INTERACTIVE BROKERS GROUP, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes in Item 1, included elsewhere in this report. In addition to historical information, the following discussion also contains forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading "Risk Factors" in our Annual Report on Form 10-K filed with the
Securities Exchange Commission("SEC") on March 1, 2021and elsewhere in this report.
When we use the terms “we”, “our” and “our” we mean
Interactive Brokers Group, Inc.(the "Company" or " IBG, Inc.") is a holding company whose primary asset is its ownership of approximately 23.5% of the membership interests of IBG LLC. The remaining approximately 76.5% of IBG LLCmembership interests are held by IBG Holdings LLC("Holdings"), a holding company that is owned by our founder and Chairman, Mr. Thomas Peterffyand his affiliates, management and other employees of IBG LLC, and certain other members. The table below shows the amount of IBG LLCmembership interests held by IBG, Inc.and Holdings as of September 30, 2021. IBG, Inc. Holdings Total Ownership % 23.5% 76.5% 100.0% Membership interests 98,175,951 319,880,492 418,056,443 We are an automated global electronic broker. We custody and service accounts for hedge and mutual funds, exchange-traded funds ("ETFs"), registered investment advisers, proprietary trading groups, introducing brokers and individual investors. We specialize in routing orders and executing and processing trades in stocks, options, futures, forex, bonds, mutual funds and ETFs on more than 135 electronic exchanges and market centers in 33 countries and 25 currencies seamlessly around the world. As an electronic broker, we execute, clear and settle trades globally for both institutional and individual customers. Capitalizing on our proprietary technology, our systems provide our customers with the capability to monitor multiple markets around the world simultaneously and to execute trades electronically in these markets at a low cost, in multiple products and currencies from a single trading account. The ever-growing complexity of multiple market centers has provided us with opportunities to build and continuously adapt our order routing software to secure excellent execution prices. Since our inception in 1977, we have focused on developing proprietary software to automate broker-dealer functions. The proliferation of electronic exchanges and market centers over the last three decades has allowed us to integrate our software with an increasing number of trading venues into one automatically functioning, computerized platform that requires minimal human intervention. Our customer base is diverse with respect to geography and segments. Currently, approximately 76% of our customers reside outside the U.S.in over 200 countries and territories, and over 50% of new customers come from outside the United States("U.S.") approximately 62% of our customers' equity is in institutional accounts such as hedge funds, financial advisors, proprietary trading desks and introducing brokers. Specialized products and services that we have developed successfully attract these accounts. For example, we offer prime brokerage services, including financing and securities lending, to hedge funds; our model portfolio technology and automated share allocation and rebalancing tools are particularly attractive to financial advisors; and our trading platform, global access and low pricing attract introducing brokers.
During the quarter ended
September 30, 2021("current quarter"), world equities markets were mixed. While the U.S., the United Kingdom, Japanand Australiaeked out small gains, major market indices in Europe, Hong Kongand Chinawere down. Despite this, there has been continued global interest in financial markets amid the search for higher yields in zero and negative-interest rate environments, especially by individuals newly attracted to these markets, which led to active trading.
