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1. Organization and Nature of Operations
We are a leading global exchange group that delivers trading, clearing, exchange technology, regulatory, 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 March 31, 2012, The NASDAQ Stock Market was home to 2,665 listed companies with a combined market capitalization of approximately $5.2 trillion. Also, 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 over-the-counter, or 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. Through NASDAQ OMX First North, our Nordic and Baltic operations also offer alternative marketplaces for smaller companies. As of March 31, 2012, the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, together with NASDAQ OMX First North, were home to 769 listed companies with a combined market capitalization of approximately $1.0 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, together with Nord Pool Spot, 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.
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2. Basis of Presentation and Principles of Consolidation
The condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The accompanying unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These adjustments are of a normal recurring nature. 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.
As permitted under U.S. GAAP, certain footnotes or other financial information can be condensed or omitted in the interim condensed consolidated financial statements. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in NASDAQ OMX's Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
Certain prior period amounts have been reclassified to conform to the current period presentation.
The preparation of condensed 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 condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
We have evaluated our subsequent events through the issuance date of this Quarterly Report on Form 10-Q. See Note 17, "Subsequent Events," for further discussion.
Income Taxes
We use the asset and liability method to provide income taxes on all transactions recorded in the condensed 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 condensed consolidated financial statements. Interest and/or penalties related to income tax matters are recognized in income tax expense.
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 year 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 regard to the company's tax return filing position. If the Finnish Tax Authority prevails in its challenge, additional tax and penalties for the years 2008-2011 and for the three months ended March 31, 2012, would total approximately $26 million. We expect the Finnish Appeals Board to agree with our position once its review is completed and, as such, believe it is unlikely NASDAQ OMX will be assessed any additional tax and penalties. Through March 31, 2012, we have recorded the tax benefits associated with the filing position.
Recently Adopted Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board, or FASB, issued amended guidance relating to FASB Accounting Standards Codification Topic 820, "Fair Value Measurements and Disclosures," which requires the categorization by level of the fair value hierarchy for items not measured at fair value on our Condensed Consolidated Balance Sheets, but for which the fair value is disclosed. This accounting guidance was effective for us on January 1, 2012. Since this guidance only required additional disclosure, it did not affect our financial position or results of operations.
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3. Restructuring Charges
The following table presents a summary of restructuring actions included in restructuring charges in the Condensed Consolidated Statements of Income:
| Three Months Ended March 31, 2012 |
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| (in millions) | ||||
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Severance |
$ | 5 | ||
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Asset impairments |
4 | |||
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Total restructuring charges |
$ | 9 | ||
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During the first quarter of 2012, we performed a comprehensive review of our processes, organizations and systems in a company-wide effort to improve performance, cut costs, and reduce spending. Through this initiative, we expect to generate substantial pre-tax savings through 2012 of approximately $25 million and annualized savings of $50 million.
During the first quarter of 2012, we recognized restructuring charges totaling $9 million including severance costs of $5 million related to workforce reductions of 38 positions across our organization and $4 million of pre-tax asset impairment charges primarily related to capitalized software which has been retired.
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4. Acquisitions
2011 Acquisitions
Acquisition of Glide Technologies
| Purchase Consideration |
Total Net Liabilities Acquired |
Purchased Intangible Assets |
Goodwill | |||||||||||||
| (in millions) | ||||||||||||||||
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Glide Technologies |
$ | 22 | $ | (2 | ) | $ | 4 | $ | 20 | |||||||
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In October 2011, we acquired Glide Technologies, a London-based service provider specializing in corporate communications and reputation management solutions, for $22 million. We acquired net liabilities, at fair value, totaling $1 million and recorded a non-current deferred tax liability of $1 million related to purchased intangible assets, resulting in total net liabilities acquired of $2 million. The purchased intangible assets totaling $4 million consisted of technology and customer relationships. Glide Technologies is part of our Corporate Solutions business within our Issuer Services segment.
The amounts in the table above 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 for Glide Technologies during the three months ended March 31, 2012.
Acquisition of the Business of RapiData
In December 2011, we acquired the business of RapiData, a leading provider of machine-readable economic news to trading firms and financial institutions, for an immaterial amount. This acquisition allows us to deliver U.S. government and other economic news directly from the source to customers interested in receiving information in an electronic feed. This service is part of our Market Data business within our Market Services segment.
Pro Forma Results and Acquisition-related Costs
Pro forma results of operations for the acquisitions completed during 2011 have not been presented since the acquisitions both individually and in the aggregate were not material to our financial results.
Acquisition-related costs for the above acquisitions were expensed as incurred and are included in merger and strategic initiatives expense in the Condensed Consolidated Statements of Income.
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5. Goodwill and Purchased Intangible Assets
Goodwill
The following table presents the changes in goodwill by business segment during the three months ended March 31, 2012:
| Market Services |
Issuer Services |
Market Technology |
Total | |||||||||||||
| (in millions) | ||||||||||||||||
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Balance at December 31, 2011 |
$ | 4,602 | $ | 306 | $ | 153 | $ | 5,061 | ||||||||
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Foreign currency translation adjustment |
133 | 10 | 6 | 149 | ||||||||||||
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Balance at March 31, 2012 |
$ | 4,735 | $ | 316 | $ | 159 | $ | 5,210 | ||||||||
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As of March 31, 2012, the amount of goodwill that is expected to be deductible for tax purposes in future periods is $93 million.
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 amount may be impaired. We test for impairment during the fourth quarter of our fiscal year using carrying amounts as of October 1. We considered the need to update our most recent annual goodwill impairment test as of March 31, 2012 and did not identify any impairment indicators that triggered a revised impairment analysis. As such, we concluded the assumptions used during the most recent annual assessment remained appropriate. There was no impairment of goodwill for the three months ended March 31, 2012 and 2011, however, events such as economic weakness or unexpected significant declines in operating results of a reporting unit may result in goodwill impairment charges in the future.
Purchased Intangible Assets
The following table presents details of our total purchased intangible assets, both finite- and indefinite-lived:
| March 31, 2012 | December 31, 2011 | |||||||||||||||||||||||||||||||
| Gross Amount |
Accumulated Amortization |
Net Amount |
Weighted- Average Useful Life (in Years) |
Gross Amount |
Accumulated Amortization |
Net Amount |
Weighted- Average Useful Life (in Years) |
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| (in millions) | (in millions) | |||||||||||||||||||||||||||||||
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Finite-Lived Intangible Assets |
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Technology |
$ | 39 | $ | (10 | ) | $ | 29 | 8 | $ | 42 | $ | (10 | ) | $ | 32 | 8 | ||||||||||||||||
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Customer relationships |
854 | (207 | ) | 647 | 21 | 854 | (196 | ) | 658 | 21 | ||||||||||||||||||||||
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Other |
6 | (2 | ) | 4 | 8 | 6 | (2 | ) | 4 | 8 | ||||||||||||||||||||||
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Foreign currency translation adjustment |
(4 | ) | 1 | (3 | ) | (25 | ) | 4 | (21 | ) | ||||||||||||||||||||||
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Total finite-lived intangible assets |
$ | 895 | $ | (218 | ) | $ | 677 | $ | 877 | $ | (204 | ) | $ | 673 | ||||||||||||||||||
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Indefinite-Lived Intangible Assets |
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Exchange and clearing registrations |
$ | 790 | $ | — | $ | 790 | $ | 790 | $ | — | $ | 790 | ||||||||||||||||||||
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Trade names |
181 | — | 181 | 181 | — | 181 | ||||||||||||||||||||||||||
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Licenses |
78 | — | 78 | 78 | — | 78 | ||||||||||||||||||||||||||
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Foreign currency translation adjustment |
(46 | ) | — | (46 | ) | (74 | ) | — | (74 | ) | ||||||||||||||||||||||
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Total indefinite-lived intangible assets |
$ | 1,003 | $ | — | $ | 1,003 | $ | 975 | $ | — | $ | 975 | ||||||||||||||||||||
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Total intangible assets |
$ | 1,898 | $ | (218 | ) | $ | 1,680 | $ | 1,852 | $ | (204 | ) | $ | 1,648 | ||||||||||||||||||
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Amortization expense for purchased finite-lived intangible assets was $13 million for the three months ended March 31, 2012 compared to $15 million for the three months ended March 31, 2011.
The estimated future amortization expense (excluding the impact of foreign currency translation adjustments of $3 million as of March 31, 2012) of purchased finite-lived intangible assets as of March 31, 2012 is as follows:
| (in millions) | ||||
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2012(1) |
$ | 39 | ||
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2013 |
50 | |||
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2014 |
49 | |||
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2015 |
47 | |||
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2016 |
44 | |||
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2017 and thereafter |
451 | |||
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Total |
$ | 680 | ||
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| (1) |
Represents the estimated amortization to be recognized for the remaining nine months of 2012. |
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6. Investments
Trading Securities
Trading securities, which are included in financial investments, at fair value in the Condensed Consolidated Balance Sheets, were $190 million as of March 31, 2012 and $261 million as of December 31, 2011. These securities are primarily comprised of Swedish government debt securities, of which $133 million as of March 31, 2012 and $212 million as of December 31, 2011, are restricted assets to meet regulatory capital requirements primarily for clearing operations at NASDAQ OMX Stockholm, or NASDAQ OMX Nordic Clearing.
