board efficiency and facilitate better corporate governance.

 

Acquisition of Zoomvision Mamato

 

In December 2010, we completed our acquisition of ZVM, a provider of webcasting and investor relations communication services for companies in the Nordic regions. ZVM, which is the leading provider of webcasting services in Northern Europe, will add to the growing range of capabilities and services NASDAQ OMX offers public and private companies in the U.S. and Europe.

 

Global Index Group

 

We develop and license NASDAQ OMX branded indexes, associated derivatives and financial products as part of our Global Index Group. We believe that these indexes and products leverage, extend and enhance the NASDAQ OMX brand. License fees for our trademark licenses vary by product based on a percentage of underlying assets, dollar value of a product issuance, number of products or number of contracts traded. In addition to generating licensing revenues, these products, particularly mutual funds and ETFs, lead to increased investments in companies listed on our global exchanges, which enhances our ability to attract new listings. We also license cash-settled options, futures and options on futures on our indexes.

 

Market Technology

 

The Market Technology segment delivers technology and services to marketplaces, brokers and regulators throughout the world. Market Technology provides technology solutions for trading, clearing, settlement, and information dissemination, and also offers facility management integration, surveillance solutions and advisory services to over 70 exchanges, clearing organizations and central securities depositories in more than 50 countries. We serve as a technology partner to some of the world's most prominent exchanges, and we also provide critical technical support to start-ups and new entrants in the exchange space. Revenues are derived from the following primary sources:

 

  •  

license, support and facility management revenues;

 

  •  

delivery project revenues; and

 

  •  

change request, advisory and broker surveillance revenues

 

License and support revenues are derived from the system solutions developed and sold by NASDAQ OMX. After we have developed and sold a system solution, the customer licenses the right to use the software and may require post contract support and other services. Facility management revenues are derived when NASDAQ OMX assumes responsibility for the continuous operation of a system platform for a customer.

 

Delivery project revenues are derived from the installation phase of the system solutions developed and sold by NASDAQ OMX. The majority of our delivery projects involve individual adaptations to the specific requirements of the customer, such as those relating to functionality and capacity.

 

Change request revenues include customer specific adaptations and modifications of the system solution sold by NASDAQ OMX after delivery has occurred. Advisory services are designed to support our customers' strategies and help them with critical decisions in a highly demanding business environment. Broker surveillance revenues are derived from surveillance solutions targeting brokers and regulators throughout the world.

 

In August 2010, we completed our acquisition of SMARTS, a leading technology provider of surveillance solutions to exchanges, regulators and brokers. This acquisition is part of our strategy to diversify our Market Technology business and enter the broker surveillance and compliance market. We believe that this acquisition will strengthen our position as the leading technology partner to marketplaces worldwide. For further discussion of our SMARTS acquisition, see Note 3, "Acquisitions and Strategic Initiatives."

 

For further discussion of our segments, see Note 18, "Segments." For further discussion of our revenue recognition policies, see "Revenue Recognition and Cost of Revenues," of Note 2, "Summary of Significant Accounting Policies."

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The consolidated financial statements are prepared in accordance with U.S. GAAP. The financial statements include the accounts of NASDAQ OMX, its wholly-owned subsidiaries and other entities in which NASDAQ OMX has a controlling financial interest. All significant intercompany accounts and transactions have been eliminated in consolidation. We consolidate those entities in which we are the primary beneficiary of a variable-interest entity, or VIE, and entities where we have a controlling financial interest. We were not the primary beneficiary of any VIE for any of the three years in the period ended December 31, 2010. When NASDAQ OMX is not the primary beneficiary of a VIE or does not have a controlling interest in an entity but exercises significant influence over the entity's operating and financial policies, such investment is accounted for under the equity method of accounting. We recognize our share of earnings or losses of an equity method investee based on our ownership percentage. As permitted under U.S. GAAP, for certain equity method investments for which financial information is not sufficiently timely for us to apply the equity method of accounting currently, we record our share of the earnings or losses of an investee from the most recent available financial statements on a lag. See Note 5, "Investments," for further discussion of our equity method investments.

 

We have evaluated our subsequent events through the issuance date of this Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

 

Foreign Currency Translation

 

Foreign denominated assets and liabilities are remeasured into the functional currency at exchange rates in effect at the balance sheet date through the income statement. Gains or losses resulting from foreign currency transactions are remeasured using the rates on the dates on which those elements are recognized during the period, and are included in general, administrative and other expense in the Consolidated Statements of Income.

 

Translation gains or losses resulting from translating our subsidiaries' financial statements from the local functional currency to the reporting currency, net of tax, are included in accumulated other comprehensive income (loss) within stockholders' equity in the Consolidated Balance Sheets. Assets and liabilities are translated at the balance sheet date while revenues and expenses are translated at the date the transaction occurs or at an applicable average rate.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash in banks and all non-restricted highly liquid investments with original maturities of three months or less at the time of purchase. Such equivalent investments included in cash and cash equivalents in the Consolidated Balance Sheets were $215 million as of December 31, 2010 and $314 million as of December 31, 2009. Cash equivalents are carried at cost plus accrued interest, which approximates fair value due to the short maturities of these investments.

 

Restricted Cash

 

Restricted cash, which was $60 million as of December 31, 2010 and $30 million as of December 31, 2009, is not available for general use by us due to regulatory and other requirements and is classified as restricted cash in the Consolidated Balance Sheets. Non-current restricted cash was $105 million as of December 31, 2010 and $80 million as of December 31, 2009. As of December 31, 2010 and 2009, non-current restricted cash includes a deposit in the guaranty fund of IDCG of $80 million which may consist of cash, cash equivalents, or short-term investments. As of December 31, 2010, a portion of IDCG's guaranty fund was invested in short-term reverse repurchase agreements. These reverse repurchase agreements, which totaled $16 million as of December 31, 2010, are recorded at the contract amount plus accrued interest, which approximates fair value. In addition, as of December 31, 2010, non-current restricted cash includes our $25 million capital injection to NOCC to improve its liquidity position. These amounts are classified as non-current restricted cash in the Consolidated Balance Sheets.

 

Financial Investments

 

Financial investments, at fair value in the Consolidated Balance Sheets, represent debt securities that are classified as trading investment securities and our available-for-sale investment security in DFM. Debt securities are bought principally to meet regulatory capital requirements for NASDAQ OMX Stockholm's clearing operations and are generally sold in the near term. Changes in fair value of trading investment securities are included in dividend and investment income in the Consolidated Statements of Income. Equity securities that are classified as long-term available-for-sale investment securities are carried at fair value in the Consolidated Balance Sheets in other assets with unrealized gains and losses, net of tax, reported in accumulated other comprehensive income (loss) within stockholders' equity. Realized gains and losses on these securities are included in earnings upon disposition of the securities using the specific identification method. In addition, realized losses are recognized when management determines that a decline in value is other-than-temporary, which requires judgment regarding the amount and timing of recovery. Indicators of other-than-temporary impairment for debt securities include issuer downgrade, default, or bankruptcy. For equity securities we also consider the extent to which cost exceeds fair value, the duration of that difference and management's judgment about the issuer's current and prospective financial condition, as well as our intent and ability to hold the security until recovery of the unrealized losses. In addition, for equity securities we also consider the performance of the investee's stock price in relation to industry indexes and review the investee's credit profile. In 2008, we recorded an other-than-temporary impairment loss on our Oslo long-term available-for-sale investment security of $35 million in asset impairment charges in the Consolidated Statements of Income. In 2009, we sold this investment security and recognized a $5 million loss which is recorded in loss on sale of investment security in the Consolidated Statements of Income.

 

Fair value of both available-for-sale and trading investment securities are generally obtained from third party pricing sources. When available, quoted market prices are used to determine fair value. If quoted market prices are not available, fair values are estimated using pricing models, where the inputs to those models are based on observable market inputs. The inputs to the valuation models vary by the type of security being priced but are typically benchmark yields, reported trades, broker dealer quotes, and prices of similar assets. Pricing models generally do not entail material subjectivity because the methodologies employed use inputs observed from active markets. See Note 14, "Fair Value of Financial Instruments," for further discussion of fair value measures.

 

Receivables, net

 

Our receivables are concentrated with our member firms, market data distributors, listed companies and market technology customers. Receivables are shown net of reserves for uncollectible accounts. The reserve for bad debts is maintained at a level that management believes to be sufficient to absorb estimated losses in the accounts receivable portfolio. The reserve is increased by the provision for bad debts which is charged against operating results and decreased by the amount of charge-offs, net of recoveries. The amount charged against operating results is based on several factors including, but not limited to, a continuous assessment of the collectability of each account, the length of time a receivable is past due and our historical experience with the particular customer. In circumstances where a specific customer's inability to meet its financial obligations is known (i.e., bankruptcy filings), we record a specific provision for bad debts against amounts due to reduce the receivable to the amount we reasonably believe will be collected. Due to changing economic, business and market conditions, we review the reserve for bad debts monthly and make changes to the reserve through the provision for bad debts as appropriate. If circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major customer's ability to pay), our estimates of recoverability could be reduced by a material amount. Total reserves netted against receivables in the Consolidated Balance Sheets were $3 million at December 31, 2010 and December 31, 2009.

 

Derivative Positions, at Fair Value

 

Through our clearing operations in the derivative markets with NASDAQ OMX Commodities and NASDAQ OMX Stockholm, we are the legal counterparty for each derivative position traded and thereby guarantee the fulfillment of each contract. We also act as the counterparty for certain trades on OTC derivative contracts. The derivatives are not used by NASDAQ OMX Commodities or NASDAQ OMX Stockholm for the purpose of trading on their own behalf. As the legal counterparty of each transaction, NASDAQ OMX Commodities and NASDAQ OMX Stockholm bear the counterparty risk between the purchaser and the seller in the contract. The counterparty risks are measured using models that are agreed to with the Financial Supervisory Authority of the applicable country, which requires us to provide minimum guarantees and maintain certain levels of regulatory capital.

 

The structure and operations of NASDAQ OMX Commodities and NASDAQ OMX Stockholm differ from other clearinghouses. NASDAQ OMX Commodities and NASDAQ OMX Stockholm are not member-owned organizations, do not maintain a guarantee fund to which members contribute and do not enforce loss sharing assessments amongst members. In addition, unlike other clearinghouses, they do not record any margin deposits and guarantee funds in the Consolidated Balance Sheets, as all risks and rewards of collateral ownership, including interest, belongs to the counterparty. Market participants must provide collateral to cover the daily margin call as needed, which is in addition to the initial collateral placed when entering into the transaction. Acceptable collateral is cash and eligible securities in a pledged bank account and/or an on-demand guarantee. All collateral is maintained at a third-party custodian bank for the benefit of the clearing members and is accessible by NASDAQ OMX in the event of default. In addition, market participants must meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations. For NASDAQ Commodities, trading on the contracts can take place up until the delivery period which can occur over a period of several years. For NASDAQ OMX Stockholm, following the completion of a transaction, settlement primarily takes place between parties by net cash settlement or with the exchange of securities and funds. For those transactions where there is an exchange of securities and funds, the transfer of ownership is registered and the securities are stored on the owner's behalf.

 

The fair value of these derivative contracts with NASDAQ OMX Commodities and NASDAQ OMX Stockholm is reported gross in the Consolidated Balance Sheets as a receivable pertaining to the purchasing party and a payable pertaining to the selling party. Such receivables and liabilities attributable to outstanding derivative positions have been netted to the extent that such a legal offset right exists and, at the same time, that it is our intention to settle these items.

 

We have the responsibility for clearing, or settlement of payment, for the derivative and equity transactions. Certain timing differences may exist related to the periodic cash settlement of counterparty trades between NASDAQ OMX Stockholm and other clearinghouses and customers, where we are acting as intermediary and guaranteeing the fulfillment of each contract. We have recorded receivables and payables associated with such timing differences in other current assets and other current liabilities, respectively, in the Consolidated Balance Sheets. Nord Pool is responsible for exchange operations and trading activities on all counterparty trades where NASDAQ OMX Commodities is acting as intermediary. There are no timing differences related to the settlement of these transactions as all trades occur through Nord Pool and not between other exchanges with different settlement requirements.

 

Resale and Repurchase Agreements, at Contract Value

 

Through our clearing operations in the resale and repurchase markets with NASDAQ OMX Stockholm, we are the legal counterparty for each resale and repurchase contract traded and thereby guarantee the fulfillment of each contract. We only clear these transactions once a bilateral contract between members has been entered into whereby the two members have agreed on all terms in the transaction. The resale and repurchase agreements are not used for financing purposes by NASDAQ OMX Stockholm. As the legal counterparty of each transaction, NASDAQ OMX Stockholm bears the counterparty risk between the purchaser and the seller in the resale and repurchase agreement.