The following is a summary of the main economic drivers affecting our business and how they compare to the quarter of the previous year:
Global trading volumes. According to industry data, average daily volumes in
U.S.exchange-listed equity-based options increased by 28% and in U.S.futures by 14%, while U.S.listed cash equities volume decreased by 2% versus a very active, pandemic-impacted prior-year quarter. Volumes were impacted positively by investors looking for yield, although professional traders likely found fewer opportunities to trade on lower market volatility. While market volatility increased moderately over the course of the current quarter, average volatility for the full current quarter was down substantially from a highly volatile prior-year quarter. Against that backdrop 37
are growing numbers of investors who continue to participate in the financial markets out of a desire to earn higher yields on investments, which cannot be achieved in bank accounts in a zero or negative interest rate environment. These competing factors led to mixed results in industry and company volumes. Note that while options, futures and
U.S.cash equities volumes are readily comparable measures, they reflect most but not all of the global volumes that generate our commission revenue. See "Trading Volumes and Customer Statistics" below in this Item 2 for additional details regarding our trade volumes, contract and share volumes, and customer statistics. Volatility. U.S. market volatility, as measured by the average ChicagoBoard Options Exchange Volatility Index ("VIX®"), fell markedly to 18, from 26 in the prior-year quarter. While last year's unusual COVID-19 pandemic-induced spike in market volatility to over 30 has moderated, it remains elevated compared to pre-pandemic levels. In general, higher volatility improves our performance because it correlates with customer trading activity across product types. Various market cross-currents led to mixed results across our major product types: customer options and stock volumes were up 34% and 100%, respectively, while futures and foreign exchange volumes declined 6% and 35%, respectively, compared to the prior-year quarter. Our customer stock volume reflected unusually strong trading in low-priced stocks, without which the increase in share volume was 20%, well above the change in industry volume. Despite the current quarter's lower average volatility than the prior-year quarter, investors sought to achieve higher yields on their investments in the zero or negative interest rate environments that exist around the world. These trends, combined with the increasing interconnectedness of investors to one another and to the markets, led to an influx of new accounts and strong increases in trading volume. Interest Rates. The U.S. Federal Reserve'starget federal funds rate range in the current quarter remained at zero to 0.25%, similar to rates in many other currencies, with the exception of those where rates are negative. U.S.rates also continue to exhibit a relatively flat yield curve. Both of these factors present us with fewer investment opportunities for interest-sensitive assets, and lead to a narrower net interest margin. Low rates reduce the interest we earn on our segregated cash, the majority of which is invested in U.S.government securities and related instruments. Further, our margin balances are tied to benchmark rates, with a minimum charge of 0.75% in U.S.dollars, so low interest rates limit the interest we receive on margin lending to our customers. We continue to offer among the lowest rates in the industry on margin lending, and we believe our low rates are an important factor that attracts customers to our platform. As an offset, lower rates also reduce our interest expense. For example, in U.S.dollars we pay interest to customers only when the federal funds effective rate is above 0.50%, and in currencies with negative rates we collect interest on a portion of customer cash balances. As an indirect positive effect, we believe low and negative benchmark world interest rates have been a factor leading to the active trading we have experienced, as investors have sought to enter securities markets to achieve higher yields on their investments. Net interest income increased compared to the prior-year quarter while the average federal funds effective rate remained unchanged from the prior-year quarter at 0.09%. While the interest we pay on customer cash balances and earn on customer margin loans is based on spreads that are compressed at low benchmark rates, rising balances have partially compensated for this reduction in net interest income. Despite flat benchmark rates, a 64% increase in our average margin loan balances contributed to a 70% rise in margin loan interest from the prior-year quarter. Further, a strong inflow of new accounts worldwide drove average customer credit balances up 14% over the prior-year quarter.
Fueled by higher average balances and strong securities lending results, our net interest income increased 41% year over year, and our overall net interest margin increased from 0. 94% to 1.13%.
Currency fluctuations. As a global electronic broker trading on exchanges around the world in multiple currencies, we are exposed to foreign currency risk. We actively manage this exposure by keeping our net worth in proportion to a defined basket of 10 currencies we call the "GLOBAL" to diversify our risk and to align our hedging strategy with the currencies that we use in our business. Because we report our financial results in
U.S.dollars, the change in the value of the GLOBAL versus the U.S.dollar affects our earnings. During the current quarter the value of the GLOBAL, as measured in U.S.dollars, decreased 0.41% compared to its value at June 30, 2021, which had a negative impact on our comprehensive earnings for the current quarter. A discussion of our approach for managing foreign currency exposure is contained in Part I, Item 3 of this Quarterly Report on Form 10-Q entitled "Quantitative and Qualitative Disclosures about Market Risk. Overall, active markets and a search for higher yields in negative and zero interest rate environments, plus investor interest in the financial markets and the growing interconnectedness of investors with the markets and each other, have resulted in more people actively engaging in the markets. Customers continue to seek our superior technology, execution capabilities and our ability to offer a broad range of products and global market access. 38
We report non-GAAP financial measures, which exclude certain items that may not be indicative of our core operating results and business outlook and may be useful in evaluating the operating performance of our business and provide a better comparison of our results in the current period to those in prior and future periods. See the "Non-GAAP Financial Measures" section below in this Item 2 for additional details. Diluted earnings per share were
$0.43for the current quarter, compared to $0.58for the prior-year quarter. Adjusted diluted earnings per share were $0.78for the current quarter, compared to $0.53for the prior-year quarter. The calculation of diluted earnings per share is detailed in Note 4 - "Equity and Earnings per Share" to the unaudited condensed consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
For the current quarter, net income was
Diluted earnings per share were
$2.58for the nine months ended September 30, 2021("current nine-month period"), compared to $1.58for the nine months ended September 30, 2020("prior-year nine-month period"). Adjusted diluted earnings per share were $2.55for the current nine-month period compared to $1.79for the prior-year nine-month period. For the current nine-month period, net revenues were $2,111 millionand income before income taxes was $1,414 million, compared to net revenues of $1,619 millionand income before income taxes of $864 millionin the prior-year nine-month period. Adjusted net revenues were $2,096 millionand adjusted income before income taxes was $1,399 millionin the current nine-month period, compared to adjusted net revenues of $1,622 millionand adjusted income before income taxes of $971 millionin the prior-year nine-month period.