Available-for-Sale Investment Security
Investment in DFM
Our available-for-sale investment security, which is included in financial investments, at fair value in the Condensed Consolidated Balance Sheets, represents our 1% investment in Dubai Financial Market PJSC, or DFM. The adjusted cost basis of this security was $18 million as of March 31, 2012 and December 31, 2011. The fair value of this investment as of March 31, 2012 was $25 million. The gross change of $7 million between the adjusted cost basis and fair value as of March 31, 2012 is reflected as an unrealized holding gain in accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets, net of taxes.
Equity Method Investments
In general, the equity method of accounting is used when we own 20% to 50% of the outstanding voting stock and when we are able to exercise significant influence over the operating and financial policies of a company. Equity interest in our equity method investments was $14 million as of March 31, 2012 and $27 million as of December 31, 2011, which consisted primarily of our equity interest in European Multilateral Clearing Facility N.V., or EMCF. Equity method investments are included in other non-current assets in the Condensed Consolidated Balance Sheets.
Income recognized from our equity interest in the earnings and losses of these companies was immaterial for both the three months ended March 31, 2012 and 2011.
In the first quarter of 2012, we recorded a pre-tax, other-than-temporary impairment charge on our equity investment in EMCF of $12 million due to a decline in operations at EMCF during the three months ended March 31, 2012. This loss is included in asset impairment charge in the Condensed Consolidated Statements of Income.
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7. Deferred Revenue
Deferred revenue represents cash payments received that are yet to be recognized as revenue. At March 31, 2012, we have estimated that our deferred revenue, which is primarily related to Global Listing Services and Market Technology revenues, will be recognized in the following years:
| Initial Listing Revenues |
Listing of Additional Shares Revenues |
Annual Renewal and Other Revenues |
Market Technology Revenues(2) |
Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
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Fiscal year ended: |
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2012(1) |
$ | 10 | $ | 27 | $ | 137 | $ | 42 | $ | 216 | ||||||||||
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2013 |
10 | 28 | 1 | 40 | 79 | |||||||||||||||
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2014 |
7 | 17 | — | 29 | 53 | |||||||||||||||
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2015 |
6 | 6 | — | 21 | 33 | |||||||||||||||
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2016 |
4 | — | — | 15 | 19 | |||||||||||||||
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2017 and thereafter |
1 | — | — | 9 | 10 | |||||||||||||||
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| $ | 38 | $ | 78 | $ | 138 | $ | 156 | $ | 410 | |||||||||||
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| (1) |
Represents deferred revenue that is anticipated to be recognized over the remaining nine months of 2012. |
| (2) |
The timing of recognition of our deferred Market Technology revenues is dependent upon the completion of customization and any significant modifications made pursuant to existing contracts. As such, as it relates to these revenues, the timing represents our best estimate. |
The changes in our deferred revenue during the three months ended March 31, 2012 and 2011 are reflected in the following table.
| Initial Listing Revenues |
Listing of Additional Shares Revenues |
Annual Renewal and Other Revenues |
Market Technology Revenues (2) |
Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
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Balance at January 1, 2012 |
$ | 39 | $ | 86 | $ | 25 | $ | 128 | $ | 278 | ||||||||||
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Additions (1) |
3 | 2 | 165 | 47 | 217 | |||||||||||||||
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Amortization (1) |
(4 | ) | (10 | ) | (52 | ) | (24 | ) | (90 | ) | ||||||||||
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Translation adjustment |
— | — | — | 5 | 5 | |||||||||||||||
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Balance at March 31, 2012 |
$ | 38 | $ | 78 | $ | 138 | $ | 156 | $ | 410 | ||||||||||
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Balance at January 1, 2011 |
$ | 42 | $ | 83 | $ | 21 | $ | 146 | $ | 292 | ||||||||||
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Additions (1) |
3 | 8 | 172 | 12 | 195 | |||||||||||||||
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Amortization (1) |
(4 | ) | (10 | ) | (57 | ) | (15 | ) | (86 | ) | ||||||||||
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Translation adjustment |
— | — | 1 | 7 | 8 | |||||||||||||||
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Balance at March 31, 2011 |
$ | 41 | $ | 81 | $ | 137 | $ | 150 | $ | 409 | ||||||||||
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| (1) |
The additions and amortization for initial listing revenues, listing of additional shares revenues and annual renewal and other revenues primarily reflect Issuer Services revenues from U.S. listing revenues. |
| (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 non-current assets in the Condensed Consolidated Balance Sheets. The amortization of Market Technology deferred revenue primarily includes revenues earned from client contracts recognized during the period. |
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8. Debt Obligations
The following table presents the changes in the carrying value of our debt obligations during the three months ended March 31, 2012:
| December 31, 2011 |
Additions | Payments, Conversions, Accretion and Other |
March 31, 2012 |
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| (in millions) | ||||||||||||||||
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3.75% convertible notes due October 22, 2012 (net of discount)(1) |
$ | — | $ | — | $ | — | $ | — | ||||||||
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2.50% convertible senior notes due August 15, 2013(2) |
88 | — | 1 | 89 | ||||||||||||
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4.00% senior unsecured notes due January 15, 2015 (net of discount)(3) |
399 | — | — | 399 | ||||||||||||
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5.55% senior unsecured notes due January 15, 2020 (net of discount)(3) |
598 | — | — | 598 | ||||||||||||
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5.25% senior unsecured notes due January 16, 2018 (net of discount)(3) |
367 | — | — | 367 | ||||||||||||
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$1.2 billion senior unsecured five-year credit facility: |
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$450 million senior unsecured term loan facility credit agreement due September 19, 2016 (average interest rate of 1.67% for the period January 1, 2012 through March 31, 2012)(4) |
439 | — | (11 | ) | 428 | |||||||||||
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$750 million revolving credit commitment due September 19, 2016 (average interest rate of 1.46% for the period January 1, 2012 through March 31, 2012)(4) |
226 | — | (100 | ) | 126 | |||||||||||
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Total debt obligations |
2,117 | — | (110 | ) | 2,007 | |||||||||||
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Less current portion |
(45 | ) | — | — | (45 | ) | ||||||||||
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Total long-term debt obligations |
$ | 2,072 | $ | — | $ | (110 | ) | $ | 1,962 | |||||||
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| (1) |
As of March 31, 2012 and December 31, 2011, approximately $0.5 million aggregate principal amount of the 3.75% convertible notes remained outstanding. |
| (2) |
See "2.50% Convertible Senior Notes" below for further discussion. |
| (3) |
See "Senior Unsecured Notes" below for further discussion. |
| (4) |
See "2011 Credit Facility" below for further discussion. |
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 August 15, 2013, or the 2013 Convertible Notes. The interest rate on the notes is 2.50% per annum payable semi-annually in arrears on February 15 and August 15.
The 2013 Convertible 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, subject to adjustment in certain events, is 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 March 31, 2012 and December 31, 2011, the remaining aggregate principal amount outstanding of the 2013 Convertible Notes is convertible into 1,686,577 shares of our common stock. 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.
Liability and Equity Components
Since the settlement structure of the 2013 Convertible 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 the 2013 Convertible Notes during the three months ended March 31, 2012 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 |
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December 31, 2011 |
$ | 93 | $ | 5 | $ | 88 | $ | 71 | $ | 32 | $ | 39 | ||||||||||||
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Accretion of debt discount |
— | (1 | ) | 1 | — | — | — | |||||||||||||||||
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March 31, 2012 |
$ | 93 | $ | 4 | $ | 89 | $ | 71 | $ | 32 | $ | 39 | ||||||||||||
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The unamortized debt discount on the 2013 Convertible Notes was $4 million as of March 31, 2012 and $5 million as of December 31, 2011 and is included in debt obligations in the Condensed Consolidated Balance Sheets. The remaining amount of $4 million will be accreted as part of interest expense through August 15, 2013, the maturity date of the convertible debt. The effective annual interest rate on the 2013 Convertible Notes was 6.53% for the three months ended March 31, 2012 and 2011, which includes the accretion of the debt discount in addition to the annual contractual interest rate of 2.50%.
The equity component of the convertible debt included in additional paid-in capital in the Condensed Consolidated Balance Sheets was $39 million at March 31, 2012 and December 31, 2011.