 

The structure and operations for the resale and repurchase market is similar to the derivative markets for NASDAQ OMX Commodities and NASDAQ OMX Stockholm. As discussed above in "Derivative Positions, at Fair Value," NASDAQ OMX Commodities and NASDAQ OMX Stockholm are not member-owned organizations, do not maintain a guarantee fund to which members contribute and do not enforce loss sharing assessments amongst members. In addition, unlike other clearinghouses, they do not record any margin deposits and guarantee funds in the Consolidated Balance Sheets, as all risks and rewards of collateral ownership, including interest, belongs to the counterparty. For resale and repurchase agreements, collateral is not held by NASDAQ OMX Stockholm. All resale and repurchase clearing activities are transacted under our clearing member agreements that give us the right, in the event of default, to liquidate collateral pledged between the clearing members and to offset receivables and payables with the same counterparty.

 

Pledged collateral, which is transferred through NASDAQ OMX Stockholm at initiation of the bilateral contract between the two clearing member counterparties, primarily consists of Swedish government debt securities. Market participants must meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations. In the event that one of the participants cannot fulfill its obligation to deliver or receive the underlying security at the agreed upon price, NASDAQ OMX Stockholm is required to buy or sell the security in the open market to fulfill its obligation. In order to protect itself against a price movement in the value of the underlying security, or price risk, NASDAQ OMX Stockholm requires all participants to provide additional margin as needed, which is valued on a daily basis and is maintained at a third-party custodian bank for the benefit of the clearing members and is accessible by NASDAQ OMX Stockholm in the event of default.

 

We record resale and repurchase agreements at contract value plus interest gross in the Consolidated Balance Sheets as a receivable pertaining to the purchasing party and a payable pertaining to the selling party. Such receivables and liabilities attributable to outstanding resale and repurchase agreements have been netted to the extent that such a legal offset right exists and, at the same time, that it is our intention to settle these items.

 

Derivative Financial Instruments and Hedging Activities

 

At December 31, 2009, we held derivative financial instruments which were designated and qualified for hedge accounting. Derivative financial instruments, which are designated or qualify for hedge accounting, are recognized in the balance sheets at fair value as either assets or liabilities. The fair value of our derivative financial instruments is determined using either market quotes or valuation models that are based upon the net present value of estimated future cash flows and incorporate current market data inputs. We report our derivative assets in either other current assets or other assets and our derivative liabilities in either other current liabilities or other liabilities in the Consolidated Balance Sheets depending on the terms of the contract. Any ineffectiveness is recorded in earnings. The accounting for the change in the fair value of a derivative financial instrument depends on its intended use and the resulting hedge designation, if any. As of December 31, 2010, there were no derivative financial instruments that were designated or qualified for hedge accounting. As of December 31, 2009, our derivative financial instruments which were designated and qualified for hedge accounting were cash flow hedges of our floating rate debt. As such, the accounting for the change in fair value of the derivative was included in accumulated other comprehensive loss in the Consolidated Balance Sheets. In the first quarter of 2010, in connection with the repayment of our senior secured credit facilities in place as of December 31, 2009, we terminated our interest rate swaps and reclassified into earnings the unrealized loss of $9 million which was included in accumulated other comprehensive loss in the Consolidated Balance Sheets at December 31, 2009. This loss is included in general, administrative and other expense in the Consolidated Statements of Income for the year ended December 31, 2010. Any ineffectiveness would impact earnings through interest expense. There was no material ineffectiveness recorded in earnings for the years ended December 31, 2010 and December 31, 2009. For further discussion of hedging activities, see below and Note 15, "Derivative Financial Instruments and Hedging Activities."

 

Derivative Financial Instruments that Qualify for Hedge Accounting

 

Derivative financial instruments that are entered into for hedging purposes are designated as such when we enter into the contract. For all derivative financial instruments that are designated for hedging activities, we formally document all of the hedging relationships between the hedge instruments and the hedged items at the inception of the relationships. We also formally document our risk management objectives and strategies for entering into the hedge transactions. We formally assess, at inception and on a quarterly basis, whether derivatives designated as hedges are highly effective in offsetting the fair value or cash flows of hedged items. If it is determined that a derivative is no longer highly effective as a hedge, we will discontinue the application of hedge accounting.

 

Non-Designated Derivatives

 

We also use derivatives as economic hedges that are not designed as accounting hedges or do not qualify for hedge accounting treatment. For derivative financial instruments that do not qualify for hedge accounting or are not designated as hedges, changes in fair value are reported in current period earnings. As of December 31, 2008, we had open foreign currency contracts hedging currency risk and recorded a $58 million net loss within gain (loss) on foreign currency contracts in the Consolidated Statements of Income. See Note 15, "Derivative Financial Instruments and Hedging Activities," for further discussion. We did not enter into any material economic hedges that did not qualify for or were not designated for hedge accounting during the years ended December 31, 2010 and 2009.

 

Property and Equipment, net

 

Property and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are generally recognized over the estimated useful lives of the related assets. Estimated useful lives generally range from 10 to 40 years for buildings and improvements, two to five years for data processing equipment and software and five to 10 years for furniture and equipment. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining term of the related lease. Depreciation and amortization are computed using the straight-line method. See Note 6, "Property and Equipment, net," for further discussion.

 

Goodwill

 

Goodwill represents the excess of purchase price over the value assigned to the net tangible and identifiable intangible assets of a business acquired. Goodwill is allocated to our reporting units based on the assignment of the fair values of each reporting unit of the acquired company. We are required to test goodwill for impairment at the reporting unit level annually, or in interim periods if certain events occur indicating that the carrying value may be impaired. We test for impairment during the fourth quarter of our fiscal year using October 1st carrying values. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill is less than the carrying value. The determination of fair value includes considerations of projected cash flows, relevant trading multiples of comparable companies and the trading price of our common stock and other factors. There was no impairment of goodwill for the years ended December 31, 2010, 2009 and 2008. Although there is no impairment as of December 31, 2010, events such as economic weakness and unexpected significant declines in operating results of reporting units may result in our having to perform a goodwill impairment test for some or all of our reporting units prior to the required annual assessment. These types of events and the resulting analysis could result in goodwill impairment charges in the future. See Note 4, "Goodwill and Purchased Intangible Assets," for further discussion.

 

Intangible Assets, net

 

Intangible assets, net, primarily include exchange and clearing registrations, customer relationships, trade names, licenses and technology. Intangible assets with finite lives are amortized on a straight-line basis over their average estimated useful lives as follows:

 

  •  

Technology: 3—10 years

 

  •  

Customer relationships: 10—30 years

 

  •  

Other: 4—10 years

 

Intangible assets deemed to have indefinite useful lives are not amortized but instead are tested for impairment at least annually and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than its carrying amount. Similar to goodwill impairment testing, we test for impairment of indefinite-lived intangible assets during the fourth quarter of our fiscal year using October 1st carrying values. Impairment exists if the carrying value of the indefinite-lived intangible asset exceeds its fair value. For finite-lived intangible assets subject to amortization, impairment is considered upon certain "triggering events" and is recognized if the carrying amount is not recoverable and the carrying amount exceeds the fair value of the intangible asset. In 2008, we recorded an impairment loss of finite-lived intangible assets of $7 million primarily related to our insurance agency business, which was part of Corporate Solutions within our Issuer Services segment. This charge was included in asset impairment charges in the Consolidated Statements of Income. See Note 4, "Goodwill and Purchased Intangible Assets," for further discussion. There was no impairment of finite-lived intangible assets in the years ended December 31, 2010 and 2009. There was no impairment of indefinite-lived intangible assets in the years ended December 31, 2010, 2009 and 2008.

 

Valuation of Other Long-Lived Assets

 

We also assess potential impairments to our other long-lived assets, including property and equipment, when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset exceeds its fair value and is not recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any required impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results. There was no impairment of other long-lived assets in the years ended December 31, 2010, 2009 and 2008.

 

Equity Method Investments

 

The equity method of accounting is used when we own less than 50% of the outstanding voting stock of a company, but exercise significant influence over the operating and financial policies of that company. We have certain investments in which we have determined that we have significant influence and as such account for the investments under the equity method of accounting. As such, we record our pro-rata share of earnings or losses each period and record any dividends as a reduction in the investment balance. We evaluate our equity method investments for other-than-temporary declines in value by considering a variety of factors such as the earnings capacity of the investment and the fair value of the investment compared to its carrying amount. In addition, for investments where the market value is readily determinable, we consider the underlying stock price as an additional factor. If the estimated fair value of the investment is less than the carrying value and management considers the decline in value to be other-than-temporary, the excess of the carrying value over the estimated fair value is recognized in the financial statements as an impairment. In December 2009, we recorded impairment losses on equity method investments of $87 million related to our investments in NASDAQ Dubai and Agora-X. No other impairments of equity method investments were recorded in 2010, 2009 or 2008.

 

We also recognized a $19 million loss on the sale of our Orc shares during 2009. See Note 5, "Investments," for further discussion.

 

Revenue Recognition and Cost of Revenues

 

Market Services Revenues

 

Transaction Services

 

U.S. Cash Equity Trading

 

U.S. cash equity trading revenues are variable, based on individual customer share volumes, and recognized as transactions occur. We charge transaction fees for executing cash equity trades in NASDAQ-listed and other listed securities on The NASDAQ Stock Market, NASDAQ OMX BX, and NASDAQ OMX PSX, as well as on orders that are routed to other market venues for execution.

 

In the U.S., we record execution revenues from transactions on a gross basis in revenues and record related expenses as cost of revenues. Nasdaq Execution Services, which is registered with the SEC as a broker-dealer, operates as The NASDAQ Stock Market's, NASDAQ OMX BX's and NASDAQ OMX PSX's routing broker-dealer for sending orders to other venues for execution in accordance with member order instructions and requirements.

 

Under our Limitation of Liability Rule and procedures, we, subject to certain caps, provide compensation for losses directly resulting from the systems' actual failure to correctly process an order, quote, message or other data into our platform. We do not record a liability for any potential claims that may be submitted under the Limitation of Liability Rule unless they meet the provisions required in accordance with U.S. GAAP. As such, losses arising as a result of the rule are accrued and charged to expense only if the loss is probable and estimable. The Limitation of Liability Rule and procedures apply to both U.S. cash equity and U.S. derivative trading in the aggregate.

 

For The NASDAQ Stock Market and NASDAQ OMX PSX we credit a portion of the per share execution charge to the market participant that provides the liquidity. For NASDAQ OMX BX we credit a portion of the per share execution charge to the market participant that takes the liquidity. We record these transaction rebates as U.S. cash equity trading cost of revenues in the Consolidated Statements of Income. These transaction rebates are paid on a monthly basis and the amounts due are included in accounts payable and accrued expenses in the Consolidated Balance Sheets.

 

Also, we pay Section 31 fees to the SEC for supervision and regulation of securities markets. We pass these costs along to our customers through our cash equity trading fees. We collect the fees as a pass-through charge from organizations executing eligible trades on NASDAQ's, NASDAQ OMX BX's and NASDAQ OMX PSX's platforms and we recognize these amounts in U.S. cash equity trading cost of revenues when incurred. Section 31 fees received are included in cash and cash equivalents in the Consolidated Balance Sheets, at the time of receipt and, as required by law, the amount due to the SEC is remitted semiannually and recorded as Section 31 fees payable to the SEC in the Consolidated Balance Sheets until paid. Since the amount recorded in revenues is equal to the amount recorded in cost of revenues, there is no impact on our revenues less transaction rebates, brokerage, clearance and exchange fees. As we hold the cash received until payment to the SEC, we earn interest income on the related cash balances.

 

European Cash Equity Trading

 

We charge transaction fees for executing trades on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic. The transaction fee for executing trades on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic is charged per executed order and as per value traded.

 

The exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic do not have any revenue sharing agreements or cost of revenues, such as transaction rebates and brokerage, clearance and exchange fees.

 

U.S. Derivative Trading and Clearing

 

U.S. derivative trading and clearing revenues are variable, based on traded and cleared volumes, and recognized when executed or when contracts are cleared. The principal types of derivative contracts traded on NASDAQ OMX PHLX and The NASDAQ Options Market are equity options, ETF options, index options and currency options. We also operate NFX, which offers trading for currency futures and other financial futures. Similar to U.S. cash equity trading, we record derivative trading and clearing revenues from transactions on a gross basis in revenues and record related expenses as cost of revenues, as we have certain risk associated with trade execution. For further discussion see "U.S. Cash Equity Trading" above.

 

As discussed under U.S. cash equity trading, for U.S. derivative trading and clearing we also credit a portion of the per share execution charge to the market participant that provides the liquidity and record the transaction rebate as U.S. derivative trading and clearing cost of revenues in the Consolidated Statements of Income. These transaction rebates are paid on a monthly basis and the amounts due are included in receivables, net in the Consolidated Balance Sheets.

 

Also, we pay Section 31 fees to the SEC for supervision and regulation of securities markets. We pass these costs along to our customers through our derivative trading and clearing fees. We collect the fees as a pass-through charge from organizations executing eligible trades on NASDAQ OMX PHLX and The NASDAQ Options Market platforms and we recognize these amounts in U.S. derivative trading and clearing cost of revenues when incurred.

 

Through NOCC, we engage in riskless principal trading of OTC power and gas contracts. Revenues are based on notional amounts or volume of power and gas transacted and/or delivered and are recognized upon settlement of the contracts.