The financial highlights for the current quarter are as follows:
? Commission income increased
? Net interest income increased
?Other income decreased
$199 millionfrom the prior-year quarter. This decrease was mainly comprised of (1) $191 millionrelated to our strategic investment in Up Fintech Holding Limited("Tiger Brokers"), which decreased to a $185 millionmark-to-market loss in the current quarter from a $6 millionmark-to-market gain in the prior-year quarter; and (2) $30 millionrelated to our currency diversification strategy, which lost $3 millionin the current quarter compared to a gain of $27 millionin the prior-year quarter; partially offset by (3) the non-recurrence of a $13 millionimpairment loss on our investment in OneChicago Exchange recognized in the prior-year quarter.
“The profit margin before tax was 50% for the current quarter, compared to 61% in the quarter of the previous year. The adjusted pre-tax profit margin for the current quarter was 65%, compared to 59% in the previous year quarter.
? Total equity at
Because we report our financial results in
U.S.dollars, the change in the value of the GLOBAL versus the U.S.dollar affects our earnings. In connection with our currency diversification strategy as of September 30, 2021, approximately 26% of our equity was denominated in currencies other than the U.S.dollar. In the current quarter, our currency diversification strategy decreased our comprehensive earnings by $43 million(compared to an increase of $72 millionin the prior-year quarter), as the U.S.dollar value of the GLOBAL decreased by approximately 0.41% compared to its value as of June 30, 2021. The effects of our currency diversification strategy are reported as (1) a component of other income (loss of $3 million) in the consolidated statement of comprehensive income and (2) other comprehensive income ("OCI") (loss of $40 million) in the consolidated statement of financial condition and the consolidated statement of comprehensive income. The full effect of the GLOBAL is captured in comprehensive income. 39
Certain trends and uncertainties
We believe that our current operations may be favorably or unfavorably impacted by the following trends that may affect our financial condition and results of operations: ?The COVID-19 pandemic has precipitated unprecedented market conditions with equally unprecedented social and community challenges. The impact of the COVID-19 pandemic going forward will depend on numerous evolving factors that cannot be accurately predicted, including the duration and spread of the pandemic, governmental regulations in response to the pandemic, and the effectiveness of vaccinations and other medical advancements. •Retail participation in the equity markets has fluctuated in the past due to investor sentiment, market conditions and a variety of other factors. Retail transaction volumes may not be sustainable and are not predictable.
“Consolidation between market centers can negatively affect the value of our IB SmartRoutingSM software.
“Price competition between brokers may continue to intensify.
• Benchmark interest rates have fluctuated over the past few years due to economic conditions. Changes in interest rates may not be predictable.
? Fiscal and / or monetary policy can change and have an impact on financial services activities and securities markets.