Interest Expense
Interest expense recognized on the 2013 Convertible Notes in the Condensed Consolidated Statements of Income for the three months ended March 31, 2012 and 2011 is as follows:
| Three Months Ended March 31, |
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| 2012 | 2011 | |||||||
| (in millions) | ||||||||
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Components of interest expense recognized on the 2013 Convertible Notes |
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Accretion of debt discount |
$ | 1 | $ | 4 | ||||
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Contractual interest |
1 | 2 | ||||||
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|
|||||
|
Total interest expense recognized on the 2013 Convertible Notes |
$ | 2 | $ | 6 | ||||
|
|
|
|
|
|||||
Senior Unsecured Notes
4.00% and 5.55% Senior Unsecured Notes
In January 2010, NASDAQ OMX issued $1 billion of senior unsecured notes, or 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, or the 2015 Notes, and $600 million aggregate principal amount of 5.55% senior notes due 2020, or the 2020 Notes. As a result of the discount, the proceeds received from the issuance were less than the aggregate principal amounts. As of March 31, 2012, the balance of $399 million for the 2015 Notes and the balance of $598 million for the 2020 Notes reflect 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 indentures that, among other things, limit our ability to consolidate, merge or sell all or substantially all of our assets, create liens, and enter into sale and leaseback transactions.
Debt Issuance Costs
We incurred debt issuance and other costs of $8 million in connection with the issuance of the Notes. These costs, which are capitalized and included in other non-current assets in the Condensed 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 immaterial for both the three months ended March 31, 2012 and 2011.
5.25% Senior Unsecured Notes
In December 2010, NASDAQ OMX issued $370 million of 5.25% senior unsecured notes due January 16, 2018, or the 2018 Notes. 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 March 31, 2012, the balance of $367 million reflects the aggregate principal amount, less the unamortized debt discount. The unamortized debt discount will be accreted through 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 such rate 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, limit 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 indentures), 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.
Credit Facilities
2011 Credit Facility
In September 2011, NASDAQ OMX entered into a $1.2 billion senior unsecured five-year credit facility which matures on September 19, 2016, or the 2011 Credit Facility. The 2011 Credit Facility consists of a $450 million funded term loan, or the 2016 Term Loan, and a $750 million revolving credit commitment (including a swingline facility and letter of credit facility). NASDAQ OMX applied the $450 million in proceeds from the 2016 Term Loan to repay in full and terminate the remaining $450 million principal amount outstanding on our former credit facility.
In March 2012, we made an optional prepayment of $100 million on the revolving credit commitment portion of the 2011 Credit Facility. As a result, availability under the revolving credit commitment was $624 million as of March 31 2012.
The loans under the 2011 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.
Under the 2011 Credit Facility, we are required to pay quarterly principal payments equal to 2.50% of the aggregate original principal amounts borrowed under the 2016 Term Loan. In the first quarter of 2012, we made a required quarterly principal payment of $11 million on our 2016 Term Loan.
The 2011 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. Our credit facilities allow us to pay cash dividends on our common stock as long as certain leverage ratios are maintained. The 2011 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 2011 Credit Facility at any time in whole or in part, without penalty. We are also required to repay loans outstanding under the 2011 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 $5 million in connection with the entry into the 2011 Credit Facility. These costs, which are capitalized and included in other non-current assets in the Condensed Consolidated Balance Sheets, are being amortized over the life of the 2011 Credit Facility. Amortization expense, which is recorded as additional interest expense for these costs, was immaterial for the three months ended March 31, 2012.
Other Credit Facilities
In addition to the revolving credit commitment under our 2011 Credit Facility discussed above, we have credit facilities related to our clearinghouses in order to meet liquidity and regulatory requirements. At March 31, 2012, these credit facilities, which are available in multiple currencies, primarily Swedish Krona and U.S. dollar, totaled $460 million ($214 million in available liquidity and $246 million to satisfy regulatory requirements), none of which was utilized. At December 31, 2011, these facilities totaled $447 million ($206 million in available liquidity and $241 million to satisfy regulatory requirements), none of which was utilized.
Debt Covenants
At March 31, 2012, we were in compliance with the covenants of all of our debt obligations.
|
|||
9. 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 Condensed Consolidated Statements of Income:
| Three Months Ended March 31, |
||||||||
| 2012 | 2011 | |||||||
| (in millions) | ||||||||
|
Components of net periodic benefit cost |
||||||||
|
Interest cost |
$ | 1 | $ | 2 | ||||
|
Expected return on plan assets |
(1 | ) | (1 | ) | ||||
|
Recognized net actuarial loss |
1 | 1 | ||||||
|
|
|
|
|
|||||
|
Net periodic benefit cost |
$ | 1 | $ | 2 | ||||
|
|
|
|
|
|||||
Non-U.S. Benefit Plans
Most employees outside the U.S. are covered by local retirement plans or by applicable social laws. Benefits under social laws are generally expensed in the periods in which the costs are incurred. These costs are included in compensation and benefits expense in the Condensed Consolidated Statements of Income and were $3 million for the three months ended March 31, 2012 and $4 million for the three months ended March 31, 2011.
U.S. Defined Contribution Savings Plan
We sponsor a voluntary defined contribution savings plan, or 401(k) Plan, for U.S. employees. Employees are immediately eligible to make contributions to the plan and are also eligible for an employer contribution match at an amount equal to 100.0% of the first 4.0% of eligible employee contributions. Savings plan expense included in compensation and benefits expense in the Condensed Consolidated Statements of Income was $1 million for both the three months ended March 31, 2012 and 2011.
We have a profit-sharing contribution feature to our 401(k) Plan which allows eligible U.S. employees to receive employer retirement contributions, or ERCs, if we meet annual corporate goals. In addition, we have a supplemental ERC for select highly compensated employees whose ERCs are limited by the annual Internal Revenue Service compensation limit. ERC expense recorded in compensation and benefits expense in the Condensed Consolidated Statements of Income was immaterial for the three months ended March 31, 2012 and $1 million for the three months ended March 31, 2011.
Employee Stock Purchase Plan
We have an employee stock purchase plan, or ESPP, under which approximately 3.6 million shares of our common stock have been reserved for future issuance as of March 31, 2012.
Our ESPP allows eligible U.S. and non-U.S. employees to purchase a limited number of shares of our common stock at six-month intervals, called offering periods, at 85.0% of the lower of the fair market value on the first or the last day of each offering period. The 15.0% discount given to our employees is included in compensation and benefits expense in the Condensed Consolidated Statements of Income and was immaterial for both the three months ended March 31, 2012 and 2011.
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12. NASDAQ OMX Stockholders' Equity
Common Stock
At March 31, 2012, 300,000,000 shares of our common stock were authorized, 213,390,247 shares were issued, and 171,854,049 shares were outstanding. The holders of common stock are entitled to one vote per share, except that our certificate of incorporation limits the ability of any person to vote in excess of 5.0% of the then-outstanding shares of NASDAQ OMX common stock. This limitation does not apply to persons exempted from this limitation by our board of directors prior to the time such person owns more than 5.0% of the then-outstanding shares of NASDAQ OMX common stock.
Common Stock in Treasury, at Cost
We account for the purchase of treasury stock under the cost method with the shares of stock repurchased reflected as a reduction to NASDAQ OMX stockholders' equity and included in common stock in treasury, at cost in the Condensed Consolidated Balance Sheets. When treasury shares are reissued, they are recorded at the average cost of the treasury shares acquired. We held 41,536,198 shares of common stock in treasury as of March 31, 2012 and 39,845,172 shares as of December 31, 2011.
Share Repurchase Program
In October 2011, our board of directors approved a share repurchase program authorizing NASDAQ OMX to repurchase in the aggregate up to $300 million of our outstanding common stock. These purchases may be made from time to time at prevailing market prices in open market purchases, privately-negotiated transactions, block purchase techniques or otherwise, as determined by our management. The purchases will be funded from existing cash balances. The share repurchase program may be suspended, modified or discontinued at any time. During the first quarter of 2012, we repurchased 1,930,295 shares of our common stock at an average price of $26.01, for an aggregate purchase price of $50 million. The shares repurchased under the share repurchase program are available for general corporate purposes. The remaining authorized amount for share repurchases under this program was $150 million as of March 31, 2012.
Other Repurchases of Common Stock
For the three months ended March 31, 2012, we repurchased 107,325 shares of our common stock in settlement of employee tax withholding obligations due upon the vesting of restricted stock.
Preferred Stock
Our certificate of incorporation authorizes the issuance of 30,000,000 shares of preferred stock, par value $0.01 per share, issuable from time to time in one or more series. At March 31, 2012 and December 31, 2011, 1,600,000 shares of series A convertible preferred stock were issued and none were outstanding.
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13. Fair Value of Financial Instruments
Fair Value Measurement—Definition and Hierarchy
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, or the exit price, in an orderly transaction between market participants at the measurement date. Fair value measurement establishes a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect NASDAQ OMX's market assumptions. These two types of inputs create the following fair value hierarchy:
| • |
Level 1—Quoted prices for identical instruments in active markets. |
| • |
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
| • |
Level 3—Instruments whose significant value drivers are unobservable. |
This hierarchy requires the use of observable market data when available.