 

As discussed above, in the U.S., our Limitation of Liability Rule and procedures apply to both U.S. cash equity and U.S. derivative trading and clearing in the aggregate. Under this rule, we, subject to certain caps, provide compensation for losses directly resulting from the systems' actual failure to correctly process an order, quote, message or other data into our platform.

 

European Derivative Trading and Clearing

 

European derivative trading and clearing revenues are also variable, based on the volume of traded and cleared contracts, and recognized when executed or when contracts are cleared. Derivative trading and clearing is conducted on NASDAQ OMX Stockholm and NASDAQ OMX Copenhagen. The principal types of derivative contracts traded are stock options and futures, index options and futures, fixed-income options and futures and stock loans. On NASDAQ OMX Stockholm, we offer clearing services for fixed-income options and futures, stock options and futures and index options and futures by serving as the CCP. In doing so, we guarantee the completion of the transaction and market participants can thereby limit their counterparty risk. We also act as the counterparty for certain OTC contracts.

 

On NASDAQ OMX Stockholm, we also offer clearing services for resale and repurchase agreements. Clearing revenues for resale and repurchase agreements are based on the value and length of the contract and are recognized when cleared.

 

European derivative trading and clearing revenues also include clearing revenues for commodities. NASDAQ OMX Commodities provides access to the world's largest power derivatives markets and one of Europe's largest carbon markets. NASDAQ OMX Commodities offers trading of international power derivatives and carbon products, operates a clearing business and offers consulting services to commodities markets globally. Our clearing revenues from trading transactions on Nord Pool are variable, based on cleared volume, and recognized when contracts are cleared. We also generate clearing revenues for contracts traded on the OTC derivative market which are also recognized when contracts are cleared. In addition, European derivatives revenues include annual renewal fees. Each January, NASDAQ OMX Commodities members are billed an annual fee which is recognized ratably over the following 12-month period.

 

NASDAQ OMX Commodities and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic do not have any revenue sharing agreements or cost of revenues, such as transaction rebates and brokerage, clearance and exchange fees.

 

Access Services

 

We generate revenues by providing market participants with several alternatives for accessing our markets for a fee. The type of connectivity is determined by the level of functionality a customer needs. As a result, access services revenues vary depending on the type of connection provided to customers. We provide co-location services to market participants whereby firms may lease space for equipment within our data center. These participants are charged monthly fees for cabinet space, connectivity and support. We also earn revenues from annual and monthly exchange membership and registration fees. Revenues for providing access to our markets, co-location services and revenues for monthly exchange membership and registration fees are recognized on a monthly basis as the service is provided. Revenues from annual fees for exchange membership and registration fees are recognized ratably over the following 12-month period.

 

Market Data

 

We earn Market Data revenues from U.S. tape plans and U.S. and European proprietary market data products.

 

Net U.S. Tape Plans

 

Revenues from U.S. tape plans include eligible UTP Plan revenues which are shared among UTP Plan participants and are presented on a net basis. See "Market Data Revenue Sharing" below for further discussion of net reporting. Under the revenue sharing provision of the UTP Plan, we are permitted to deduct costs associated with acting as the exclusive Securities Information Processor from the total amount of tape revenues collected. After these costs are deducted from the tape revenues, we distribute to the respective UTP Plan participants, including The NASDAQ Stock Market, NASDAQ OMX BX and NASDAQ OMX PSX, their share of tape revenues based on a formula, required by Regulation NMS, that takes into account both trading and quoting activity. In addition, all quotes and trades in NYSE- and NYSE Amex-listed securities are reported and disseminated in real time, and as such, we share in the tape revenues for information on NYSE- and NYSE Amex-listed securities. Revenues from net U.S. tape plans are recognized on a monthly basis.

 

U.S. Market Data Products

 

We collect and process information and earn revenues as a distributor of our market data. We provide varying levels of quote and trade information to market participants and to data distributors, who in turn sell subscriptions for this information to the public. We earn revenues primarily based on the number of data subscribers and distributors of our data. U.S. Market Data revenues are recognized on a monthly basis. These revenues, which are subscription based, are recorded net of amounts due under revenue sharing arrangements with market participants.

 

European Market Data Products

 

European Market Data revenues, which are subscription based, are generated primarily through the sale and distribution of trading information based on data generated through trading on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic and are recognized on a monthly basis.

 

Market Data Revenue Sharing

 

The most significant component of Market Data revenues presented on a net basis is the UTP Plan revenue sharing in the U.S. All indicators of gross vs. net reporting under U.S. GAAP have been considered in analyzing the appropriate presentation of UTP Plan revenue sharing. However, the following are the primary indicators of net reporting:

 

  •  

Primary Obligor: We are the Securities Information Processor for the UTP Plan, in addition to being a participant in the UTP Plan. In our unique role as Securities Information Processor, we facilitate the collection and dissemination of revenues on behalf of the UTP Plan participants. As a participant, we share in the net distribution of revenues according to the plan on the same terms as all other plan participants.

 

  •  

Risk of Loss/Credit Risk: Risk of loss on the revenue is shared equally among plan participants according to the UTP Plan.

 

  •  

Price Latitude: The operating committee of the UTP Plan, which is comprised of representatives from each of the participants, including us solely in our capacity as a UTP Plan participant, is responsible for setting the level of fees to be paid by distributors and subscribers and taking action in accordance with the provisions of the UTP Plan, subject to SEC approval.

 

The exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic do not have any market data revenue sharing agreements or cost of revenues, such as transaction rebates and brokerage, clearance and exchange fees.

 

Broker Services

 

Our Broker Services operations offer technology and customized securities administration solutions to financial participants in the Nordic market. The primary services consist of flexible back-office systems, which allow customers to entirely or partly outsource their company's back-office functions. Revenues from broker services are based on a fixed basic fee for administration or licensing, maintenance and operations, and a variable portion that depends on the number of transactions completed. Broker Services revenues are recognized on a continuous basis as services are rendered.

 

Prior to November 2009, we also offered Broker Services operations in the United Kingdom. In November 2009, we sold our Broker Services operations in the United Kingdom to TD Waterhouse and recorded a gain of $5 million, which is included in gain on sales of businesses in the Consolidated Statements of Income for the year ended December 31, 2009.

 

Issuer Services Revenues

 

Global Listing Services

 

U.S. Listing Services

 

Listing Services revenues in the U.S. include annual renewal fees, listing of additional shares fees and initial listing fees. Annual renewal fees are recognized ratably over the following 12-month period. Listing of additional shares fees and initial listing fees are recognized on a straight-line basis over estimated service periods, which are four and six years, respectively, based on our historical listing experience and projected future listing duration.

 

European Listing Services

 

European listing fees, which are comprised of revenues derived from annual fees received from listed companies on our Nordic and Baltic exchanges and NASDAQ OMX First North , are directly related to the listed companies' market capitalization on a trailing 12-month basis. These revenues are recognized ratably over the following 12-month period.

 

Corporate Solutions

 

Global Listing Services revenues also include fees from Corporate Solutions. These fees include subscription income from Shareholder.com and Directors Desk, fees from GlobeNewswire and revenues from Corporate Solutions Nordic. Prior to October 2009, Corporate Solutions revenues also included commission income from our Carpenter Moore insurance agency business. In October 2009, we sold substantially all of our Carpenter Moore business and recorded a gain of $7 million which is included in gain on sales of businesses in the Consolidated Statements of Income for the year ended December 31, 2009. Fee income for services other than placement of insurance coverage is recognized as those services are provided. Shareholder.com revenues are based on subscription agreements with customers. Revenues from subscription agreements are recognized ratably over the contract period, generally one year in length. As part of subscription services, customers also are charged usage fees based upon actual usage of the services provided. Revenues from usage fees and other services are recognized when earned. Directors Desk revenues are based on subscriptions for online services for directors. Subscriptions are one year in length and revenues are recognized ratably over the year. GlobeNewswire generates fees primarily from wire distribution services, and revenues are recognized as services are provided. For our insurance agency business, commission income was recognized when coverage became effective, the premium due under the policy was known or could be reasonably estimated, and substantially all required services related to placing the insurance had been provided. Broker commission adjustments and commissions on premiums billed directly by underwriters were recognized when such amounts could be reasonably estimated.

 

Global Index Group

 

We develop and license NASDAQ OMX branded indexes, associated derivatives and financial products as part of our Global Index Group business. Revenues primarily include license fees from these branded indexes, associated derivatives and financial products in the U.S. and abroad. We also generate revenues by licensing and listing third-party structured products and third-party sponsored ETFs. We primarily have two types of license agreements: transaction-based licenses and asset-based licenses. Transaction-based licenses are generally renewable long-term agreements. Customers are charged based on transaction volume or a minimum contract amount, or both. If a customer is charged based on transaction volume, we recognize revenue when the transaction occurs. If a customer is charged based on a minimum contract amount, we recognize revenue on a pro-rata basis over the licensing term. Asset-based licenses are also generally long-term agreements. Customers are charged based on a percentage of assets under management for licensed products, per the agreement, on a monthly or quarterly basis. These revenues are recorded on a monthly or quarterly basis over the term of the license agreement.

 

Market Technology Revenues

 

The Market Technology segment delivers technology and services to marketplaces, brokers and regulators throughout the world. Market Technology provides technology solutions for trading, clearing, settlement and information dissemination, and also offers facility management integration, surveillance solutions and advisory services.

 

Revenues are derived from the following primary sources: licensing, support and facility management revenues, delivery project revenues, as well as change request, advisory and broker surveillance revenues.

 

We enter into multiple-element sales arrangements to provide technology solutions and services to our customers. In order to recognize revenues associated with each individual element of a multiple-element sales arrangement separately, we are required to establish the existence of Vendor Specific Objective Evidence, or VSOE, of fair value for each element. When VSOE for individual elements of an arrangement cannot be established, revenue is generally deferred and recognized over either the final element of the arrangement or the entire term of the arrangement for which the services will be delivered.

 

License and support revenues are derived from the system solutions developed and sold by NASDAQ OMX and are generally entered into in multiple-element sales arrangements. After we have developed and sold a system solution, the customer licenses the right to use the software and may require post contract support and other services. Facility management revenues are also generally entered into in multiple-element sales arrangements and are derived when NASDAQ OMX assumes responsibility for the continuous operation of a system platform for a customer and receives facility management revenues which can be both fixed and volume-based. Revenues for license, support and facility management services are generally deferred and recognized over either the final element of the arrangement or the entire term of the arrangement for which the services will be delivered. We record the deferral of revenue associated with multiple-element sales arrangements in deferred revenue and non-current deferred revenue and the deferral of costs in other current assets and other assets in the Consolidated Balance Sheets.

 

Delivery project revenues are derived from the installation phase of the system solutions developed and sold by NASDAQ OMX. The majority of our delivery projects involve individual adaptations to the specific requirements of the customer, such as those relating to functionality and capacity. We may customize our software technology and make significant modifications to the software to meet the needs of our customers, and as such, we account for these arrangements under contract accounting. Under contract accounting, when VSOE for valuing certain elements of an arrangement cannot be established, total revenues, as well as costs incurred, are deferred until the customization and significant modifications are complete and are then recognized over the post contract support period. We record the deferral of this revenue in deferred revenue and non-current deferred revenue and the deferral of costs in other current assets and other assets in the Consolidated Balance Sheets.

 

Change request revenues include customer specific adaptations and modifications of the system solution sold by NASDAQ OMX after delivery has occurred. Change request revenues are recognized in revenue when earned. Advisory services are designed to support our customers' strategies and help them with critical decisions in a highly demanding business environment. Advisory services revenues are recognized in revenue when earned. Broker surveillance revenues are derived from surveillance solutions targeting brokers and regulators throughout the world. Broker surveillance revenues are subscription based and are recognized in revenue when earned.

 

Earnings per Share

 

We present both basic and diluted EPS. Basic EPS is computed by dividing net income attributable to NASDAQ OMX adjusted for accretion on our series A convertible preferred stock by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income attributable to NASDAQ OMX adjusted for accretion on our series A convertible preferred stock and the interest impact of our 3.75% convertible notes, net of tax by the weighted-average number of common shares and common share equivalents outstanding during the period and reflects the assumed conversion of all dilutive securities which consist primarily of convertible notes, employee stock options, restricted stock and PSUs. Common share equivalents are excluded from the computation in periods for which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period are anti-dilutive and, accordingly, are excluded from the calculation. See Note 13, "Earnings per Common Share," for further discussion.

 

Share-Based Compensation

 

Accounting for share-based compensation requires the measurement and recognition of compensation expense for all equity awards based on estimated fair values. We recognize compensation expense for equity awards on a straight-line basis over the requisite service period of the award. See Note 11, "Share-Based Compensation," for further discussion.

 

Deferred Revenue

 

Deferred revenue represents revenues for services not yet rendered, primarily for Global Listing Services and Market Technology. See Note 7, "Deferred Revenue," for further discussion.

 

Advertising Costs

 

We expense advertising costs, which include media advertising and production costs, in the periods in which the costs are incurred. Media advertising and production costs included as marketing and advertising expense in the Consolidated Statements of Income totaled $9 million in 2010, $5 million for 2009 and $7 million for 2008.