•New legislation or modifications to existing regulations and rules could occur in the future. Scrutiny of payment for order flow and order routing practices by regulatory and legislative authorities has increased. •We continue to be exposed to the risks and uncertainties of doing business in international markets, particularly in the heavily regulated brokerage industry. Such risks and uncertainties include political, economic and financial instability, and foreign policy changes. For example, tensions between the
U.S.and Chinahave escalated recently, and changes in Chinese governmental oversight of Hong Kongand in the Chinese and Hong Kongcapital markets could result in adverse effects on our business and loss of assets we hold in the region. •Our remaining market making activities will continue to be impacted by market structure changes, market conditions, the level of automation of competitors, and the relationship between actual and implied volatility in the equities markets. See "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K, filed with the SECon March 1, 2021, and elsewhere in this report for a discussion of other risks that may affect our financial condition and results of operations. ? 40
Trading volumes and customer statistics
The tables below present historical trading volumes and customer statistics for our business. Trading volumes are the primary driver in our business. Information on our net interest income can be found elsewhere in this report. TRADE VOLUMES: (in thousands, except %) Cleared Non-Cleared Avg. Trades Customer % Customer % Principal % Total % per U.S. Period Trades Change Trades Change Trades Change Trades Change Trading Day 2018 328,099 21,880 18,663 368,642 1,478 2019 302,289 (8%) 26,346 20% 17,136 (8%) 345,771 (6%) 1,380 2020 620,405 105% 56,834 116% 27,039 58% 704,278 104% 2,795 3Q2020 160,015 14,701 7,453 182,169 2,846 3Q2021 193,218 21% 18,106 23% 8,228 10% 219,552 21% 3,431 2Q2021 196,659 16,130 7,975 220,764 3,504 3Q2021 193,218 (2%) 18,106 12% 8,228 3% 219,552 (1%) 3,431 CONTRACT AND SHARE VOLUMES: (in thousands, except %) TOTAL Options % Futures (1) % Stocks % Period (contracts) Change (contracts) Change (shares) Change 2018 408,406 151,762 210,257,186 2019 390,739 (4%) 128,770 (15%) 176,752,967 (16%) 2020 624,035 60% 167,078 30% 338,513,068 92% 3Q2020 163,972 39,186 87,514,614 3Q2021 214,988 31% 36,940 (6%) 172,828,874 97% 2Q2021 196,715 35,061 172,099,915 3Q2021 214,988 9% 36,940 5% 172,828,874 0% ALL CUSTOMERS Options % Futures (1) % Stocks % Period (contracts) Change (contracts) Change (shares) Change 2018 358,852 148,485 198,909,375 2019 349,287 (3%) 126,363 (15%) 167,826,490 (16%) 2020 584,195 67% 164,555 30% 331,263,604 97% 3Q2020 153,612 38,685 85,893,357 3Q2021 205,797 34% 36,473 (6%) 172,082,316 100% 2Q2021 189,073 34,635 171,417,373 3Q2021 205,797 9% 36,473 5% 172,082,316 0% _________________________
(1) The volume of futures contracts includes options on futures contracts.
Table of Contents CLEARED CUSTOMERS Options % Futures (1) % Stocks % Period (contracts) Change (contracts) Change (shares) Change 2018 313,795 146,806 194,012,882 2019 302,068 (4%) 125,225 (15%) 163,030,500 (16%) 2020 518,965 72% 163,101 30% 320,376,365 97% 3Q2020 137,660 38,405 83,246,086 3Q2021 186,656 36% 36,245 (6%) 169,002,045 103% 2Q2021 170,902 34,355 168,601,027 3Q2021 186,656 9% 36,245 6% 169,002,045 0% PRINCIPAL TRANSACTIONS Options % Futures (1) % Stocks % Period (contracts) Change (contracts) Change (shares) Change 2018 49,554 3,277 11,347,811 2019 41,452 (16%) 2,407 (27%) 8,926,477 (21%) 2020 39,840 (4%) 2,523 5% 7,249,464 (19%) 3Q2020 10,360 501 1,621,257 3Q2021 9,191 (11%) 467 (7%) 746,558 (54%) 2Q2021 7,642 426 682,542 3Q2021 9,191 20% 467 10% 746,558 9% ________________________
(1) The volume of futures contracts includes options on futures contracts.