The following table presents for each of the above hierarchy levels, our financial assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011.
| March 31, 2012 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Financial Assets Measured at Fair Value on a Recurring Basis |
||||||||||||||||
|
Financial investments, at fair value(1) |
$ | 215 | $ | 215 | $ | — | $ | — | ||||||||
|
Default fund investments(2) |
129 | 129 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 344 | $ | 344 | $ | — | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2011 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Financial Assets Measured at Fair Value on a Recurring Basis |
||||||||||||||||
|
Derivative positions, at fair value(3) |
$ | 1,566 | $ | — | $ | 1,566 | $ | — | ||||||||
|
Financial investments, at fair value(1) |
279 | 279 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 1,845 | $ | 279 | $ | 1,566 | $ | — | ||||||||
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|
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|
|
|||||||||
|
Financial Liabilities Measured at Fair Value on a Recurring Basis |
||||||||||||||||
|
Derivative positions, at fair value(3) |
$ | 1,566 | $ | — | $ | 1,566 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 1,566 | $ | — | $ | 1,566 | $ | — | ||||||||
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| (1) |
Primarily comprised of trading securities, mainly Swedish government debt securities, of $190 million as of March 31, 2012 and $261 million as of December 31, 2011. Of these securities, $133 million as of March 31, 2012 and $212 million as of December 31, 2011 are restricted assets to meet regulatory capital requirements primarily for clearing operations at NASDAQ OMX Nordic Clearing. This balance also includes our available-for-sale investment security in DFM of $25 million as of March 31, 2012 and $18 million as of December 31, 2011. See Note 6, "Investments," for further discussion of our trading investment securities and available-for-sale investment security. |
| (2) |
In March 2012, NASDAQ OMX Nordic Clearing implemented member sponsored default funds. Default fund contributions may include cash contributions which can be invested by NASDAQ OMX Nordic Clearing, in accordance with our investment policy, either in highly rated government debt securities or reverse repurchase agreements with highly rated government debt securities as collateral. As of March 31, 2012, $129 million of cash contributions have been invested in highly rated government debt securities. See Note 14, "Clearing Operations," for further discussion of default fund contributions. |
| (3) |
Prior to the new clearing structure, discussed in Note 14, "Clearing Operations," these amounts represented net amounts associated with our clearing operations in the derivative markets with NASDAQ OMX Nordic Clearing. Receivables and payables attributable to outstanding derivative positions were netted to the extent that such a legal offset right existed and, at the same time, that it was our intention to settle these items. See "Derivative Positions, at Fair Value and Resale and Repurchase Agreements, at Contract Value Prior to March 2012," of Note 14, "Clearing Operations," for further discussion. The new clearing structure significantly changed the nature and extent of the risk of loss to NASDAQ OMX Nordic Clearing in the event of a member default. Since the risk of loss will now be shared amongst clearing members, beginning in March 2012, we no longer record these derivative positions in the Condensed Consolidated Balance Sheets. |
Financial Instruments Not Measured at Fair Value on a Recurring Basis
Some of our financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature. Such financial assets and financial liabilities include: cash and cash equivalents, restricted cash, receivables, net, certain other current assets, non-current restricted cash, accounts payable and accrued expenses, Section 31 fees payable to SEC, accrued personnel costs, and certain other current liabilities.
We also consider our debt obligations to be financial instruments. Based on borrowing rates currently available to us for debt with similar terms and maturities, the fair value of our debt utilizing discounted cash flow analyses was $2.1 billion at March 31, 2012 and $2.3 billion at December 31, 2011, and is categorized as level 2 in the fair value hierarchy. For further discussion of our debt obligations, see Note 8, "Debt Obligations."
|
|||
14. Clearing Operations
Nordic Clearing
NASDAQ OMX Nordic Clearing is authorized and supervised as a European multi-asset clearinghouse by the Swedish Financial Supervisory Authority, or SFSA, and is authorized to conduct clearing operations in Norway by the Norwegian Ministry of Finance. The clearinghouse acts as the central counterparty for exchange and OTC trades in equity derivatives, fixed income derivatives, physical power, power derivatives, carbon derivatives, and resale and repurchase contracts.
Through our clearing operations in the financial markets, which include the resale and repurchase market, and the commodities markets, we are the legal counterparty for, and guarantee the fulfillment of, each contract traded. These contracts are not used by NASDAQ OMX Nordic Clearing for the purpose of trading on its own behalf. As the legal counterparty of each transaction, NASDAQ OMX Nordic Clearing bears the counterparty risk between the purchaser and seller in the contract. In its guarantor role, NASDAQ OMX Nordic Clearing has precisely equal and offsetting claims to and from clearing members on opposite sides of each contract, standing as an intermediary on every contract cleared. In accordance with the rules and regulations of NASDAQ OMX Nordic Clearing, clearing members' open positions are aggregated to create a single portfolio for which default fund and margin collateral requirements are calculated. See "Default Fund Contributions" and "Margin Collateral" below for further discussion of NASDAQ OMX Nordic Clearing's default fund and margin requirements.
In anticipation of new regulations proposed by the European Market Infrastructure Regulation, NASDAQ OMX Nordic Clearing implemented three member sponsored default funds in March 2012: one related to financial markets, one related to commodities markets, and a mutualized fund. Under this new regulatory structure, NASDAQ OMX Nordic Clearing and its clearing members must contribute to the total regulatory capital related to the clearing operations of NASDAQ OMX Nordic Clearing. This structure applies an initial separation of default fund contributions for the financial and commodities markets in order to create a buffer for each market's counterparty risks. Simultaneously, a mutualized default fund provides capital efficiencies to NASDAQ OMX Nordic Clearing with regard to total regulatory capital required. See "Default Fund Contributions" below for further discussion of NASDAQ OMX Nordic Clearing's default fund. A power of assessment and liability waterfall have also been implemented in anticipation of the new regulations. See "Power of Assessment" and "Liability Waterfall" below for further discussion. These new requirements ensure the alignment of risk between NASDAQ OMX Nordic Clearing and its clearing members.
Prior to March 2012, NASDAQ OMX Nordic Clearing did not maintain a default fund to which clearing members contributed capital and did not enforce loss sharing assessments amongst members. Therefore, in a default situation where the capital provided by the defaulting member was insufficient to cover its losses, only NASDAQ OMX Nordic Clearing's own risk-bearing capital was at risk and not that of the non-defaulting members. See "Derivative Positions, at Fair Value and Resale and Repurchase Agreements, at Contract Value Prior to March 2012" below for further discussion.
Default Fund Contributions
Contributions made to the default funds are proportional to the exposures of each clearing member. When a clearing member is active in both the financial and commodities markets, contributions must be made to both markets' default funds. Clearing members' eligible contributions may include cash and non-cash contributions. Cash contributions received are invested by NASDAQ OMX Nordic Clearing, in accordance with our investment policy, either in highly rated government debt securities or reverse repurchase agreements with highly rated government debt securities as collateral. Clearing members' cash contributions are included in default funds and margin deposits in the Condensed Consolidated Balance Sheets as both a current asset and a current liability. Non-cash contributions include highly rated government debt securities that must meet specific criteria approved by NASDAQ OMX Nordic Clearing. Non-cash contributions are pledged assets that are not recorded in the Condensed Consolidated Balance Sheets as NASDAQ OMX does not take legal ownership of these assets and the risks and rewards remain with the clearing members. These balances may fluctuate over time due to changes in the amount of deposits required and whether members choose to provide cash or non-cash contributions. Pursuant to clearing member agreements, we pay interest on cash deposits to clearing members. Assets pledged are held at a nominee account in NASDAQ OMX Nordic Clearing's name for the benefit of the clearing members and are immediately accessible by NASDAQ OMX Nordic Clearing in the event of a default.
As of March 31, 2012, clearing member default fund contributions were as follows:
| March 31, 2012 | ||||||||||||
| Cash Contributions(1) |
Non-Cash Contributions |
Total Contributions |
||||||||||
| (in millions) | ||||||||||||
|
Default fund contributions |
$ | 145 | $ | 18 | $ | 163 | ||||||
|
|
|
|
|
|
|
|||||||
| (1) |
As of March 31, 2012, in accordance with our investment policy, NASDAQ OMX Nordic Clearing has invested $129 million of cash contributions in highly rated government debt securities. The remaining balance of $16 million is held in cash. |
In addition to clearing members' required contributions to the default funds, NASDAQ OMX Nordic Clearing is also required to contribute capital to the default funds as specified under its clearinghouse rules. As of March 31, 2012, NASDAQ OMX Nordic Clearing committed capital totaling $94 million to the member sponsored default funds, in the form of government debt securities, which are recorded as financial investments, at fair value in the Condensed Consolidated Balance Sheets. The combined regulatory capital of the clearing members and NASDAQ OMX Nordic Clearing will serve to secure the obligations of a clearing member and may be used to cover losses sustained by a clearing member in the event of a default.
Other Capital Contributions by NASDAQ OMX Nordic Clearing
NASDAQ OMX Nordic Clearing maintains a $121 million credit facility which may be utilized in certain situations to satisfy regulatory requirements. As of March 31, 2012, NASDAQ OMX Nordic Clearing committed $8 million of this credit facility to satisfy its regulatory requirements under its default fund structure.