 

Software Costs

 

Significant purchased application software and operational software that are an integral part of computer hardware are capitalized and amortized on a straight-line basis over their estimated useful lives, generally two to five years. All other purchased software is charged to expense as incurred. We develop systems solutions for both internal and external use.

 

Certain costs incurred in connection with developing or obtaining internal use software are capitalized. Unamortized capitalized software development costs are included in data processing equipment and software, within property and equipment, net in the Consolidated Balance Sheets. Amortization of costs capitalized is included in depreciation and amortization expense in the Consolidated Statements of Income.

 

Certain costs of computer software to be sold, leased, or otherwise marketed as a separate product or as part of a product or process are capitalized after the product has reached technological feasibility. Technological feasibility is established upon completion of a detail program design or, in its absence, completion. Thereafter, all software production costs are capitalized. Prior to reaching technological feasibility, all costs are charged to expense. Capitalized costs are amortized on a straight-line basis over the remaining estimated economic life of the product and are included in depreciation and amortization expense in the Consolidated Statements of Income.

 

Leases

 

We expense rent from non-cancellable operating leases, net of sublease income, on a straight line basis, based on future minimum lease payments. The net costs are included in occupancy expense in the Consolidated Statements of Income. See Note 16, "Leases," for further discussion.

 

Income Taxes

 

We use the asset and liability method to provide income taxes on all transactions recorded in the consolidated financial statements. Deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e., temporary differences) and are measured at the enacted rates that will be in effect when these differences are realized. If necessary, a valuation allowance is established to reduce deferred tax assets to the amount that is more likely than not to be realized.

 

In order to recognize and measure our unrecognized tax benefits, management determines whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the recognition thresholds, the position is measured to determine the amount of benefit to be recognized in the consolidated financial statements. Interest and/or penalties related to income tax matters are recognized in income tax expense.

 

Recently Adopted Accounting Pronouncements

 

ASC Topic 605.25— In October 2009, the Financial Accounting Standards Board, or FASB, issued authoritative guidance on FASB Accounting Standards Codification, or ASC, Topic 605.25, "Revenue Recognition—Multiple-Element Arrangements." This guidance modifies the revenue recognition guidance for arrangements that involve the delivery of multiple-elements, such as product, software, services or support, to a customer at different times as part of a single revenue generating transaction. This standard provides principles and application guidance to determine whether multiple deliverables exist, how the individual deliverables should be separated and how to allocate the revenue in the arrangement among those separate deliverables. The standard also expands the disclosure requirements for multiple deliverable revenue arrangements. This accounting guidance was effective for us on January 1, 2011, but allowed early adoption as of the first quarter of 2010 or through a retrospective application to all revenue arrangements for all periods presented in the financial statements. We adopted this guidance in the first quarter of 2010. The adoption did not have a significant impact on our financial position or results of operations.

 

ASC Topic 820 —In January 2010, the FASB issued amended guidance relating to ASC Topic 820, "Fair Value Measurements and Disclosures." The amended guidance requires new disclosures as follows:

 

  •  

Amounts related to transfers in and out of Levels 1 and 2 shall be disclosed separately and the reasons for the transfers shall be described.

 

  •  

In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements on a gross basis.

 

The guidance also provides amendments that clarify existing disclosures related to the following:

 

  •  

Reporting fair value measurement disclosures for each class of assets and liabilities.

 

  •  

Providing disclosure surrounding the valuation techniques and inputs used to measure fair value for both Level 2 and Level 3 fair value measurements.

 

This accounting guidance was effective for us beginning on January 1, 2010, except for the disclosure requirements surrounding the reconciliation of Level 3 fair value measurements, which were effective for us on January 1, 2011. Since this guidance only requires additional disclosure, it did not and will not affect our financial position or results of operations.

 

ASC Topic 855 —In February 2010, the FASB issued amended guidance on subsequent events. Under this amended guidance, entities that file with the SEC are no longer required to disclose the date through which subsequent events have been evaluated in originally issued or revised financial statements. This amended guidance was effective immediately and we adopted the new requirements as of March 31, 2010.

Acquisitions and Strategic Initiatives
Acquisitions and Strategic Initiatives

3. Acquisitions and Strategic Initiatives

 

We completed the following acquisitions and strategic initiatives in 2010, 2009 and 2008. The results of operations of each transaction are included in our Consolidated Statements of Income from the dates of each acquisition or strategic initiative.

 

2010 Acquisitions

 

We completed the following acquisitions during 2010:

 

     Purchase
Consideration 		     Total Net (Liabilities)
Assets Acquired 		    Purchased
Intangible Assets		      Goodwill  
     (in millions)  

FTEN(1)

   $   110       $ (1 )      $   46       $   65   

SMARTS(2)

     77         (5 )      28         54   

Nord Pool ASA(3)

     17         7        2         8   
                                  

Total for 2010

    $   204       $   1      $   76       $   127   
                                  

(1)

In December 2010, we acquired FTEN, a leading provider of RTRM solutions for the financial securities market for $110 million. FTEN purchase consideration includes $1 million held in escrow to be paid in 2011 and $11 million held in escrow to be paid in 2012, in accordance with the purchase agreement. We acquired net assets, at fair value, totaling $3 million and recorded a current deferred tax liability of $2 million and a non-current deferred tax liability of $16 million related to purchased intangible assets, and we also recorded a non-current deferred tax asset of $14 million related to net operating loss carry forwards, resulting in total net liabilities acquired of $1 million. The total deferred tax liabilities of $18 million represent the tax effect of the difference between the estimated assigned fair value of the acquired intangible assets ($46 million) and the tax basis ($0) of such assets. The estimated amount of $18 million is determined by multiplying the difference of $46 million by FTEN's effective tax rate of 39.55%. The purchased intangible assets of $46 million consisted of $23 million in customer relationships, $12 million in technology, $9 million for the FTEN trade name and $2 million related to non-compete agreements.

(2)

In August 2010, we acquired SMARTS, a leading technology provider of surveillance solutions to exchanges, regulators and brokers to diversify our Market Technology business and enter the broker surveillance and compliance market. We completed our acquisition of SMARTS for $77 million, which included a $75 million initial purchase price as well as a $2 million working capital adjustment. SMARTS purchase consideration also includes $2 million held in escrow to be paid in 2011 and $11 million held in escrow to be paid in 2012, in accordance with the purchase agreement. We acquired net assets, at fair value, totaling $3 million and recorded a current deferred tax liability of $1 million and a non-current deferred tax liability of $7 million related to purchased intangible assets, resulting in total net liabilities acquired of $5 million. The total deferred tax liabilities of $8 million represent the tax effect of the difference between the estimated assigned fair value of the acquired intangible assets ($28 million) and the tax basis ($0) of such assets. The estimated amount of $8 million is determined by multiplying the difference of $28 million by SMARTS' effective tax rate of 30%. The purchased intangible assets of $28 million consisted of $11 million in technology and $17 million in customer relationships.

(3)

In May 2010, we acquired Nord Pool, a derivatives trading market, for $17 million (101 million NOK). We acquired net assets, at fair value, totaling $8 million and recorded deferred tax liabilities of $1 million related to purchased intangible assets, resulting in total net assets acquired of $7 million. Through this acquisition, we now hold a Norwegian exchange license and operate the Nordic power market and the European carbon market on one trading platform.

 

The above amounts represent the preliminary allocation of the purchase price and are subject to revision during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Adjustments to the provisional values during the measurement period will be pushed back to the date of acquisition. Comparative information for periods after acquisition but before the period in which the adjustments are identified will be adjusted to reflect the effects of the adjustments as if they were taken into account as of the acquisition date. Changes to amounts recorded as assets and liabilities may result in a corresponding adjustment to goodwill. There were no adjustments to the provisional values during the year ended December 31, 2010.

 

Acquisition of ZVM

 

In December 2010, we acquired ZVM, a provider of webcasting and investor relation communication services for companies in the Nordic region, for an immaterial amount. ZVM, which is the leading provider of webcasting services in Northern Europe, will add to the growing range of capabilities and services NASDAQ OMX offers public and private companies in the U.S. and Europe.

 

Acquisition of Assets of North American Energy Credit and Clearing Corp.

 

In March 2010, we also purchased the assets of North American Energy Credit and Clearing Corp. for an immaterial amount. With this purchase, NASDAQ OMX expanded its presence in the OTC energy commodity markets. As previously discussed, the acquisition of these assets was effected through our newly-established subsidiary, NOCC. In March 2010, we also provided an additional $25 million in capital to NOCC to improve its liquidity position. As of December 31, 2010, this amount is classified as non-current restricted cash in the Consolidated Balance Sheets.

 

2010 Acquisition-related Costs

 

For the year ended December 31, 2010, acquisition-related transaction costs for the 2010 acquisitions described above are included in merger and strategic initiatives expense in the Consolidated Statements of Income.

 

2009 Strategic Initiative

 

Investment in European Multilateral Clearing Facility N.V.

 

In January 2009, we acquired a 22% stake in EMCF, a leading European clearinghouse, which is accounted for under the equity method of accounting.

 

2008 Acquisitions and Strategic Initiatives

 

Combination with OMX AB and Strategic Partnership with Borse Dubai Limited

 

On February 27, 2008, Nasdaq and OMX AB combined their businesses pursuant to an agreement with Borse Dubai. The purchase price of OMX AB was $4.4 billion, consisting of an equity component and a cash component. Our business combination with OMX AB created a premier global exchange company, bringing together complementary businesses, diversifying our operations, enhancing our existing product offerings and solidifying our leadership in global exchange technology.

 

Concurrently with the business combination with OMX AB, we also acquired a 33 1/3% equity stake in NASDAQ Dubai in exchange for a contribution of $50 million in cash and the entry into certain technology and trademark licensing agreements. In November 2008, we listed our common stock on NASDAQ Dubai. In December 2009, we agreed to participate in the realignment of the ownership structure of NASDAQ Dubai. As part of this realignment, NASDAQ Dubai became a wholly-owned subsidiary of DFM, a publicly traded company controlled by Borse Dubai and NASDAQ OMX received a 1% equity interest in DFM in exchange for its equity interest in NASDAQ Dubai. In connection with the realignment, in December 2009, we recorded an impairment charge of $82 million to write down our investment in NASDAQ Dubai to its estimated fair value. See Note 5, "Investments," for further discussion.

 

Acquisition of the Philadelphia Stock Exchange

 

In July 2008, we completed our acquisition of PHLX, expanding our presence in the derivatives market. The acquisition of PHLX provided us with one of the largest options market in the U.S. and with increased exposure to a fast growing asset class and diversification into an area adjacent to our core equity trading business. PHLX, renamed NASDAQ OMX PHLX, operates as a distinct market alongside The NASDAQ Options Market, our options platform that was launched in March 2008. With the acquisition of PHLX and the launch of The NASDAQ Options Market, we have substantially increased our footprint in global derivatives.

 

Acquisition of the Boston Stock Exchange

 

We completed our acquisition of BSX in August 2008. The BSX acquisition provided us with an additional license for trading both cash equities and options and a clearing license. We used the BSX license to create a second U.S. cash equities market, called NASDAQ OMX BX, which was launched in January 2009. With NASDAQ OMX BX, we were able to offer an additional quote within the U.S. cash equities marketplace, providing our customers enhanced trading choices and price flexibility. We have been able to leverage our INET trading system, which runs The NASDAQ Stock Market, to operate NASDAQ OMX BX, providing customers an additional fast and efficient cash equities market.

 

Acquisition of Certain Businesses from Nord Pool

 

In October 2008, we acquired Nord Pool's clearing, international derivatives and consulting subsidiaries. As a result of the acquisition, we launched NASDAQ OMX Commodities, which offers energy and carbon derivatives products. NASDAQ OMX Commodities provides access to the world's largest power derivatives markets and one of Europe's largest carbon markets.

 

Acquisition of a Majority Interest in International Derivatives Clearing Group

 

In December 2008, we acquired a majority interest in IDCG, and IDCG became an independently operated subsidiary of NASDAQ OMX. IDCG provides CCP clearing for interest rate swap products through its clearinghouse subsidiary IDCH. NFX is serving as the designated contract market for trading of certain of these interest rate swap products.

 

Investment in Agora-X, LLC

 

As of December 31, 2008, we had a 20% aggregate equity interest in Agora-X and increased our ownership interest to 85% in December 2009, resulting in a majority stake. In the second quarter of 2010, we made a strategic decision to close our Agora-X business and recorded a loss of $5 million. This charge was included in loss on divestiture of businesses in the Consolidated Statements of Income for the year ended December 31, 2010.