Year over Year 3Q2021 3Q2020 %
Total Accounts (in thousands) 1,536 981
Customer Equity (in billions) (1)
$ 353.8 $ 232.7
Cleared DARTs (in thousands) (2) 2,017 1,629
Total Customer DARTs (in thousands) (2) 2,263 1,832
Cleared Customers Commission per Cleared Commissionable Order (3)
$ 2.46 $ 2.69(9%) Cleared Avg. DARTs per Account (Annualized) 343 442 (22%) Consecutive Quarters 3Q2021 2Q2021 % Change Total Accounts (in thousands) 1,536 1,414
Customer Equity (in billions) (1)
$ 353.8 $ 363.5
Cleared DARTs (in thousands) (2) 2,017 2,082
Total Customer DARTs (in thousands) (2) 2,263 2,304
Cleared Customers Commission per Cleared Commissionable Order (3)
$ 2.46 $ 2.383% Cleared Avg. DARTs per Account (Annualized) 343 382 (10%) ________________________ (1)Excludes non-customers.
(2) Average Daily Revenue (“DART”) transactions are based on customer orders.
(3) Commissionable Order – a sales order that generates commissions.
Results of operations
The table below presents our consolidated results of operations for the periods indicated. The period-to-period comparisons below of financial results are not necessarily indicative of future results. Three Months Ended
Nine months ended
2021 2020 2021 2020 (in millions, except share
and amounts per share)
Commissions $ 311
$ 279$ 1,030 $ 824Other fees and services 49 45 160 123 Other income (loss) (170) 29 68 25 Total non-interest income 190 353 1,258 972 Interest income 325 240 1,022 853 Interest expense (51) (45) (169) (206) Total net interest income 274 195 853 647 Total net revenues 464 548 2,111 1,619 Non-interest expenses Execution, clearing and distribution fees 61 74 183 227 Employee compensation and benefits 98 77 291 239 Occupancy, depreciation and amortization 19 17 58 51 Communications 8 6 24 19 General and administrative 44 37 138 206 Customer bad debt - 3 3 13 Total non-interest expenses 230 214 697 755 Income before income taxes 234 334 1,414 864 Income tax expense 28 32 116 65 Net income 206 302 1,298 799 Less net income attributable to noncontrolling interests 164 256 1,057 675 Net income available for common stockholders $ 42 $ 46 $ 241 $ 124Earnings per share Basic $ 0.44 $ 0.59$ 2.60 $ 1.60Diluted $ 0.43 $ 0.58$ 2.58 $ 1.58Weighted average common shares outstanding Basic 96,229,958 78,509,625 92,814,767 77,543,008 Diluted 96,989,968 79,120,548 93,671,689 78,243,699 Comprehensive income Net income available for common stockholders $ 42 $ 46 $ 241 $ 124 Other comprehensive income Cumulative translation adjustment, before income taxes (9) 8 (21) 5 Income taxes related to items of other comprehensive income - - - - Other comprehensive income (loss), net of tax (9) 8 (21) 5 Comprehensive income available for common stockholders $ 33 $ 54 $ 220 $ 129 Comprehensive income attributable to noncontrolling interests Net income attributable to noncontrolling interests $ 164 $ 256 $ 1,057 $ 675 Other comprehensive income - cumulative translation adjustment (31) 37 (74) 24 Comprehensive income attributable to noncontrolling interests $ 133 $ 293 $ 983 $ 699 43
Three months ended
Total net income, for the current quarter, decreased
We earn commissions from our cleared customers for whom we act as an executing and clearing broker and from our non-cleared customers for whom we act as an execution-only broker. We have a commission structure that allows customers to choose between (1) an all-inclusive fixed, or "bundled", rate; (2) a tiered, or "unbundled", rate that offers lower commissions for high volume customers where we pass through regulatory and exchange fees; or (3) our IBKR LiteSM offering, which provides commission-free trades on
U.S.exchange-listed stocks and ETFs and generates no commission revenues for us but, instead, generates payments from market makers and others to whom we route these orders, which are included in commissions. Our commissions are geographically diversified. Commissions, for the current quarter, increased $32 million, or 11%, compared to the prior-year quarter, to $311 million, driven by higher customer trading volumes, particularly in stocks and options. Total customer options contracts and stock share volumes increased 34% and 100%, respectively, while futures contracts volume decreased 6% compared to the prior-year quarter. Removing the effect of trading in low-priced stocks, the stock share volume rose 20%. Total DARTs for cleared and execution-only customers, for the current quarter, increased 24% to 2.3 million, compared to 1.8 million for the prior-year quarter. DARTs for cleared customers, i.e., customers for whom we execute trades, as well as clear and carry positions, for the current quarter, increased 24% to 2.0 million, compared to 1.6 million for the prior-year quarter. Average commission per commissionable order for cleared customers, for the current quarter, decreased 9% to $2.46, compared to $2.69for the prior-year quarter, reflecting smaller average order sizes in options and foreign exchange, as well as higher exchange rebates passed through to our customers.