Margin Collateral
NASDAQ OMX Nordic Clearing requires all clearing members to provide collateral, which may consist of cash and eligible securities, in a pledged bank account and/or an on-demand guarantee, to guarantee performance on the clearing members' open positions, or initial margin. In addition, clearing members must also provide collateral to cover the daily margin call as needed, which is in addition to the initial margin. All collateral is maintained at a third-party custodian bank for the benefit of the clearing members and is immediately accessible by NASDAQ OMX Nordic Clearing in the event of a default. NASDAQ OMX Nordic Clearing has not recorded any of the pledged margin collateral in our Condensed Consolidated Balance Sheets as all risks and rewards of collateral ownership, including interest, belong to the counterparty. Clearing members pledged margin collateral was $6.2 billion as of March 31, 2012 and $5.0 billion as of December 31, 2011.
NASDAQ OMX Nordic Clearing marks to market all outstanding contracts at least daily, requiring payment from clearing members whose positions have lost value and making payments to clearing members whose positions have gained value. The mark-to-market process helps identify any clearing members that may not be able to satisfy their financial obligations in a timely manner allowing NASDAQ OMX Nordic Clearing the ability to mitigate the risk of a clearing member defaulting due to exceptionally large losses. In the event of a default, NASDAQ OMX Nordic Clearing can access the defaulting member's margin deposits to cover the defaulting member's losses.
In the first half of 2013, NASDAQ OMX Nordic Clearing will implement a new collateral process. NASDAQ OMX Nordic Clearing will maintain all cash deposits related to margin collateral and will include these cash deposits in default funds and margin deposits in the Condensed Consolidated Balance Sheets as both a current asset and a current liability, as NASDAQ OMX Nordic Clearing will assume the risks and rewards of collateral ownership. In addition to cash, clearing members may also contribute eligible pledged assets consisting of highly rated government debt securities that must meet the specific criteria approved by NASDAQ OMX Nordic Clearing and/or an on-demand guarantee. These pledged assets will not be recorded in our Condensed Consolidated Balance Sheets as NASDAQ OMX will not take legal ownership of these assets as the risks and rewards will remain with the clearing members. Assets pledged will be held at a nominee account in NASDAQ OMX Nordic Clearing's name for the benefit of the clearing members and will be immediately accessible by NASDAQ OMX Nordic Clearing in the event of a default.
Regulatory Capital and Risk Management Calculations
NASDAQ OMX Nordic Clearing manages risk through a comprehensive counterparty risk management framework, which is comprised of policies, procedures, standards and resources. The level of regulatory capital is determined in accordance with our regulatory capital policy, as approved by the SFSA. Regulatory capital calculations are continuously updated through a proprietary capital-at-risk calculation model that establishes the appropriate level of capital.
As mentioned above, NASDAQ OMX Nordic Clearing is the legal counterparty for each contract traded and thereby guarantees the fulfillment of each contract. NASDAQ OMX Nordic Clearing accounts for this guarantee as a performance guarantee. We determine the fair value of the performance guarantee by considering daily settlement of contracts and other margining and default fund requirements, our risk management program, historical evidence of default payments, and the estimated probability of potential default payouts. The calculation is determined using proprietary risk management software that simulates gains and losses based on historical market prices, extreme but plausible market scenarios, volatility and other factors present at that point in time for those particular unsettled contracts. Based on this analysis, the estimated liability was nominal and no liability was recorded as of March 31, 2012.
The market value of derivative contracts outstanding prior to netting was as follows:
| March 31, 2012 |
||||
| (in millions) | ||||
|
Commodity forwards and options(1) (2) |
$ | 1,375 | ||
|
Fixed-income options and futures(2) (3) |
302 | |||
|
Stock options and futures(2) (3) |
129 | |||
|
Index options and futures(2) (3) |
99 | |||
|
|
|
|||
|
Total |
$ | 1,905 | ||
|
|
|
|||
| (1) |
We determined the fair value of our forward contracts using standard valuation models that were based on market-based observable inputs including LIBOR rates and the spot price of the underlying instrument. |
| (2) |
We determined the fair value of our option contracts using standard valuation models that were based on market-based observable inputs including implied volatility, interest rates and the spot price of the underlying instrument. |
| (3) |
We determined the fair value of our future contracts based upon quoted market prices and average quoted market yields. |
The total number of derivative contracts cleared through NASDAQ OMX Nordic Clearing for the three months ended March 31, 2012 was as follows:
| Number of Cleared Contracts | ||||||
|
Commodity forwards and options(1) |
294,614 | |||||
|
Fixed-income options and futures |
10,851,785 | |||||
|
Stock options and futures |
8,354,235 | |||||
|
Index options and futures |
11,186,985 | |||||
|
|
|
|||||
|
Total |
30,687,619 | |||||
|
|
|
|||||
| (1) |
The total volume in cleared power related to commodity contracts was 521 Terawatt hours (TWh). |
The contract value of resale and repurchase agreements as of March 31, 2012 was $4.4 billion and the total number of contracts cleared for the three months ended March 31, 2012 was 865,359.
Power of Assessment
To further strengthen the contingent financial resources of the clearinghouse, NASDAQ OMX Nordic Clearing has power of assessment that provides the ability to collect additional funds from its clearing members to cover a defaulting member's remaining obligations up to the limits established under the terms of the clearinghouse rules. The power of assessment corresponds to 100% of the clearing member's contribution to the financial markets and commodities markets default funds.
Liability Waterfall
The liability waterfall is the priority order in which the capital resources would be utilized in the event of a default where the defaulting clearing member's collateral would not be sufficient to cover the cost to settle its portfolio. If a default occurs and the defaulting clearing member's collateral, including cash deposits and pledged assets, is depleted, then capital is utilized in the following amount and order:
| • |
junior capital contributed by NASDAQ OMX Nordic Clearing, which totaled $15 million at March 31, 2012; |
| • |
specific market default fund where the loss occurred, either financial or commodities market, which includes capital contributions of both the clearing members and NASDAQ OMX Nordic Clearing on a pro-rata basis; |
| • |
senior capital contributed by NASDAQ OMX Nordic Clearing, calculated in accordance with clearinghouse rules to be $23 million at March 31, 2012; and |
| • |
mutualized default fund, which includes capital contributions of both the clearing members and NASDAQ OMX Nordic Clearing on a pro-rata basis. |
If additional funds are needed after utilization of the mutualized default fund, then NASDAQ OMX Nordic Clearing will utilize its power of assessment and additional capital contributions will be required by non-defaulting members up to the limits established under the terms of the clearinghouse rules.
See "Guarantees Issued and Credit Facilities Available," of Note 15, "Commitments, Contingencies and Guarantees," for further discussion of our guarantees on the fulfillment of these contracts.
Derivative Positions, at Fair Value and Resale and Repurchase Agreements, at Contract Value Prior to March 2012
The new clearing structure, discussed above, significantly changed the nature and extent of the risk of loss to NASDAQ OMX Nordic Clearing in the event of a member default. Since the full risk of loss to NASDAQ OMX Nordic Clearing will now be shared amongst clearing members, we no longer record derivative positions or resale and repurchase agreements in the Condensed Consolidated Balance Sheets.
Prior to the implementation of member sponsored default funds, NASDAQ OMX Nordic Clearing placed its own funds at risk and was the primary obligor that would bear the ultimate risk of counterparty default. As a result, the fair value of derivative contracts and the contract value of resale and repurchase agreements were reported gross in the Condensed Consolidated Balance Sheets as a receivable pertaining to the purchasing party and a payable pertaining to the selling party. Such receivables and payables attributable to outstanding derivative positions and resale and repurchase agreements were netted to the extent that such a legal offset right existed and, at the same time, that it was our intention to settle these items.
Our derivative positions, at fair value in the Condensed Consolidated Balance Sheets were $1,566 million at December 31, 2011. See "Guarantees Issued and Credit Facilities Available," of Note 15, "Commitments, Contingencies and Guarantees," for further discussion of our guarantees on the fulfillment of these contracts. The following table presents the fair value of our outstanding derivative positions at December 31, 2011 prior to netting:
| December 31, 2011 | ||||||||
| Asset | Liability | |||||||
| (in millions) | ||||||||
|
Commodity forwards and options(1) (2) |
$ | 1,152 | $ | 1,152 | ||||
|
Fixed-income options and futures(2) (3) |
272 | 272 | ||||||
|
Stock options and futures(2) (3) |
197 | 197 | ||||||
|
Index options and futures(2) (3) |
137 | 137 | ||||||
|
|
|
|
|
|||||
|
Total |
$ | 1,758 | $ | 1,758 | ||||
|
|
|
|
|
|||||
| (1) |
We determined the fair value of our forward contracts using standard valuation models that were based on market-based observable inputs including LIBOR rates and the spot price of the underlying instrument. |
| (2) |
We determined the fair value of our option contracts using standard valuation models that were based on market-based observable inputs including implied volatility, interest rates and the spot price of the underlying instrument. |
| (3) |
We determined the fair value of our future contracts based upon quoted market prices and average quoted market yields. |
Our resale and repurchase agreements, at contract value in the Condensed Consolidated Balance Sheets, were $3,745 million at December 31, 2011. The resale and repurchase agreements were recorded at their contractual amounts plus interest which approximated fair value, as the fair value of these items was not materially sensitive to shifts in market interest rates because of the short-term nature of these instruments and/or variable interest rates or to credit risk because the resale and repurchase agreements were fully collateralized. The resale and repurchase agreements generally mature in less than 30 days. For the margin collateral process, see "Margin Collateral" above.