 

The following table presents a summary of our acquisitions in 2008:

 

     Purchase
Consideration(1) 		     Total Net (Liabilities)
Assets Acquired(2)		     Purchased
Intangible Assets		     Goodwill  
     (in millions)  

2008

         

OMX AB

    $ 4,371       $ (340 )    $ 1,207      $ 3,504   

PHLX

      708         (99 )      337        470   

BSX

      43         (44 )      52        35   

Nord Pool

      317         68 (3)      81 (3)      168 (3) 

IDCG

      85         59        26        —     
                                 

Total for 2008

    $ 5,524       $ (356 )    $ 1,703      $ 4,177   
                                 

(1)

OMX AB consideration includes $2,267 million for the value of common stock issued to Borse Dubai, $2,029 million in cash and $75 million in acquisition costs. PHLX consideration includes $652 million in cash, $12 million in acquisition costs and $44 million in working capital adjustments. PHLX consideration included $15 million held in escrow at December 31, 2008, which was paid in 2009 in accordance with the purchase agreement. BSX consideration includes the $61 million purchase price, plus $5 million for the settlement of a loan, less $23 million of negative working capital adjustments. BSX consideration included $3 million held in escrow, which was paid in 2010 in accordance with the purchase agreement. Nord Pool consideration includes $249 million in cash, $66 million in a vendor note which was settled in 2009 and $2 million in acquisition costs. IDCG purchase consideration consisted primarily of cash.

(2)

We acquired net assets of OMX AB totaling $137 million and recorded deferred tax liabilities of $477 million related to OMX AB's intangible assets. We acquired net assets of PHLX totaling $55 million and recorded deferred tax liabilities of $154 million related to PHLX's intangible assets. The PHLX net assets of $55 million were reduced by $44 million of working capital, which was included as an adjustment to the purchase consideration. We acquired net liabilities of BSX totaling $22 million and recorded deferred tax liabilities of $22 million related to BSX's intangible assets. The BSX net liabilities of $22 million include $23 million of negative working capital, which was included as an adjustment to the purchase consideration. We acquired net assets in the Nord Pool transaction totaling $91 million and recorded deferred tax liabilities of $23 million related to Nord Pool's intangible assets. See (3) below for adjustments to Nord Pool's intangible assets and deferred tax liabilities. We acquired net assets of IDCG of $59 million, which included cash received from NASDAQ OMX for the acquisition consideration.

(3 )

As we finalized the purchase price allocation for the Nord Pool transaction in the fourth quarter of 2009, the fair values of the purchased intangible assets were adjusted, resulting in a decrease of $8 million, an increase to goodwill of $7 million and a decrease to deferred tax liabilities of $1 million. The impact on amortization expense was immaterial.

 

The following table presents the details of the purchased intangible assets acquired in the above 2008 acquisitions. All purchased finite-lived intangible assets are amortized using the straight-line method. See Note 4, "Goodwill and Purchased Intangible Assets," for further discussion.

 

     Technology      Customer
Relationships		    

Registrations, Licenses
and Trade Names

      Total  
     Estimated
Useful
Life
(in Years)		      Amount      Estimated
Useful
Life
(in Years)		      Amount    

Estimated
Useful
Life
(in Years)

    Amount      Amount  
     (in millions, except years)  

2008

                   

OMX AB

      3-10       $ 40         20-33       $   420      Indefinite(1)    $ 747       $ 1,207   

PHLX

      2-5         11         19-23         113      Indefinite(2 )      213         337   

BSX

      —           —           17         2      Indefinite( 3 )      50         52   

Nord Pool

      7         1         22         77 (6 )    10(4 )      3         81   

IDCG

      —           —           —           —        Indefinite( 5 )      26         26   
                                           

Total for 2008

       $ 52          $   612         $ 1,039       $ 1,703   
                                           

(1)

Includes exchange and clearing registrations and the OMX AB trade name which we determined to have an indefinite estimated useful life.

( 2 )

Includes exchange and futures registrations and the PHLX trade name which we determined to have an indefinite estimated useful life.

( 3 )

Includes SRO and clearing licenses which we determined to have an indefinite estimated useful life.

( 4 )

Includes the Nord Pool trade name which we determined to have an estimated useful life of 10 years.

( 5 )

Includes derivative clearing license for interest rate swap products which we determined to have an indefinite estimated useful life.

(6 )

As we finalized the purchase price allocation for the Nord Pool transaction in the fourth quarter of 2009, the fair values of the purchased intangible assets were adjusted, resulting in a decrease of $8 million, an increase to goodwill of $7 million and a decrease to deferred tax liabilities of $1 million. The impact on amortization expense was immaterial.

 

Pro Forma Results

 

The consolidated financial statements for the years ended December 31, 2010, 2009 and 2008 include the financial results of the above 2010, 2009 and 2008 acquisitions and strategic initiatives from the date of each acquisition or strategic initiative. Pro forma results of operations for the acquisitions completed in 2010 and the strategic initiative completed in 2009 have not been presented since these acquisitions and the strategic initiative both individually and in the aggregate were not material to our financial results.

 

The unaudited pro forma combined historical results for the year ended December 31, 2008, shown in the table below, include the combined historical Consolidated Statements of Income of Nasdaq, OMX AB and PHLX giving effect to the OMX AB business combination and PHLX acquisition as if they had occurred at the beginning of 2008. We also acquired BSX, Nord Pool and IDCG in 2008, but we have not included their results prior to their respective closing dates in these pro forma results as these transactions were not considered significant.

 

     December 31, 2008  
     (in millions, except per
share amounts)		  

Revenues

    $ 3,853   

Revenues less transaction rebates, brokerage, clearance and exchange fees

      1,652   

Net income

      309   

Net income attributable to NASDAQ OMX

      308   

Basic earnings per share

    $ 1.54   

Diluted earnings per share

    $ 1.45   

 

The pro forma results for the year ended December 31, 2008 primarily includes adjustments for amortization of the intangible assets acquired in the business combination with OMX AB and the PHLX acquisition, the elimination of OMX AB's historical amortization expense, elimination of PHLX's non-recurring expenses related to the acquisition, additional interest expense on our prior credit facilities and the 2.50% convertible senior notes, elimination of OMX AB's historical interest expense related to OMX AB's debt that was refinanced and related tax adjustments.

 

The pro forma results for the year ended December 31, 2008 also include the elimination of the non-recurring gain on the contribution of the Nasdaq trade name in the transaction with NASDAQ Dubai discussed above, as well as adjustments to eliminate interest income related to the net cash received from the sale of our investment in LSE.

Goodwill and Purchased Intangible Assets
Goodwill and Purchased Intangible Assets

4. Goodwill and Purchased Intangible Assets

 

Goodwill

 

The following table presents the changes in goodwill by business segment during the year ended December 31, 2010:

 

     Market
Services		      Issuer
Services		      Market
Technology		      Total  
     (in millions)  

Balance at December 31, 2009

    $ 4,432       $ 273       $ 95       $ 4,800   

Goodwill acquired

      73         —           54         127   

Foreign currency translation adjustment and other

      174         19         7         200   
                                   

Balance at December 31, 2010

    $ 4,679       $ 292       $ 156       $ 5,127   
                                   

 

As of December 31, 2010, the amount of goodwill that is expected to be deductible for tax purposes in future periods is $107 million.

 

The goodwill acquired for Market Services shown above relates to our acquisitions of FTEN in December 2010 and Nord Pool in May 2010. The goodwill acquired for Market Technology relates to our acquisition of SMARTS in August 2010. See Note 3, "Acquisitions and Strategic Initiatives," for further discussion.

 

Purchased Intangible Assets

 

The following table presents details of our total purchased intangible assets, both finite- and indefinite-lived:

 

    December 31, 2010     December 31, 2009  
    Gross
Carrying
Amount		     Accumulated
Amortization		     Net
Intangible
Assets		     Weighted-
Average
Useful
Life (in
Years)		     Gross
Carrying
Amount		     Accumulated
Amortization		     Net
Intangible
Assets		     Weighted-
Average
Useful
Life (in
Years)		  
    (in millions)     (in millions)  

Finite-Lived Intangible Assets

                

Technology

   $ 72      $ (41 )    $ 31        6      $ 65      $ (41 )    $ 24        4   

Customer relationships

     853        (152 )      701        21        813        (110 )      703        21   

Other

     6        (1 )      5        8        5        (1 )      4        10   

Foreign currency translation adjustment

     (15 )      4        (11 )        (45 )      7        (38 )   
                                                   

Total finite-lived intangible assets

   $ 916      $ (190 )    $ 726        $ 838      $ (145 )    $ 693     
                                                   

Indefinite-Lived Intangible Assets

                

Exchange and clearing registrations

   $ 790      $ —        $ 790        $ 790      $ —        $ 790     

Trade names

     181        —          181          173        —          173     

Licenses

     78        —          78          76        —          76     

Foreign currency translation adjustment

     (56 )      —          (56 )        (101 )      —          (101 )   
                                                   

Total indefinite-lived intangible assets

   $ 993      $ —        $ 993        $ 938      $ —        $ 938     
                                                   

Total intangible assets

   $ 1,909      $ (190 )    $ 1,719        $ 1,776      $ (145 )    $ 1,631     
                                                   

 

Amortization expense for purchased finite-lived intangible assets was $57 million for the years ended December 31, 2010 and 2009 and $48 million for the year ended December 31, 2008. The increase in amortization expense in 2009 compared to 2008 was primarily due to intangible asset amortization expense on identifiable finite-lived intangible assets purchased in connection with the OMX AB business combination and the acquisitions of PHLX and certain businesses of Nord Pool from the date of each acquisition.

 

In 2008, due to an operating loss and a projection of future cash flow losses due to lower contract rates for Carpenter Moore, which was part of Corporate Solutions within our Issuer Services segment, we evaluated the ongoing value of the intangible assets associated with this business. Based on this evaluation, we determined that finite-lived intangible assets, consisting primarily of customer relationships and technology, with a carrying value of approximately $7 million, were no longer recoverable and were in fact impaired, and wrote them down to their estimated fair value of zero. The risk-adjusted discount rates used to compute the present value of the expected net cash flows of individual intangible assets were based on Carpenter Moore's weighted average cost of capital, which ranged from 14.5% to 16.9%. These discount rates were determined after consideration of Carpenter Moore's rate of return on debt and equity and the weighted-average return on invested capital. We recorded the impairment loss in asset impairment charges in the Consolidated Statements of Income for the year ended December 31, 2008. In October 2009, we sold substantially all of our Carpenter Moore business and recorded a gain of $7 million included in gain on sales of businesses in the Consolidated Statements of Income.

 

The estimated future amortization expense (excluding the impact of foreign currency translation adjustments of $11 million as of December 31, 2010) of purchased intangible assets as of December 31, 2010 is as follows:

 

     (in millions)  

2011

    $ 53   

2012

      50   

2013

      49   

2014

      47   

2015

      45   

2016 and thereafter

      493   
        

Total

    $ 737   
        

 

Investments
Investments

5. Investments

 

Trading Securities

 

Trading securities, which are included in financial investments, at fair value in the Consolidated Balance Sheets, were $220 million as of December 31, 2010 and $308 million as of December 31, 2009. These securities are primarily comprised of Swedish government debt securities, of which $190 million as of December 31, 2010 and $183 million as of December 31, 2009, are restricted assets to meet regulatory capital requirements for NASDAQ OMX Stockholm's clearing operations.

 

Available-for-Sale Investment Securities

 

Investment in DFM

 

Our available-for-sale investment security, which is included in financial investments, at fair value in the Consolidated Balance Sheets, represents our 1% investment in DFM. In May 2010, we completed the exchange of our equity interest in NASDAQ Dubai for a 1% investment in DFM. See "Investment in NASDAQ Dubai" below for further discussion.

 

As of December 31, 2010, the cost basis of this security was $36 million and the fair value was $33 million. The $3 million change between the cost basis and fair value is reflected as an unrealized holding loss in accumulated other comprehensive loss in the Consolidated Balance Sheets. We reviewed the carrying value of this investment security to determine whether an other-than-temporary decline in value exists. We considered factors affecting the investee, factors affecting the industry the investee operates in and general market trends. We also considered the length of time the market value has been below the cost basis and the near-term prospects for recovery of unrealized losses. As of December 31, 2010, we have not recognized an other-than-temporary decline in value on this investment security.

 

Investment in Oslo

 

In connection with our business combination with OMX AB, we acquired a long-term available-for-sale investment security in Oslo. In 2008, we recorded an other-than-temporary impairment loss on this investment security of $35 million in asset impairment charges in the Consolidated Statements of Income. During the second quarter of 2009, we made a strategic decision to sell this investment security, demonstrating our intent to no longer hold this investment, and recorded a $5 million loss, which includes costs directly related to the sale, primarily broker fees. This loss is included in loss on sale of investment security in the Consolidated Statements of Income for the year ended December 31, 2009.

 

Equity Method Investments

 

The equity method of accounting is used when we own less than 50% of the outstanding voting stock, but exercise significant influence over the operating and financial policies of a company.

 

Equity interest in our equity method investments was $27 million as of December 31, 2010, which consisted primarily of our equity interest in EMCF. Equity interest in our equity method investments was $66 million as of December 31, 2009, which consisted primarily of our equity interests in NASDAQ Dubai and EMCF. Equity method investments are included in other assets in the Consolidated Balance Sheets. As discussed above, we completed the exchange of our equity interest in NASDAQ Dubai for a 1% available-for-sale investment in DFM in May 2010. See "Investment in NASDAQ Dubai" below for further discussion.