Other fees and services
We earn fee income on services provided to our customers, which includes market data fees, risk exposure fees, minimum activity fees, payments for order flow from exchange-mandated programs, and other fees and services charged to customers. Other fees and services, for the current quarter, increased
$4 million, or 9%, compared to the prior-year quarter, to $49 million, driven by a 167% increase in risk exposure fee income to $8 million; an 83% increase in payments for order flow income from options exchange-mandated programs to $11 million; and a 19% increase in market data fee income to $19 million; partially offset by an 86% decrease in account activity fees to $1 million, as we eliminated account activity fees for most account types effective July 1, 2021; and a 71% decrease in IPO-related fee income to $2 million.
Other income consists of foreign exchange gains (losses) from our currency diversification strategy, gains (losses) from principal transactions, gains (losses) from our equity method investments, and other revenue not directly attributable to our core business offerings. A discussion of our approach to managing foreign currency exposure is contained in Part I, Item 3 of this Quarterly Report on Form 10-Q entitled "Quantitative and Qualitative Disclosures about Market Risk." Other income, for the current quarter, decreased
$199 millionto a $170 millionloss in the current quarter compared to a $29 milliongain in the prior-year quarter. This decrease was mainly comprised of $191 millionrelated to our strategic investment in Tiger Brokers, which decreased to a $185 millionmark-to-market loss in the current quarter from a $6 millionmark-to-market gain in the prior-year quarter; and $30 millionrelated to our currency diversification strategy, which lost $3 millionin the current quarter compared to a gain of $27 millionin the prior-year quarter; partially offset by the non-recurrence of a $13 millionimpairment loss on our investment in OneChicago Exchange recognized in the prior-year quarter.
Interest income and interest expenses
We earn interest on margin lending to customers secured by marketable securities these customers hold with us; from our investments in
U.S.and foreign government securities; from borrowing and lending securities; on deposits (in positive interest rate currencies) with banks; and on certain customers' cash balances in negative rate currencies We pay interest on customer cash balances (in 44
currencies with sufficiently positive interest rates); for borrowing and lending of securities; on deposits (in currencies at negative interest rates) with banks; and on our loans.
Net interest income (interest income less interest expense), for the current quarter, increased
$79 million, or 41%, compared to the prior-year quarter, to $274 million. The increase in net interest income was driven by higher average margin loan balances and strong securities lending activity. Net interest income on customer balances, for the current quarter, increased $40 million, compared to the prior-year quarter, driven by a $18.1 billionincrease in average margin loan balances; partially offset by a $6.4 billiondecrease in average segregated cash and securities balances. Outside the U.S., notably in Europe, despite the proportionately higher growth in foreign currency cash balances, negative benchmark interest rates in some currencies have affected our ability to achieve acceptable yields on our segregated cash in this region. See the "Business Environment" section above in this Item 2 for a further discussion about the change in interest rates in the current quarter. We earn income on securities loaned and borrowed to support customer long and short stock holdings in margin accounts. In addition, our Stock Yield Enhancement Program provides an opportunity for customers with fully-paid stock to allow us to lend it out. We pay customers a rebate on the cash collateral generally equal to 50% of the income we earn from lending the shares. We place cash and/or U.S. Treasurysecurities, as collateral securing the loans in the customer's account, in segregated accounts or at an affiliate acting as collateral agent for the benefit of our customer. In the current quarter, average securities borrowed balances decreased 20%, to $3.6 billionwhile average securities loaned balances increased 82%, to $10.5 billion, compared to the prior-year quarter. Lower average securities borrowed balances reflected our success in supporting our customers' short selling from in-house inventory, while higher average securities loaned balances resulted in greater revenues from lending more of our customer's growing stock holdings. Net interest earned from securities lending is affected by the level of demand for securities positions held by our customers that investors were looking to sell short. During the current quarter, net interest earned from securities lending transactions increased $37 million, or 43%, compared to the prior-year quarter, as