U.S. Clearing
Similar to our clearing operations at NASDAQ OMX Nordic Clearing, through our clearing operations in the derivative markets with our majority-owned subsidiary International Derivatives Clearing Group, or IDCG (through International Derivatives Clearinghouse, LLC), as well as trading at NASDAQ OMX Commodities Clearing Company, or NOCC, we are the legal counterparty for each position traded and thereby guarantee the fulfillment of each contract. The derivatives are not used by the above entities for the purpose of trading on their own behalf.
We require market participants at IDCG and NOCC to meet certain minimum financial standards to mitigate the risk that they become unable to satisfy their obligations and to provide collateral to cover the daily margin call as needed. Customer pledged cash collateral held by IDCG and NOCC, which was $11 million at March 31, 2012 and $9 million at December 31, 2011, is included in default funds and margin deposits as both a current asset and current liability in the Condensed Consolidated Balance Sheets, as the risks and rewards of collateral ownership, including interest income, belong to IDCG and NOCC. Clearing member cash contributed to IDCG's guaranty fund was $2 million at March 31, 2012 and $8 million at December 31, 2011. This cash is included in default funds and margin deposits as both a current asset and current liability in the Condensed Consolidated Balance Sheets, as the risks and rewards of collateral ownership, including interest income, belong to IDCG.
As of March 31, 2012, NASDAQ OMX has contributed $78 million to the IDCG guarantee fund and $25 million to the NOCC guarantee fund. At December 31, 2011, NASDAQ OMX contributed $72 million to the IDCG guarantee fund and $25 million to the NOCC guarantee fund. These amounts are recorded in non-current restricted cash in the Condensed Consolidated Balance Sheets.
|
|||
15. Commitments, Contingencies and Guarantees
Guarantees Issued and Credit Facilities Available
In addition to the default fund contributions and margin collateral pledged by clearing members discussed in Note 14, "Clearing Operations," we have obtained financial guarantees and credit facilities which are guaranteed by us through counter indemnities, to provide further liquidity and default protection related to our clearing businesses. Financial guarantees issued to us totaled $4 million at both March 31, 2012 and December 31, 2011. At March 31, 2012, credit facilities, which are available in multiple currencies, primarily Swedish Krona and U.S. dollar, totaled $460 million ($214 million in available liquidity and $246 million to satisfy regulatory requirements), none of which was utilized. At December 31, 2011, these facilities totaled $447 million ($206 million in available liquidity and $241 million to satisfy regulatory requirements), none of which was utilized.
We believe that the potential for us to be required to make payments under these arrangements is mitigated through the pledged collateral and our risk management policies. Accordingly, no contingent liability is recorded in the Condensed Consolidated Balance Sheets for these arrangements.
Lease Commitments
We lease some of our office space and equipment under non-cancelable operating leases with third parties and sublease office space to third parties. Some of our lease agreements contain renewal options and escalation clauses based on increases in property taxes and building operating costs.
Other Guarantees
We have provided other guarantees of $19 million as of March 31, 2012 and $17 million as of December 31, 2011. These guarantees are primarily related to obligations for our rental and leasing contracts. In addition, for certain Market Technology contracts, we have provided performance guarantees of $6 million as of March 31, 2012 and December 31, 2011 related to the delivery of software technology and support services. We have received financial guarantees from various financial institutions to support the above guarantees.
We have also provided a $25 million guarantee to our wholly-owned subsidiary, NOCC, to cover potential losses in the event of customer defaults, net of any collateral posted against such losses.
We believe that the potential for us to be required to make payments under these arrangements is unlikely. Accordingly, no contingent liability is recorded in the Condensed Consolidated Balance Sheets for the above guarantees.
Escrow Agreements
In connection with our acquisitions of FTEN, SMARTS and Glide Technologies, we entered into escrow agreements to secure the payments of post-closing adjustments and other closing conditions. At March 31, 2012, these escrow agreements provide for future payments of $29 million and are included in other current liabilities and other non-current liabilities in the Condensed Consolidated Balance Sheets.
Brokerage Activities
Our broker-dealer subsidiaries, Nasdaq Execution Services and NASDAQ Options Services, provide guarantees to securities clearinghouses and exchanges under their standard membership agreements, which require members to guarantee the performance of other members. If a member becomes unable to satisfy its obligations to a clearinghouse or exchange, other members would be required to meet its shortfalls. To mitigate these performance risks, the exchanges and clearinghouses often require members to post collateral, as well as meet certain minimum financial standards. Nasdaq Execution Services' and NASDAQ Options Services' maximum potential liability under these arrangements cannot be quantified. However, we believe that the potential for Nasdaq Execution Services and NASDAQ Options Services to be required to make payments under these arrangements is unlikely. Accordingly, no contingent liability is recorded in the Condensed Consolidated Balance Sheets for these arrangements.
Litigation
We may be subject to claims arising out of the conduct of our business. We are not currently a party to any litigation that we believe could have a material adverse effect on our business, financial condition, or operating results. However, from time to time, we have been threatened with, or named as a defendant in, lawsuits or involved in regulatory proceedings.
|
|||
16. Business Segments
We manage, operate and provide our products and services in three business segments: Market Services, Issuer Services, and Market Technology.
Our Market Services segment includes our U.S. and European Transaction Services businesses, which includes Access Services, as well as our Market Data business, which are interrelated because the Transaction Services businesses generate the quote and trade information that we sell to market participants and data distributors. Market Services also includes our Broker Services business, which offers technology and customized securities administration solutions to financial participants in the Nordic markets.
Our Issuer Services segment includes our Global Listing Services and Global Index Group businesses. The companies listed on The NASDAQ Stock Market and our Nordic and Baltic exchanges represent a diverse array of industries. This diversity of companies listed on NASDAQ OMX markets allows us to develop and license NASDAQ OMX branded indexes, associated derivatives, and financial products as part of our Global Index Group. The Global Listing Services business also includes our Corporate Solutions business, which generates revenues through our shareholder, directors, newswire, and other services.
Our Market Technology segment is the world's leading technology solutions provider and partner to exchanges, clearing organizations and central securities depositories. Our technology business is also the sales channel for our complete global offering to other marketplaces. Market Technology provides technology solutions for trading, clearing, settlement and information dissemination, and also offers facility management integration, surveillance solutions, and advisory services.
Our management allocates resources, assesses performance and manages these businesses as three separate segments. We evaluate the performance of our segments based on several factors, of which the primary financial measure is income before income taxes. Results of individual businesses are presented based on our management accounting practices and our management structure. Certain amounts are allocated to corporate items in our management reports based on the decision that those activities should not be used to evaluate the segment's operating performance. These amounts include, but are not limited to, amounts related to restructuring actions, mergers, strategic initiatives, long-term asset impairment, and financing activities. See below for further discussion.
The following table presents certain information regarding these operating segments for the three months ended March 31, 2012 and 2011.
| Market Services |
Issuer Services |
Market Technology |
Corporate Items and Eliminations |
Consolidated | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Three months ended March 31, 2012 |
||||||||||||||||||||
|
Total revenues |
$ | 666 | $ | 90 | $ | 45 | $ | — | $ | 801 | ||||||||||
|
Cost of revenues |
(390 | ) | — | — | — | (390 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Revenues less transaction rebates, brokerage, clearance and exchange fees |
276 | 90 | 45 | — | 411 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Income (loss) before income taxes (1) |
$ | 130 | $ | 27 | $ | 3 | $ | (23 | ) | $ | 137 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Three months ended March 31, 2011 |
||||||||||||||||||||
|
Total revenues |
$ | 683 | $ | 89 | $ | 43 | $ | — | $ | 815 | ||||||||||
|
Cost of revenues |
(402 | ) | — | — | — | (402 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Revenues less transaction rebates, brokerage, clearance and exchange fees |
281 | 89 | 43 | — | 413 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Income (loss) before income taxes (2) |
$ | 125 | $ | 30 | $ | 1 | $ | (4 | ) | $ | 152 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (1) |
Corporate items and eliminations for the three months ended March 31, 2012 primarily include costs associated with an other-than-temporary impairment charge related to our equity method investment in EMCF, restructuring charges taken during the first quarter of 2012 and merger and strategic initiatives expense. |
| (2) |
Corporate items and eliminations for the three months ended March 31, 2011 primarily include merger and strategic initiatives expense. |
For further discussion of our segments' results, see "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations—Segment Operating Results."
|
|||
17. Subsequent Events
Dividends on Common Stock
On April 23, 2012, our board of directors declared an initial quarterly cash dividend of $0.13 per share on our outstanding common stock, which will be payable on June 29, 2012, to all stockholders of record as of the close of business on June 15, 2012. We expect to continue to pay quarterly cash dividends, although the amount and timing of any future cash dividends are subject to approval by our board of directors.