 

Income (loss) recognized from our equity interest in the earnings and losses of these companies was a net gain of $2 million for the year ended December 31, 2010 compared with a net loss of $107 million for the year ended December 31, 2009. The net loss during the year ended December 31, 2009 was primarily due to impairment charges relating to NASDAQ Dubai and Agora-X and the sale of our investment in Orc. See "Investment in NASDAQ Dubai," "Investment in Orc Software," and "Impairment of Agora-X," below for further discussion.

 

Income (loss) recognized from our equity method investments is included in income (loss) from unconsolidated investees, net in the Consolidated Statements of Income.

 

Investment in NASDAQ Dubai

 

In December 2009, we agreed to participate in the realignment of the ownership structure of NASDAQ Dubai. The realignment was completed in May 2010 and at that time, NASDAQ Dubai became a wholly-owned subsidiary of DFM, a publicly traded company controlled by Borse Dubai. We received a 1% equity interest in DFM in exchange for our equity interest in NASDAQ Dubai. Our existing technology and trademark licensing arrangements with Borse Dubai and NASDAQ Dubai remain unchanged.

 

In connection with the realignment of the ownership structure discussed above, a third-party specialist determined the fair value of NASDAQ Dubai. Based on this valuation, we determined our carrying value of NASDAQ Dubai was no longer recoverable and was in fact impaired, and we wrote down our investment to fair value which resulted in an $82 million pre-tax, non-cash impairment charge for the year ended December 31, 2009.

 

At the time of the realignment in May 2010, we recorded a pre-tax, non cash loss of $1 million in income (loss) from unconsolidated investees, net in the Consolidated Statements of Income, which was based on the difference between the price of DFM common stock multiplied by the number of shares of DFM acquired and the carrying value of our investment in NASDAQ Dubai at the time of the exchange.

 

NASDAQ Dubai and DFM are related parties, as both of them are primarily owned by Borse Dubai, our largest stockholder.

 

Investment in Orc Software

 

During the second quarter of 2009, we made a strategic decision to sell our investment in Orc, demonstrating our intent to no longer hold this investment. We sold shares representing 25.25% of the share capital of Orc to a group of Swedish and other international investors for $54 million in cash. As a result of the sale, we recognized a $19 million loss, which includes costs directly related to the sale, primarily broker fees. The loss is included in income (loss) from unconsolidated investees, net in the

Consolidated Statements of Income for the year ended December 31, 2009.

 

Impairment of Agora-X

 

In December 2009, we entered into an agreement to increase our investment in Agora-X from 20% to 85%. In evaluating the fair value of the total investment, it was determined that our carrying value of Agora-X was no longer recoverable and was in fact impaired, and we wrote down our investment to fair value which resulted in a pre-tax, non-cash impairment charge of $5 million.

Property and Equipment, Net
Property and Equipment, net

6. Property and Equipment, net

 

The following table presents our major categories of property and equipment, net:

 

     December 31,  
     2010     2009  
     (in millions)  

Data processing equipment and software

    $ 348      $ 313   

Furniture, equipment and leasehold improvements

      180        178   
                
     528        491   

Less: accumulated depreciation and amortization

      (364 )      (327 ) 
                

Total property and equipment, net

    $ 164      $ 164   
                

 

Depreciation and amortization expense for property and equipment was $46 million for the year ended December 31, 2010, $47 million for the year ended December 31, 2009 and $45 million for the year ended December 31, 2008. These amounts are included in depreciation and amortization expense in the Consolidated Statements of Income.

 

As of December 31, 2010 and 2009, we do not own any real estate properties.

 

Deferred Revenue
Deferred Revenue

7. Deferred Revenue

 

Deferred revenue represents cash payments received that are yet to be recognized as revenue. At December 31, 2010, we have estimated that our deferred revenue, which is primarily related to Global Listing Services and Market Technology fees, will be recognized in the following years:

 

     Initial
Listing
Fees		      Listing of
Additional
Shares Fees		      Annual
Renewal Fees
and Other		      Market
Technology(1) 		     Total  
     (in millions)  

Fiscal year ended:

               

2011

    $   15       $ 35       $ 21       $ 51       $   122   

2012

      11         25         —           29         65   

2013

      7         17         —           28         52   

2014

      5         6         —           19         30   

2015

      3         —           —           11         14   

2016 and thereafter

      1         —           —           8         9   
                                            
   $   42       $ 83       $ 21       $ 146       $   292   
                                            

(1)

The timing of recognition of our deferred Market Technology revenues is dependent upon when significant modifications are made pursuant to existing contracts. As such, as it relates to these fees, the timing represents our best estimate.

 

Our deferred revenue during the years ended December 31, 2010 and 2009 is reflected in the following table.

 

     Initial
Listing
Fees		     Listing of
Additional
Shares Fees		     Annual
Renewal Fees
and Other		     Market
Technology(2) 		    Total  
     (in millions)  

Balance at January 1, 2009

    $ 57      $ 74      $ 21      $ 101      $ 253   

Additions(1)

     9        39        169        87        304   

Amortization(1)

     (20 )      (37 )      (173 )      (64 )      (294 ) 

Foreign currency translation adjustment

      —          —          1        1        2   
                                        

Balance at December 31, 2009

    $ 46      $ 76      $ 18      $   125      $ 265   
                                        

Additions(1)

     14        46        222        32        314   

Amortization(1)

     (18 )      (39 )      (219 )      (13 )      (289 ) 

Foreign currency translation adjustment

      —          —          —          2        2   
                                        

Balance at December 31, 2010

    $ 42      $ 83      $ 21      $   146      $ 292   
                                        

(1)

The additions and amortization for initial listing fees, listing of additional shares fees and annual renewal fees and other primarily reflect Issuer Services revenues from U.S. listing fees.

(2)

Market Technology deferred revenues include revenues from delivered client contracts in the support phase charged during the period. Under contract accounting, where customization and significant modifications to the software are made to meet the needs of our customers, total revenues as well as costs incurred, are deferred until significant modifications are completed and delivered. Once delivered, deferred revenue and the related deferred costs are recognized over the post contract support period. We have included the deferral of costs in other current assets and other assets in the Consolidated Balance Sheets. The amortization of Market Technology deferred revenue includes revenues earned from client contracts recognized during the period and from the technology licenses contributed to NASDAQ Dubai.

Debt Obligations
Debt Obligations

8. Debt Obligations

 

The following table presents the changes in our debt obligations during the year ended December 31, 2010:

 

    December 31,
2009		     Additions     Payments,
Conversions,
Accretion and
Other		     December 31,
2010		  
    (in millions)  

3.75% convertible notes due October 22, 2012 (net of discount)(1)

  $ —        $ —        $ —        $ —     

2.50% convertible senior notes due August 15, 2013

    374        —          14        388   

4.00% senior unsecured notes due January 15, 2015 (net of discount)(2)

    —          398        —          398   

5.55% senior unsecured notes due January 15, 2020 (net of discount)(2)

    —          598        —          598   

$700 million senior unsecured term loan facility credit agreement due January 15, 2013 (average interest rate of 2.33% for the year ended December 31, 2010)(2)

    —          700        (130 )      570   

5.25% senior unsecured notes due January 16, 2018, (net of discount)(3)

    —          367        —          367   

Senior unsecured bridge facility(4)

    —          370        (370 )     —     

6.25% subordinated debt assumed from the acquisition of Nord Pool's derivatives, clearing and consulting subsidiaries repaid in May 2010(5)

    18        —          (18 )      —     

$2,000 million senior secured term credit facilities repaid January 2010(2)

    1,700        —          (1,700 )      —     
                               

Total debt obligations

     2,092        2,433        (2,204 )      2,321   

Less current portion

     (225 )      —          85        (140 ) 
                               

Total long-term debt obligations

   $ 1,867      $ 2,433      $ (2,119 )    $ 2,181   
                               

(1)

In September 2009, most holders of our outstanding 3.75% convertible notes converted their outstanding positions into common stock. As of December 31, 2010 and December 31, 2009, approximately $0.5 million aggregate principal amount of the 3.75% convertible notes remained outstanding. For further discussion, see "3.75% Convertible Notes" below.

(2)

See "Senior Unsecured Notes, Credit Facility and Repayment of Our Senior Secured Credit Facilities in Place as of December 31, 2009" below for further discussion.

(3)

See "5.25% Senior Unsecured Notes" below for further discussion.

(4)

See "Bridge Facility" below for further discussion.

(5)

Our subordinated debt obligation assumed in the acquisition of Nord Pool's derivatives, clearing and consulting subsidiaries was denominated in Norwegian Krone and totaled 100 million Norwegian Krone ($18 million as of December 31, 2009 and $16 million at the time of the repayment in May 2010). The difference of $2 million reflects changes in foreign currency exchange rates.

 

3.75% Convertible Notes

 

The 3.75% convertible notes were originally issued to Hellman & Friedman, or H&F ($300 million), SLP ($141 million) and other holders ($4 million) in order to finance the acquisition of INET. These notes were convertible into our common stock at a price of $14.50 per share, representing 30,689,655 shares subject to adjustment in general for any stock split, dividend, combination, recapitalization or similar event. We also issued warrants to purchase shares of our common stock at a price of $14.50 per share to H&F (3,400,000 shares), SLP (1,523,325 shares) and other holders (39,175 shares). The warrants became exercisable on April 22, 2006 and would have expired on December 8, 2008. During 2007, H&F converted all of their 3.75% convertible notes into common stock and exercised all of their outstanding warrants prior to expiration. During 2007 and 2008, SLP and other holders converted a portion of their 3.75% convertible notes into common stock and exercised all of their outstanding warrants prior to expiration. In September 2009, SLP and another holder, or Holders, converted their remaining outstanding 3.75% convertible notes into common stock in accordance with the terms of the notes. As an inducement for conversion, we agreed to pay the Holders and certain of their affiliates an aggregate amount of $9 million in cash and issue to the Holders shares of our series A convertible preferred stock, with an aggregate initial liquidation preference amount of $16 million. See "Preferred Stock," of Note 12, "NASDAQ OMX Stockholders' Equity," for further discussion.

 

As of December 31, 2010 and 2009, approximately $0.5 million aggregate principal amount of the 3.75% convertible notes remained outstanding.

 

2.50% Convertible Senior Notes

 

During the first quarter of 2008, in connection with the business combination with OMX AB, we completed the offering of $475 million aggregate principal amount of 2.50% convertible senior notes due 2013. The interest rate on the notes is 2.50% per annum payable semi-annually in arrears on February 15 and August 15 and will mature on August 15, 2013.

 

The notes are convertible in certain circumstances specified in the indenture for the notes. Upon conversion, holders will receive, at the election of NASDAQ OMX, cash, common stock or a combination of cash and common stock. It is our current intent and policy to settle the principal amount of the notes in cash. The conversion rate will initially be 18.1386 shares of common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $55.13 per share of common stock. At December 31, 2010, the 2.50% convertible senior notes are convertible into 7,757,283 shares of our common stock, subject to adjustment upon the occurrence of specified events. Subject to certain exceptions, if we undergo a "fundamental change" as described in the indenture, holders may require us to purchase their notes at a price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest.

 

Since the settlement structure of our 2.50% convertible senior notes permits settlement in cash upon conversion, we are required to separately account for the liability and equity components of the convertible debt in a manner that reflects our nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This entails bifurcation of a component of the debt, classification of that component in equity and then accretion of the resulting discount on the debt being reflected in the income statement as part of interest expense.

 

The changes in the liability and equity components of our 2.50% convertible senior notes during the year ended December 31, 2010 and 2009 are as follows:

 

     Liability Component     Equity Component  
     (in millions)     (in millions)  
     Principal
Balance		     Unamortized Debt
Discount		     Net Carrying
Amount		     Gross Equity
Component		     Deferred
Taxes		     Net Equity
Component		  

January 1, 2009

    $   475      $ 74      $   401      $ 85      $ 34      $ 51   

Accretion of debt discount

      —          (13 )      13        —          —          —     

Early extinguishment of debt

      (47 )      (7 )      (40 )      (5 )      (2 )      (3 ) 
                                                

December 31, 2009

    $ 428      $ 54      $ 374      $ 80      $ 32      $ 48   

Accretion of debt discount

      —          (14 )      14        —          —          —     
                                                

December 31, 2010

    $ 428      $ 40      $ 388      $ 80      $ 32      $ 48   
                                                

 

The unamortized debt discount on the convertible debt was $40 million as of December 31, 2010 and $54 million as of December 31, 2009 and is included in debt obligations in the Consolidated Balance Sheets. This amount will be accreted as part of interest expense through the maturity date of the convertible debt of August 15, 2013. The effective annual interest rate on the 2.50% convertible senior notes was 6.53% for the years ended December 31, 2010 and 2009, which includes the accretion of the debt discount in addition to the annual contractual interest rate of 2.50%.