we were able to satisfy investor demand for more of the hard-to-borrow securities they sought to sell short. It should be noted that securities lending transactions entered into to support customer activity may produce interest income (expense) that is offset by interest expense (income) related to customer balances. The Company measures return on interest-earning assets using net interest margin ("NIM"). NIM is computed by dividing the annualized net interest income by the average interest-earning assets for the period. Interest-earning assets consist of cash and securities segregated for regulatory purposes (including U.S.government securities and securities purchased under agreements to resell), customer margin loans, securities borrowed, other interest-earning assets (solely firm assets), and customer cash balances swept into FDICinsured banks as part of our Insured Bank Deposit Sweep Program. Interest-bearing liabilities consist of customer credit balances, securities loaned and other interest-bearing liabilities. Yields are generally a reflection of benchmark interest rates in each currency in which the Company and its customers hold cash balances. Because a substantial portion of customer cash and margin loans are denominated in currencies other than the U.S.dollar, changes in U.S.benchmark interest rates do not impact the total amount of segregated cash and securities, customer margin loans and customer credit balances. Furthermore, because interest, when benchmark rates are at higher levels, is paid only on eligible cash credit balances (i.e., balances over $10 thousandor equivalent, in securities accounts with over $100 thousandin equity, and in smaller accounts at reduced rates), changes in benchmark interest rates are not passed through to the total amount of customer credit balances. Finally, the Company's policies with respect to currencies with negative interest rates impact the yields on segregated cash and customer credit balances as effective interest rates in those currencies fluctuate. Generally, as benchmark interest rates rise, a larger portion of the interest earned on securities lending transactions is reported as net interest income on "Segregated cash and securities, net" instead of "Securities borrowed and loaned, net" because interest earned on cash collateral held in specially designated bank accounts for the benefit of customers, in accordance with the U.S.customer protection rules, increases. ? 45
The table below presents net interest income information corresponding to interest-earning assets and interest-bearing liabilities for the periods indicated. Three Months Ended September 30, 2021 2020 (in millions) Average interest-earning assets Segregated cash and securities $ 37,239
$ 43,589Customer margin loans 46,636 28,490 Securities borrowed 3,567 4,477 Other interest-earning assets 7,426 5,075 FDIC sweeps 1 2,707 2,982 $ 97,575 $ 84,613Average interest-bearing liabilities Customer credit balances $ 78,625 $
Securities loaned 10,489
Other interest-bearing liabilities - 251 $ 89,114
$ 74,874Net Interest income Segregated cash and securities, net $ (4) $
Customer margin loans 2 141
Securities borrowed and loaned, net 123
Customer credit balances, net 2 8
Other net interest income 1,3 9 10 Net interest income 3 $ 277
$ 201Net interest margin ("NIM") 1.13% 0.94% Annualized Yields Segregated cash and securities -0.04% 0.13% Customer margin loans 1.20% 1.16% Customer credit balances -0.04% -0.05%
(1)Represents the average amount of customer cash swept into
FDIC-insured banks as part of our Insured Bank Deposit Sweep Program. This item is not recorded in the Company's condensed consolidated statements of financial condition. Income derived from program deposits is reported in other net interest income in the table above. ? (2)Interest income and interest expense on customer margin loans and customer credit balances, respectively, are calculated on daily cash balances within each customer's account on a net basis, which may result in an offset of balances across multiple account segments (e.g., between securities and commodities segments). (3)Includes income from financial instruments that has the same characteristics as interest, but is reported in other fees and services and other income in the Company's condensed consolidated statements of comprehensive income. For the three months ended September 30, 2021and 2020, $2 millionand $6 millionwere reported in other fees and services, respectively, and $0was reported in other income. 46
Non-interest expenses, for the current quarter, increased
$16 million, or 7%, compared to the prior-year quarter, to $230 million, mainly due to a $21 millionincrease in employee compensation and benefits and a $7 millionincrease in general and administrative expenses; partially offset by a $13 milliondecrease in execution, clearing and distribution fees. As a percentage of total net revenues, non-interest expenses were 50% for the current quarter and 39% for the prior-year quarter.