Non-Binding Agreement Regarding IDCG
On April 23, 2012, we signed a non-binding agreement with LCH.Clearnet Group Limited regarding LCH.Clearnet Group's proposed acquisition of IDCG. If the transaction proceeds, LCH.Clearnet Group would become the sole owner of IDCG and NASDAQ OMX would become a shareholder of LCH.Clearnet Group.
Acquisition of NOS Clearing ASA
On April 24, 2012, we signed an agreement to acquire NOS Clearing ASA for approximately $40 million (240 million Norwegian Krone). NOS Clearing ASA is a leading Norway-based clearinghouse primarily for the freight market and seafood derivative market. The transaction is subject to regulatory approval and is expected to close during the third quarter of 2012.
Acquisition of BWise Beheer B.V.
In May 2012, we acquired a 72% ownership interest in BWise Beheer B.V. and subsidiaries, or BWise, a Netherlands-based service provider that offers enterprise governance, risk management and compliance software and services to help companies track, measure and manage key organizational risks, for approximately $62 million (47 million Euro). We have agreed to purchase the remaining 28% ownership interest in BWise in two separate transactions, resulting in 100% ownership by the first half of 2015. BWise will be part of our Corporate Solutions business within our Issuer Services segment.
|
|||
| Three Months Ended March 31, 2012 |
||||
| (in millions) | ||||
|
Severance |
$ | 5 | ||
|
Asset impairments |
4 | |||
|
|
|
|||
|
Total restructuring charges |
$ | 9 | ||
|
|
|
|||
|
|||
| Purchase Consideration |
Total Net Liabilities Acquired |
Purchased Intangible Assets |
Goodwill | |||||||||||||
| (in millions) | ||||||||||||||||
|
Glide Technologies |
$ | 22 | $ | (2 | ) | $ | 4 | $ | 20 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
|||
| Market Services |
Issuer Services |
Market Technology |
Total | |||||||||||||
| (in millions) | ||||||||||||||||
|
Balance at December 31, 2011 |
$ | 4,602 | $ | 306 | $ | 153 | $ | 5,061 | ||||||||
|
Foreign currency translation adjustment |
133 | 10 | 6 | 149 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Balance at March 31, 2012 |
$ | 4,735 | $ | 316 | $ | 159 | $ | 5,210 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| March 31, 2012 | December 31, 2011 | |||||||||||||||||||||||||||||||
| Gross Amount |
Accumulated Amortization |
Net Amount |
Weighted- Average Useful Life (in Years) |
Gross Amount |
Accumulated Amortization |
Net Amount |
Weighted- Average Useful Life (in Years) |
|||||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||||||||||
|
Finite-Lived Intangible Assets |
||||||||||||||||||||||||||||||||
|
Technology |
$ | 39 | $ | (10 | ) | $ | 29 | 8 | $ | 42 | $ | (10 | ) | $ | 32 | 8 | ||||||||||||||||
|
Customer relationships |
854 | (207 | ) | 647 | 21 | 854 | (196 | ) | 658 | 21 | ||||||||||||||||||||||
|
Other |
6 | (2 | ) | 4 | 8 | 6 | (2 | ) | 4 | 8 | ||||||||||||||||||||||
|
Foreign currency translation adjustment |
(4 | ) | 1 | (3 | ) | (25 | ) | 4 | (21 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Total finite-lived intangible assets |
$ | 895 | $ | (218 | ) | $ | 677 | $ | 877 | $ | (204 | ) | $ | 673 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Indefinite-Lived Intangible Assets |
||||||||||||||||||||||||||||||||
|
Exchange and clearing registrations |
$ | 790 | $ | — | $ | 790 | $ | 790 | $ | — | $ | 790 | ||||||||||||||||||||
|
Trade names |
181 | — | 181 | 181 | — | 181 | ||||||||||||||||||||||||||
|
Licenses |
78 | — | 78 | 78 | — | 78 | ||||||||||||||||||||||||||
|
Foreign currency translation adjustment |
(46 | ) | — | (46 | ) | (74 | ) | — | (74 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Total indefinite-lived intangible assets |
$ | 1,003 | $ | — | $ | 1,003 | $ | 975 | $ | — | $ | 975 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Total intangible assets |
$ | 1,898 | $ | (218 | ) | $ | 1,680 | $ | 1,852 | $ | (204 | ) | $ | 1,648 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| (in millions) | ||||
|
2012(1) |
$ | 39 | ||
|
2013 |
50 | |||
|
2014 |
49 | |||
|
2015 |
47 | |||
|
2016 |
44 | |||
|
2017 and thereafter |
451 | |||
|
|
|
|||
|
Total |
$ | 680 | ||
|
|
|
|||
| (1) |
Represents the estimated amortization to be recognized for the remaining nine months of 2012. |
|
|||
| Initial Listing Revenues |
Listing of Additional Shares Revenues |
Annual Renewal and Other Revenues |
Market Technology Revenues(2) |
Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Fiscal year ended: |
||||||||||||||||||||
|
2012(1) |
$ | 10 | $ | 27 | $ | 137 | $ | 42 | $ | 216 | ||||||||||
|
2013 |
10 | 28 | 1 | 40 | 79 | |||||||||||||||
|
2014 |
7 | 17 | — | 29 | 53 | |||||||||||||||
|
2015 |
6 | 6 | — | 21 | 33 | |||||||||||||||
|
2016 |
4 | — | — | 15 | 19 | |||||||||||||||
|
2017 and thereafter |
1 | — | — | 9 | 10 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| $ | 38 | $ | 78 | $ | 138 | $ | 156 | $ | 410 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (1) |
Represents deferred revenue that is anticipated to be recognized over the remaining nine months of 2012. |
| (2) |
The timing of recognition of our deferred Market Technology revenues is dependent upon the completion of customization and any significant modifications made pursuant to existing contracts. As such, as it relates to these revenues, the timing represents our best estimate. |
| Initial Listing Revenues |
Listing of Additional Shares Revenues |
Annual Renewal and Other Revenues |
Market Technology Revenues (2) |
Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Balance at January 1, 2012 |
$ | 39 | $ | 86 | $ | 25 | $ | 128 | $ | 278 | ||||||||||
|
Additions (1) |
3 | 2 | 165 | 47 | 217 | |||||||||||||||
|
Amortization (1) |
(4 | ) | (10 | ) | (52 | ) | (24 | ) | (90 | ) | ||||||||||
|
Translation adjustment |
— | — | — | 5 | 5 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Balance at March 31, 2012 |
$ | 38 | $ | 78 | $ | 138 | $ | 156 | $ | 410 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Balance at January 1, 2011 |
$ | 42 | $ | 83 | $ | 21 | $ | 146 | $ | 292 | ||||||||||
|
Additions (1) |
3 | 8 | 172 | 12 | 195 | |||||||||||||||
|
Amortization (1) |
(4 | ) | (10 | ) | (57 | ) | (15 | ) | (86 | ) | ||||||||||
|
Translation adjustment |
— | — | 1 | 7 | 8 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Balance at March 31, 2011 |
$ | 41 | $ | 81 | $ | 137 | $ | 150 | $ | 409 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (1) |
The additions and amortization for initial listing revenues, listing of additional shares revenues and annual renewal and other revenues primarily reflect Issuer Services revenues from U.S. listing revenues. |
| (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 non-current assets in the Condensed Consolidated Balance Sheets. The amortization of Market Technology deferred revenue primarily includes revenues earned from client contracts recognized during the period. |
|
|||
| December 31, 2011 |
Additions | Payments, Conversions, Accretion and Other |
March 31, 2012 |
|||||||||||||
| (in millions) | ||||||||||||||||
|
3.75% convertible notes due October 22, 2012 (net of discount)(1) |
$ | — | $ | — | $ | — | $ | — | ||||||||
|
2.50% convertible senior notes due August 15, 2013(2) |
88 | — | 1 | 89 | ||||||||||||
|
4.00% senior unsecured notes due January 15, 2015 (net of discount)(3) |
399 | — | — | 399 | ||||||||||||
|
5.55% senior unsecured notes due January 15, 2020 (net of discount)(3) |
598 | — | — | 598 | ||||||||||||
|
5.25% senior unsecured notes due January 16, 2018 (net of discount)(3) |
367 | — | — | 367 | ||||||||||||
|
$1.2 billion senior unsecured five-year credit facility: |
||||||||||||||||
|
$450 million senior unsecured term loan facility credit agreement due September 19, 2016 (average interest rate of 1.67% for the period January 1, 2012 through March 31, 2012)(4) |
439 | — | (11 | ) | 428 | |||||||||||
|
$750 million revolving credit commitment due September 19, 2016 (average interest rate of 1.46% for the period January 1, 2012 through March 31, 2012)(4) |
226 | — | (100 | ) | 126 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total debt obligations |
2,117 | — | (110 | ) | 2,007 | |||||||||||
|
Less current portion |
(45 | ) | — | — | (45 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total long-term debt obligations |
$ | 2,072 | $ | — | $ | (110 | ) | $ | 1,962 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) |
As of March 31, 2012 and December 31, 2011, approximately $0.5 million aggregate principal amount of the 3.75% convertible notes remained outstanding. |
| (2) |
See "2.50% Convertible Senior Notes" below for further discussion. |
| (3) |
See "Senior Unsecured Notes" below for further discussion. |
| (4) |
See "2011 Credit Facility" below for further discussion. |
| Liability Component | Equity Component | |||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||
| Principal Balance |
Unamortized Debt Discount |
Net Carrying Amount |
Gross Equity Component |
Deferred Taxes |
Net Equity Component |
|||||||||||||||||||
|
December 31, 2011 |
$ | 93 | $ | 5 | $ | 88 | $ | 71 | $ | 32 | $ | 39 | ||||||||||||
|
Accretion of debt discount |
— | (1 | ) | 1 | — | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
March 31, 2012 |