 

As of December 31, 2010 and December 31, 2009, the equity component of the convertible debt included in additional paid-in capital in the Consolidated Balance Sheets was $48 million. This amount is calculated as follows: $80 million of excess principal of the convertible debt over the carrying amount less $32 million of deferred taxes. The deferred tax liability is determined by multiplying the $80 million of excess principal of the convertible debt over the carrying amount by the U.S. marginal tax rate of 39.55%.

 

Interest expense recognized on our 2.50% convertible senior notes in the Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008 is as follows:

 

     Year Ended
December 31,		  
     2010      2009      2008  
     (in millions)  

Components of interest expense recognized on our 2.50% convertible senior notes

         

Accretion of debt discount

    $  14       $  13       $  11   

Contractual interest

      10         11         10   
                          

Total interest expense recognized on our 2.50% convertible senior notes

    $ 24       $ 24       $ 21   
                          

 

Early Extinguishment of Debt

 

In 2009, we repurchased $47 million principal amount of the 2.50% convertible senior notes for a cash payment of $40 million and recognized a pre-tax gain on the early extinguishment of debt of $4 million (net of debt issuance and other costs of $0.8 million) which is recorded in general, administrative and other expense in the Consolidated Statements of Income. As a result of the $47 million repurchase, the remaining aggregate principal amount outstanding on these notes as of December 31, 2009 was $428 million. See above for further discussion.

 

Debt Issuance Costs

 

In 2008, in conjunction with the issuance of the 2.50% convertible senior notes, we incurred debt issuance costs of $10 million. These costs, which are capitalized and included in other assets in the Consolidated Balance Sheets, are being amortized over the life of the debt obligation. In connection with the early extinguishment of a portion of these notes, we recorded a pre-tax charge of $0.8 million for the year ended December 31, 2009 for debt issuance costs. See "Early Extinguishment of Debt" above for further discussion. Amortization expense, which is recorded as additional interest expense for these costs, was $2 million for the years ended December 31, 2010, 2009 and 2008.

 

Senior Unsecured Notes, Credit Facility and Repayment of Our Senior Secured Credit Facilities in Place as of December 31, 2009

 

In January 2010, NASDAQ OMX issued $1 billion of senior unsecured notes, or the Notes, and entered into a $950 million senior unsecured three-year credit facility. The credit facility provides for an unfunded $250 million revolving credit commitment (including a swingline facility and letter of credit facility), a $350 million funded Tranche A term loan and a $350 million funded Tranche X term loan. NASDAQ OMX applied the net proceeds from the Notes, the $700 million funded Term Loans and cash on hand to repay all amounts outstanding under our senior secured credit facilities in place as of December 31, 2009 and related fees. As a result, NASDAQ OMX terminated the associated credit agreement.

 

The Notes

 

The Notes were issued at a discount in two separate series consisting of $400 million aggregate principal amount of 4.00% senior notes due 2015 and $600 million aggregate principal amount of 5.55% senior notes due 2020. As a result of the discount, the proceeds received from the issuance were less than the aggregate principal amounts. As of December 31, 2010, the balance of $398 million for the 4.00% senior notes due 2015 and the balance of $598 million for the 5.55% senior notes due 2020, reflects the aggregate principal amounts, less the unamortized debt discount. The unamortized debt discount will be accreted through interest expense over the life of the Notes.

 

The 2015 Notes pay interest semiannually at a rate of 4.00% per annum until January 15, 2015, and the 2020 Notes pay interest semiannually at a rate of 5.55% per annum until January 15, 2020. The Notes are general unsecured obligations of ours and rank equally with all of our existing and future unsubordinated obligations. The Notes are not guaranteed by any of our subsidiaries. The Notes were issued under an indenture that, among other things, limits our ability to consolidate, merge or sell all or substantially all of our assets, create liens, and enter into sale and leaseback transactions.

 

Credit Facility

 

The credit facility provides for an unfunded $250 million revolving credit commitment (including a swingline facility and letter of credit facility), a $350 million funded Term Loan A and a $350 million funded Term Loan X. The loans under the credit facility have a variable interest rate based on either the London Interbank Offered Rate, or LIBOR, or the Federal Funds Rate, plus an applicable margin that varies with NASDAQ OMX's debt rating.

 

As required under our credit facility, we paid quarterly principal payments of $35 million on our Term Loans beginning in the third quarter of 2010. Total required payments were $70 million during 2010. In addition to the required quarterly payments, we made optional payments totaling $60 million of principal on our Term Loans during 2010.

 

The credit facility contains financial and operating covenants. Financial covenants include an interest expense coverage ratio and a maximum leverage ratio. Operating covenants include limitations on NASDAQ OMX's ability to incur additional indebtedness, grant liens on assets, enter into affiliate transactions and pay dividends.

 

The credit facility also contains customary affirmative covenants, including access to financial statements, notice of defaults and certain other material events, maintenance of business and insurance, and events of default, including cross-defaults to our material indebtedness.

 

NASDAQ OMX is permitted to repay borrowings under the credit facility at any time in whole or in part, without penalty. We also are required to repay loans outstanding under the credit facility with net cash proceeds from sales of property and assets of NASDAQ OMX and its subsidiaries (excluding inventory sales and other sales in the ordinary course of business) and casualty and condemnation proceeds, in each case subject to specified exceptions and thresholds.

 

Debt Issuance Costs

 

We incurred debt issuance and other costs of $21 million in connection with the issuance of the Notes and the entry into the new credit facility. These costs, which are capitalized and included in other assets in the Consolidated Balance Sheets, are being amortized over the life of the debt obligations. Amortization expense, which is recorded as additional interest expense for these costs, was $5 million for the year ended December 31, 2010.

 

Bridge Facility

 

In December 2010, NASDAQ OMX entered into a $400 million senior unsecured bridge facility and borrowed $370 million to partially finance the purchase of our stock from Borse Dubai. See "Share Repurchase from Borse Dubai," of Note 12, "NASDAQ OMX Stockholders' Equity," for further discussion of our share repurchase from Borse Dubai. We applied the net proceeds from the issuance of our 2018 notes, discussed below, and cash on hand to repay all amounts outstanding under the bridge facility and terminated the bridge facility as of December 31, 2010. The effective interest rate on borrowings under the bridge facility was 1.76%. Interest expense was immaterial for the year ended December 31, 2010.

 

5.25% Senior Unsecured Notes

 

In December 2010, NASDAQ OMX issued $370 million of 5.25% senior unsecured notes due 2018. We applied the net proceeds from the 2018 Notes of $367 million and cash on hand of $3 million to repay all amounts outstanding under our bridge facility, discussed above, as well as related fees.

 

The 2018 Notes were issued at a discount. As a result of the discount, the proceeds received from the issuance were less than the aggregate principal amount. As of December 31, 2010, the balance of $367 million reflects the aggregate principal amount, less the unamortized debt discount. The unamortized debt discount will be accreted though interest expense over the life of the 2018 Notes.

 

The 2018 Notes pay interest semiannually at a rate of 5.25% per annum until January 16, 2018 and may vary with NASDAQ OMX's debt rating up to a rate not to exceed 7.25%. The 2018 Notes are general unsecured obligations of ours and rank equally with all of our existing and future unsubordinated obligations. They are not guaranteed by any of our subsidiaries. The 2018 Notes were issued under indentures that among other things, limits our ability to consolidate, merge or sell all or substantially all of our assets, create liens, and enter into sale and leaseback transactions. In addition, upon a change of control triggering event (as defined in the indenture), the terms require us to repurchase all or part of each holder's notes for cash equal to 101% of the aggregate principal amount purchased plus accrued and unpaid interest, if any.

 

Debt Issuance Costs

 

We incurred debt issuance and other costs of $3 million in connection with the issuance of the 2018 Notes. These costs, which are capitalized and included in other assets in the Consolidated Balance Sheets, are being amortized over the life of the debt obligation. Amortization expense, which is recorded as additional interest expense for these costs, was immaterial for the year ended December 31, 2010.

 

Senior Secured Credit Facilities in Place as of December 31, 2009

 

In connection with the business combination with OMX AB, on February 27, 2008, NASDAQ OMX entered into a credit agreement which provided for up to $2,075 million of senior secured loans, which included (i) a five-year, $2,000 million senior secured term loan facility, or the Term Loan Facility, which consisted of (a) a $1,050 million term loan facility allocated to the OMX AB business combination, (b) a $650 million term loan facility allocated to the acquisition of PHLX, and (c) a $300 million term loan facility allocated to the Nord Pool transaction, and (ii) a five-year, $75 million senior secured revolving credit facility, with a letter of credit subfacility and swingline loan subfacility, or the Revolving Credit Facility, and together with the Term Loan Facility, the senior secured credit facilities in place as of December 31, 2009. The Revolving Credit Facility was undrawn as of December 31, 2009.

 

In addition, NASDAQ OMX may have requested that prospective additional lenders under the senior secured credit facilities in place as of December 31, 2009 agree to make available incremental term loans and incremental revolving commitments from time to time in an aggregate amount not to exceed $200 million.

 

In addition to financing the business combination with OMX AB, the acquisition of PHLX and the Nord Pool transaction, we used the debt financing under the senior secured credit facilities in place as of December 31, 2009 to pay fees and expenses incurred in connection with such transactions and repay certain indebtedness of OMX AB.

 

In January 2010, NASDAQ OMX applied the net proceeds from the Notes, the $700 million funded Term Loans and cash on hand to repay all amounts outstanding under our senior secured credit facilities in place as of December 31, 2009 and related fees. As a result, NASDAQ OMX terminated the associated credit agreement.

 

Borrowings under the senior secured credit facilities in place as of December 31, 2009 (other than swingline loans) bore interest at (i) the base rate (the higher of the prime rate announced by the Bank of America, N.A, and the federal funds effective rate plus 0.50%), plus an applicable margin, or (ii) the LIBO rate (set by the British Bankers Association LIBOR Rate), plus an applicable margin. The interest rate on swingline loans made under the senior secured credit facilities in place as of December 31, 2009 was the base rate, plus an applicable margin.

 

NASDAQ OMX's obligations under the senior secured credit facilities in place as of December 31, 2009 (i) were guaranteed by each of the existing and future direct and indirect material wholly-owned domestic subsidiaries of NASDAQ OMX, subject to certain exceptions, and (ii) were secured, subject to certain exceptions, by all the capital stock of each of our present and future subsidiaries (limited, in the case of foreign subsidiaries, to 65.0% of the voting stock of such subsidiaries) and all of the present and future property and assets (real and personal) of NASDAQ OMX and the guarantors.

 

NASDAQ OMX was permitted to repay borrowings under the senior secured credit facilities in place as of December 31, 2009 at any time in whole or in part, without penalty.

 

Principal Amortization Payment

 

As required under our senior secured credit facilities in place as of December 31, 2009, during 2009, we repaid a principal amount of $225 million on our borrowings under the senior secured credit facilities in place as of December 31, 2009.

 

Interest Rate Swaps

 

Under the provisions of our senior secured credit facilities in place as of December 31, 2009, we were required to maintain approximately 30% of our debt structure on a fixed rate basis for two years from the date of the credit agreement. As such, in August 2008, we entered into interest rate swap agreements that effectively converted $200 million of funds borrowed under our senior secured credit facilities in place as of December 31, 2009, which was floating rate debt, to a fixed rate basis through August 2011. The interest rate swaps were fixed to a base rate of 3.73% plus the current credit spread of 200 basis points as of December 31, 2009. The credit spread (not to exceed 200 basis points) was subject to change based upon the leverage ratio in accordance with the senior secured credit facilities in place as of December 31, 2009. In connection with the repayment of these senior secured credit facilities in place as of December 31, 2009 in January 2010, we terminated our interest rate swaps. See "Cash Flow Hedges," of Note 15, "Derivative Financial Instruments and Hedging Activities," for further discussion.

 

Debt Issuance Costs

 

In 2008, in conjunction with our senior secured credit facilities in place as of December 31, 2009, we incurred debt issuance costs of $44 million. These costs, which were capitalized and included in other assets in the Consolidated Balance Sheets, were being amortized over the life of the debt obligation. Amortization expense, which was recorded as additional interest expense for these costs, was $9 million for the year ended December 31, 2009 and $7 million for the year ended December 31, 2008.

 

In January 2010, as a result of the repayment of our senior secured credit facilities in place as of December 31, 2009, we recorded a pre-tax charge of $40 million, which included the write-off of the remaining unamortized balance of debt issuance costs incurred of $28 million, costs to terminate our float-to-fixed interest rate swaps previously designated as a cash flow hedge of $9 million and other costs of $3 million. These charges are included in general, administrative and other expense in the Consolidated Statements of Income for the year ended December 31, 2010.

 

Other Credit Facilities

 

In addition to the $250 million revolving credit commitment discussed above, we have credit facilities related to our clearinghouses in order to meet liquidity and regulatory requirements. These credit facilities, which are available in multiple currencies, primarily Swedish Krona and U.S. dollar, totaled $440 million ($196 million in available liquidity and $244 million to satisfy regulatory requirements), none of which was utilized at December 31, 2010. At December 31, 2009, these facilities totaled $417 million ($185 million in available liquidity which can be pledged as collateral and $232 million to satisfy regulatory requirements), none of which was utilized.