Execution, clearing and distribution costs
Execution, clearing and distribution fees include the costs of executing and clearing trades, net of liquidity rebates received from various exchanges and market centers, as well as regulatory fees and market data fees. Execution fees are paid primarily to electronic exchanges and market centers on which we trade. Clearing fees are paid to clearing houses and clearing agents. Market data fees are paid to third parties to receive streaming price quotes and related information. Execution, clearing and distribution fees, for the current quarter, decreased
$13 million, or 18%, compared to the prior-year quarter, to $61 million, primarily driven by a $10 milliondecrease in exchange fees due to greater capture of liquidity rebates from certain exchanges and a $5 milliondecrease in regulatory fees on reduced rates. As a percentage of total net revenues, execution, clearing and distribution fees were 13% for the current quarter and 14% for the prior-year quarter.
Employee compensation and benefits
Employee compensation and benefits include salaries, bonuses and other incentive compensation plans, group insurance, contributions to benefit programs and other related employee costs. Employee compensation and benefits expenses, for the current quarter, increased
$21 million, or 27%, compared to the prior-year quarter, to $98 million, associated with a 31% increase in the average number of employees to 2,450 for the current quarter, compared to 1,869 for the prior-year quarter. We continued to add staff in customer service, compliance and software development. As we continue to grow, our focus on automation has allowed us to maintain a relatively small staff. As a percentage of total net revenues, employee compensation and benefits expenses were 21% for the current quarter and 14% for the prior-year quarter. Employee compensation and benefits expenses as a percentage of adjusted net revenues were 15% for the current and the prior-year quarter.
Occupancy, depreciation and amortization
Occupancy charges primarily consist of rent payments on office and data center leases and related occupancy costs, such as utilities. Depreciation charges result from the depreciation of fixed assets, such as computer and communication equipment, as well as the depreciation of leasehold improvements and internal software developments capitalized.
Occupancy, depreciation and amortization expenses, for the current quarter, increased
$2 million, or 12%, compared to the prior-year quarter, to $19 million, mainly due to higher costs related to the expansion of our physical space for both offices and data centers. As a percentage of total net revenues, occupancy, depreciation and amortization expenses were 4% for the current quarter and 3% for the prior-year quarter.
Communications expenses consist primarily of the cost of voice and data telecommunications lines supporting our business, including connectivity to exchanges and market centers around the world.
Communications expenses, for the current quarter, increased
$2 million, or 33%, compared to the prior-year quarter, to $8 million. As a percentage of total net revenues, communications expenses were 2% for the current quarter and 1% for the prior-year quarter. 47
General and administrative
General and administrative expenses mainly consist of advertising; expenses for professional services, such as legal and audit work; legal and regulatory issues; and other operating expenses.
General and administrative expenses, for the current quarter, increased
$7 million, or 19%, compared to the prior-year quarter, to $44 million, primarily due to a $3 millionincrease in professional and legal fees related to litigation and a $3 millionincrease in bank fees related to prior periods. As a percentage of total net revenues, general and administrative expenses were 9% for the current quarter and 7% for the prior-year quarter.
Bad debts from the customer
Bad debts from customers consist primarily of losses incurred by customers in excess of their assets with us, less amounts collected by us.
Bad debts from customers for the current quarter decreased
Income tax expense
U.S.federal, state and local income taxes on our taxable income, which is proportional to the percentage we own of IBG LLC. Also, our operating subsidiaries are subject to income tax in the respective jurisdictions in which they operate. Income tax expense, for the current quarter, decreased $4 million, or 13%, compared to the prior-year quarter, to $28 million, primarily due to lower U.S.income tax expense driven by lower income before taxes, partially offset by IBG, Inc.'shigher average ownership percentage of IBG LLCwhich rose from 18.8% to 23.0%.
The table below presents information on our income tax expense for the periods indicated.
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