$ | 93 | $ | 4 | $ | 89 | $ | 71 | $ | 32 | $ | 39 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Three Months Ended March 31, |
||||||||
| 2012 | 2011 | |||||||
| (in millions) | ||||||||
|
Components of interest expense recognized on the 2013 Convertible Notes |
||||||||
|
Accretion of debt discount |
$ | 1 | $ | 4 | ||||
|
Contractual interest |
1 | 2 | ||||||
|
|
|
|
|
|||||
|
Total interest expense recognized on the 2013 Convertible Notes |
$ | 2 | $ | 6 | ||||
|
|
|
|
|
|||||
|
|||
| Three Months Ended March 31, |
||||||||
| 2012 | 2011 | |||||||
| (in millions) | ||||||||
|
Components of net periodic benefit cost |
||||||||
|
Interest cost |
$ | 1 | $ | 2 | ||||
|
Expected return on plan assets |
(1 | ) | (1 | ) | ||||
|
Recognized net actuarial loss |
1 | 1 | ||||||
|
|
|
|
|
|||||
|
Net periodic benefit cost |
$ | 1 | $ | 2 | ||||
|
|
|
|
|
|||||
|
|||
| March 31, 2012 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Financial Assets Measured at Fair Value on a Recurring Basis |
||||||||||||||||
|
Financial investments, at fair value(1) |
$ | 215 | $ | 215 | $ | — | $ | — | ||||||||
|
Default fund investments(2) |
129 | 129 | — | — | ||||||||||||
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|
|
|
|
|
|
|
|
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|
Total |
$ | 344 | $ | 344 | $ | — | $ | — | ||||||||
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|
|
|
|
|
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| December 31, 2011 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Financial Assets Measured at Fair Value on a Recurring Basis |
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|
Derivative positions, at fair value(3) |
$ | 1,566 | $ | — | $ | 1,566 | $ | — | ||||||||
|
Financial investments, at fair value(1) |
279 | 279 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
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|
Total |
$ | 1,845 | $ | 279 | $ | 1,566 | $ | — | ||||||||
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|
|
|
|
|
|
|
|||||||||
|
Financial Liabilities Measured at Fair Value on a Recurring Basis |
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|
Derivative positions, at fair value(3) |
$ | 1,566 | $ | — | $ | 1,566 | $ | — | ||||||||
|
|
|
|
|
|
|
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|
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|
Total |
$ | 1,566 | $ | — | $ | 1,566 | $ | — | ||||||||
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|
|
|
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|
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| (1) |
Primarily comprised of trading securities, mainly Swedish government debt securities, of $190 million as of March 31, 2012 and $261 million as of December 31, 2011. Of these securities, $133 million as of March 31, 2012 and $212 million as of December 31, 2011 are restricted assets to meet regulatory capital requirements primarily for clearing operations at NASDAQ OMX Nordic Clearing. This balance also includes our available-for-sale investment security in DFM of $25 million as of March 31, 2012 and $18 million as of December 31, 2011. See Note 6, "Investments," for further discussion of our trading investment securities and available-for-sale investment security. |
| (2) |
In March 2012, NASDAQ OMX Nordic Clearing implemented member sponsored default funds. Default fund contributions may include cash contributions which can be invested by NASDAQ OMX Nordic Clearing, in accordance with our investment policy, either in highly rated government debt securities or reverse repurchase agreements with highly rated government debt securities as collateral. As of March 31, 2012, $129 million of cash contributions have been invested in highly rated government debt securities. See Note 14, "Clearing Operations," for further discussion of default fund contributions. |
| (3) |
Prior to the new clearing structure, discussed in Note 14, "Clearing Operations," these amounts represented net amounts associated with our clearing operations in the derivative markets with NASDAQ OMX Nordic Clearing. Receivables and payables attributable to outstanding derivative positions were netted to the extent that such a legal offset right existed and, at the same time, that it was our intention to settle these items. See "Derivative Positions, at Fair Value and Resale and Repurchase Agreements, at Contract Value Prior to March 2012," of Note 14, "Clearing Operations," for further discussion. The new clearing structure significantly changed the nature and extent of the risk of loss to NASDAQ OMX Nordic Clearing in the event of a member default. Since the risk of loss will now be shared amongst clearing members, beginning in March 2012, we no longer record these derivative positions in the Condensed Consolidated Balance Sheets. |
|
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| March 31, 2012 | ||||||||||||
| Cash Contributions(1) |
Non-Cash Contributions |
Total Contributions |
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| (in millions) | ||||||||||||
|
Default fund contributions |
$ | 145 | $ | 18 | $ | 163 | ||||||
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|
|
|
|
|
|
|||||||
| (1) |
As of March 31, 2012, in accordance with our investment policy, NASDAQ OMX Nordic Clearing has invested $129 million of cash contributions in highly rated government debt securities. The remaining balance of $16 million is held in cash. |
| March 31, 2012 |
||||
| (in millions) | ||||
|
Commodity forwards and options(1) (2) |
$ | 1,375 | ||
|
Fixed-income options and futures(2) (3) |
302 | |||
|
Stock options and futures(2) (3) |
129 | |||
|
Index options and futures(2) (3) |
99 | |||
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|
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|
Total |
$ | 1,905 | ||
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|
|
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| (1) |
We determined the fair value of our forward contracts using standard valuation models that were based on market-based observable inputs including LIBOR rates and the spot price of the underlying instrument. |
| (2) |
We determined the fair value of our option contracts using standard valuation models that were based on market-based observable inputs including implied volatility, interest rates and the spot price of the underlying instrument. |
| (3) |
We determined the fair value of our future contracts based upon quoted market prices and average quoted market yields. |
| Number of Cleared Contracts | ||||||
|
Commodity forwards and options(1) |
294,614 | |||||
|
Fixed-income options and futures |
10,851,785 | |||||
|
Stock options and futures |
8,354,235 | |||||
|
Index options and futures |
11,186,985 | |||||
|
|
|
|||||
|
Total |
30,687,619 | |||||
|
|
|
|||||
| (1) |
The total volume in cleared power related to commodity contracts was 521 Terawatt hours (TWh). |
| December 31, 2011 | ||||||||
| Asset | Liability | |||||||
| (in millions) | ||||||||
|
Commodity forwards and options(1) (2) |
$ | 1,152 | $ | 1,152 | ||||
|
Fixed-income options and futures(2) (3) |
272 | 272 | ||||||
|
Stock options and futures(2) (3) |
197 | 197 | ||||||
|
Index options and futures(2) (3) |
137 | 137 | ||||||
|
|
|
|
|
|||||
|
Total |
$ | 1,758 | $ | 1,758 | ||||
|
|
|
|
|
|||||
| (1) |
We determined the fair value of our forward contracts using standard valuation models that were based on market-based observable inputs including LIBOR rates and the spot price of the underlying instrument. |
| (2) |
We determined the fair value of our option contracts using standard valuation models that were based on market-based observable inputs including implied volatility, interest rates and the spot price of the underlying instrument. |
| (3) |
We determined the fair value of our future contracts based upon quoted market prices and average quoted market yields. |
|
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| Market Services |
Issuer Services |
Market Technology |
Corporate Items and Eliminations |
Consolidated | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Three months ended March 31, 2012 |
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|
Total revenues |
$ | 666 | $ | 90 | $ | 45 | $ | — | $ | 801 | ||||||||||
|
Cost of revenues |
(390 | ) | — | — | — | (390 | ) | |||||||||||||
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|
Revenues less transaction rebates, brokerage, clearance and exchange fees |
276 | 90 | 45 | — | 411 | |||||||||||||||
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|
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|
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|
Income (loss) before income taxes (1) |
$ | 130 | $ | 27 | $ | 3 | $ | (23 | ) | $ | 137 | |||||||||
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|
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|
Three months ended March 31, 2011 |
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|
Total revenues |
$ | 683 | $ | 89 | $ | 43 | $ | — | $ | 815 | ||||||||||
|
Cost of revenues |
(402 | ) | — | — | — | (402 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Revenues less transaction rebates, brokerage, clearance and exchange fees |
281 | 89 | 43 | |||||||||||||||||