 

Debt Covenants

 

At December 31, 2010, we were in compliance with the covenants of all of our debt obligations.

Income Taxes
Income Taxes

9. Income Taxes

 

The income tax provision consists of the following amounts:

 

     Year Ended December 31,  
   2010     2009     2008  
     (in millions)  

Current income taxes:

       

Federal

    $ 116      $ 96      $ 220   

State

      36        32        49   

Foreign

      20        10        36   
                        

Total current income taxes

      172        138        305   
                        

Deferred income taxes:

       

Federal

      (25 )      (26 )      (61 ) 

State

      (26 )      8        (14 ) 

Foreign

      16        8        (32 ) 
                        

Total deferred income taxes

      (35 )      (10 )      (107 ) 
                        

Total income tax provision

    $ 137      $ 128      $ 198   
                        

 

U.S. federal taxes have not been provided on undistributed earnings of certain non-U.S. subsidiaries to the extent such earnings will be reinvested abroad for an indefinite period of time. At December 31, 2010, the cumulative amount of undistributed earnings in these subsidiaries is approximately $70 million. We have the intent and ability to indefinitely reinvest the undistributed earnings of our non-U.S. subsidiaries.

 

A reconciliation of the income tax provision, based on the U.S. federal statutory rate, to our actual income tax provision for the years ended December 31, 2010, 2009 and 2008 is as follows:

 

     Year Ended December 31,  
     2010      2009      2008  
     (in millions)  

Federal income tax provision at the statutory rate

      35.0 %       35.0 %       35.0 % 

State income tax provision, net of federal effect

      4.2 %       6.6 %       4.5 % 

Foreign income tax provision at a rate different than the federal rate

      (3.2 )%       (3.6 )%       (3.3 )% 

Foreign asset impairment loss, not deductible for tax purposes

      —           —           1.9 % 

Earnings from foreign affiliates, not subject to tax

      (3.5 )%       (4.8 )%       —     

Nondeductible expenses

      0.3 %       2.8 %       0.2 % 

Change in deferred taxes due to change in tax rate(1)

     (3.0 )%       —           —     

Excess capital loss carry back(1)

     (2.4 )%       —           —     

Other, net

      (1.4 )%       (3.3 )%       0.3 % 
                          

Actual income tax provision(1)

     26.0 %       32.7 %       38.6 % 
                          

 

(1)

The lower effective tax rate in 2010 when compared to 2009 was primarily due to the restructuring of certain NASDAQ OMX subsidiaries. These transactions resulted in one-time reductions in deferred tax liabilities due to a revised effective tax rate and a one-time tax deduction for a capital loss.

 

The temporary differences, which give rise to our deferred tax assets and (liabilities), consisted of the following:

 

     December 31,  
     2010      2009  
     (in millions)  

Deferred tax assets:

      

Deferred revenues

    $     28       $     31   

U.S. federal net operating loss

      20         4   

Foreign net operating loss

      104         129   

State net operating loss

      1         4   

Compensation and benefits

      77         68   

Investments

      —           55   

Foreign currency translation

      155         253   

Lease reserves

      8         18   

Tax credits

      5         5   

Excess capital loss

      64         —     

Other

      15         14   
                 

Gross deferred tax assets

      477         581   
                 

Deferred tax liabilities:

      

Amortization of software development costs and depreciation

      (25 )       (24 ) 

Amortization of acquired intangible assets

      (653 )       (644 ) 

Adoption of ASC 470.20, net of accretion

      (19 )       (24 ) 

Other

      (27 )       (14 ) 
                 

Gross deferred tax liabilities

      (724 )       (706 ) 
                 

Net deferred tax liabilities before valuation allowance

      (247 )       (125 ) 
                 

Less: valuation allowance

      (31 )       (52 ) 
                 

Net deferred tax liabilities

    $ (278 )     $ (177 ) 
                 

 

A valuation allowance has been established with regards to the tax benefits associated with certain net operating losses, as it is more likely than not that these losses will not be realized in the future.

 

The U.S. federal net operating loss of $20 million, which includes $14 million related to the acquisition of FTEN in December 2010 and $6 million related to subsidiaries of OMX that are not included in our U.S. federal consolidated income tax return, will expire in years 2022-2030. Of the $104 million foreign net operating loss, $17 million will expire in years 2018-2025 and $87 million has no expiration date. The $1 million state net operating loss will expire in years 2013-2029. The excess capital loss of $64 million will be offset against capital gains realized in 2007.

 

The following represents the domestic and foreign components of income before income tax provision:

 

     Year Ended December 31,  
     2010      2009      2008  
     (in millions)  

Domestic

    $   393       $   325       $   448   

Foreign

      133         66         65   
                          

Income before income tax provision

    $ 526       $ 391       $ 513   
                          

 

In 2010, 2009 and 2008, we recorded income tax benefits of $2 million, $4 million and $5 million, respectively, primarily related to employee stock option exercises. These amounts were recorded as additional paid-in-capital in the Consolidated Balance Sheets.

 

We are subject to examination by federal, state and local, and foreign tax authorities. We regularly assess the likelihood of additional assessments by each jurisdiction and have established tax reserves that we believe are adequate in relation to the potential for additional assessments. We believe that the resolution of tax matters will not have a material effect on our financial condition but may be material to our operating results for a particular period and upon the effective tax rate for that period.

 

As of December 31, 2010, we had $12 million of unrecognized benefits, of which $8 million would affect our effective tax rate if recognized. As of December 31, 2009, we had $11 million of unrecognized benefits, of which $6 million would affect our effective tax rate if recognized.

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

 

     Year Ended
December 31,		  
     2010      2009  
     (in millions)  

Beginning balance

    $   11       $     9   

Additions as a result of tax positions taken in prior periods

      1         1   

Additions as a result of tax positions taken in the current period

      2         3   

Reductions due to the settlement from tax authorities

      (2 )       (2 ) 
                 

Ending balance

    $ 12       $ 11   
                 

 

Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. As of December 31, 2010, we had accrued $4 million for interest and penalties, net of tax effect. As of December 31, 2009, we had accrued $2 million for interest and penalties, net of tax effect.

 

NASDAQ OMX and its eligible subsidiaries file a consolidated U.S. federal income tax return and applicable state and local income tax returns and non-U.S. income tax returns. Federal income tax returns for the years 2007 through 2009 are subject to examination by the Internal Revenue Service. Several state tax returns are currently under examination by the respective tax authorities for the years 2000 through 2008 and we are subject to examination for 2009. Non-U.S. tax returns are subject to review by the respective tax authorities for the years 2003 through 2009. In August 2010, we paid the state of California $2 million with respect to audits for the years 1996 through 1998 and the years 2000 through 2006. Since this amount was included in our unrecognized tax benefits as of December 31, 2009, such payment does not affect our 2010 effective tax rate. The outcome of these audits did not have a material impact on our financial position or results of operations. We anticipate that the amount of unrecognized tax benefits at December 31, 2010 will significantly decrease in the next twelve months as we expect to settle certain tax audits. The final outcome of such audits cannot yet be determined. We anticipate that such adjustments will not have a material impact on our consolidated financial position or results of operations.

 

In the fourth quarter of 2010, we received an appeal from the Finnish Tax Authority in which such authority challenges certain interest expense deductions claimed by NASDAQ OMX in Finland for the years 2009 and 2008. NASDAQ OMX's tax return position with respect to this deduction was previously reviewed and approved by the Finnish Tax Authority. The appeal also demands certain penalties be paid with regards to such tax return filing position. If the Finnish Tax Authority prevails in their challenge, additional tax and penalties for such years would total approximately $10 million. We expect the Finnish Tax Authority to agree with our position once its review is completed and, as such, it is unlikely NASDSAQ OMX will be assessed any additional tax and penalties. Through December 31, 2010, we have recorded the tax benefits associated with such filing position.

 

In June 2009, NASDAQ OMX filed an application for an advance tax ruling with the Swedish Tax Council for Advance Tax Rulings. The application was filed to confirm whether certain interest expense is deductible for Swedish tax purposes under legislation that became effective on January 1, 2009. In June 2010, we received a favorable response from the Swedish Tax Council for Advance Tax Rulings in which all members of the Council agreed that such interest expense is deductible for Swedish tax purposes. The Swedish Tax Agency has recently appealed such ruling to the Swedish Supreme Administrative Court. We expect the Swedish Supreme Administrative Court to agree with the ruling from the Swedish Tax Council for Advance Tax Rulings. For the year ended December 31, 2010, we recorded a tax benefit of $18 million, or $0.09 per diluted share, related to this matter. Since January 1, 2009, we have recorded a tax benefit of $37 million, or $0.18 per diluted share, related to this matter.

Employee Benefits
Employee Benefits

10. Employee Benefits

 

U.S. Defined-Benefit Pension and Supplemental Executive Retirement Plans

 

We maintain non-contributory, defined-benefit pension plans, non-qualified supplemental executive retirement plans, or SERPs, for certain senior executives and post-retirement benefit plans for eligible employees in the U.S., collectively referred to as the NASDAQ OMX Benefit Plans.

 

Our pension plans and SERPs are frozen. Future service and salary for all participants do not count toward an accrual of benefits under the pension plans and SERPs.

 

Components of Net Periodic Benefit Cost

 

The following table sets forth the components of net periodic pension, SERP and post-retirement benefits costs from the NASDAQ OMX Benefit Plans recognized in compensation and benefits expense in the Consolidated Statements of Income:

 

     Year Ended December 31,  
     2010      2009      2008 (1)  
     (in millions)  

Components of net periodic benefit cost

         

Service cost

    $   —         $   —         $ 1   

Interest cost

      7         7         4   

Expected return on plan assets

      (5 )       (4 )       (3 ) 

Recognized net actuarial (gain) loss

      3         (2 )       —     

Settlement loss recognized

      1         1         —     

Curtailment gain

      —           —           (1 ) 
                          

Benefit cost (gain)

    $ 6       $ 2       $ 1   
                          

(1)

The NASDAQ OMX PHLX benefit costs are from the date of acquisition.

 

Benefit Obligations and Funded Status

 

The following table provides a reconciliation of the changes in the benefit obligation, the plan assets and the funded status of the NASDAQ OMX Benefit Plans.

 

     2010     2009  
     Pension     SERP     Post-
retirement		     Total     Pension     SERP     Post-
retirement		     Total  
     (in millions)  

Change in benefit obligation

                 

Benefit obligation at beginning of year

    $ 77      $ 29      $ 9      $ 115      $ 61      $ 29      $ 10      $ 100   

Interest cost

      4        2        1        7        4        2        1        7   

Actuarial losses (gains)

      —          —          1        1        1        (3 )      (3 )      (5 ) 

Benefits paid

      (2 )      (2 )      —          (4 )      (1 )      (2 )      —          (3 ) 

Settlements

      (3 )      —          —          (3 )      (3 )      —          —          (3 ) 

Loss due to change in discount rate

      7        1        1        9        15        3        1        19   
                                                                

Benefit obligation at end of year

      83        30        12        125        77        29        9        115   
                                                                

Change in plan assets

                 

Fair value of plan assets at beginning of year

      58        —          —          58        43        —          —          43   

Actual return on plan assets

      4        —          —          4        10        —          —          10   

Company contributions

      5        2        —          7        9        2        —          11   

Benefits paid

      (2 )      (2 )      —          (4 )      (1 )      (2 )      —          (3 ) 

Settlements

      (3 )      —          —          (3 )      (3 )      —          —          (3 ) 
                                                                

Fair value of plan assets at end of year

      62        —          —          62        58        —          —          58   
                                                                

Underfunded status of the plans

      (21 )      (30 )      (12 )      (63 )      (19 )      (29 )      (9 )      (57 ) 

Accumulated benefit obligation

    $ 83      $ 30      $ 12      $ 125      $ 77      $ 29      $ 9      $ 115   

 

The total underfunded status of the NASDAQ OMX Benefit Plans of $63 million at December 31, 2010 and $57 million at December 31, 2009 is included in other liabilities and accrued personnel costs in the Consolidated Balance Sheets. No plan assets are expected to be returned to us during the year ending December 31, 2011.

 

Actuarial Assumptions

 

The following tables provide the weighted-average actuarial assumptions for the NASDAQ OMX Benefit Plans.

 

Weighted-average assumptions used to determine benefit obligations at the end of the fiscal year:

 

     2010     2009  

Discount rate:

     

Pension

      5.25 %      5.75 % 

SERP

      5.25 %      5.75 % 

Post-retirement

      5.25 %      5.75 % 

Rate of compensation increase:

     

Pension

      N/A        N/A   

SERP

      N/A        N/A   

Post-retirement

      N/A        N/A   

 

Weighted-average assumptions used to determine net benefit cost for the fiscal year:

 

     2010     2009     2008  

Discount rate:

       

Pension

      5.75 %      7.00 %      6.10 % 

SERP

      5.75 %      7.00 %      6.10 % 

Post-retirement

      5.75 %      7.00 %      6.00 % 

Rate of compensation increase:

       

Pension

     N/A        N/A        N/A   

SERP

     N/A        N/A        N/A   

Post-retirement

      N/A