Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 000-32651

 

 

The NASDAQ OMX Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   52-1165937

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

One Liberty Plaza, New York, New York   10006
(Address of Principal Executive Offices)   (Zip Code)

+1 212 401 8700

(Registrant’s telephone number, including area code)

No changes

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at July 28, 2011

Common Stock, $.01 par value per share   177,077,488 shares

 

 

 


Table of Contents

The NASDAQ OMX Group, Inc.

Form 10-Q

For the Quarterly Period Ended June 30, 2011

INDEX

 

PART I. FINANCIAL INFORMATION

  

Item 1.

   Financial Statements (unaudited)      2   
  

Condensed Consolidated Balance Sheets—June 30, 2011 and December 31, 2010

     2   
  

Condensed Consolidated Statements of Income—Three and Six Months Ended June 30, 2011 and 2010

     3   
  

Condensed Consolidated Statements of Comprehensive Income—Three and Six Months Ended June 30, 2011 and 2010

     4   
  

Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2011 and 2010

     5   
  

Notes to Condensed Consolidated Financial Statements

     6   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      27   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      48   

Item 4.

   Controls and Procedures      51   

PART II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings      51   

Item 1A.

   Risk Factors      51   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      51   

Item 3.

   Defaults upon Senior Securities      51   

Item 4.

   (Removed and Reserved)      51   

Item 5.

   Other Information      51   

Item 6.

   Exhibits      51   

SIGNATURES

     52   

 

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About This Form 10-Q

Throughout this Form 10-Q, unless otherwise specified:

 

   

“NASDAQ OMX,” “we,” “us” and “our” refer to The NASDAQ OMX Group, Inc.

 

   

“The NASDAQ Stock Market” and “NASDAQ” refer to the registered national securities exchange operated by The NASDAQ Stock Market LLC.

 

   

“OMX AB” refers to OMX AB (publ), as that entity operated prior to the business combination with Nasdaq.

 

   

“Nasdaq” refers to The Nasdaq Stock Market, Inc., as that entity operated prior to the business combination with OMX AB.

 

   

“NASDAQ OMX Nordic” refers to collectively, NASDAQ OMX Stockholm, NASDAQ OMX Copenhagen, NASDAQ OMX Helsinki and NASDAQ OMX Iceland.

 

   

“NASDAQ OMX Baltic” refers to collectively, NASDAQ OMX Tallinn, NASDAQ OMX Riga and NASDAQ OMX Vilnius.

 

   

“FINRA” refers to the Financial Industry Regulatory Authority.

 

   

“SEK” or “Swedish Krona” refers to the lawful currency of Sweden.

This Quarterly Report on Form 10-Q includes market share and industry data that we obtained from industry publications and surveys, reports of governmental agencies and internal company surveys. Industry publications and surveys generally state that the information they contain has been obtained from sources believed to be reliable, but we cannot assure you that this information is accurate or complete. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position are based on the most currently available market data. For market comparison purposes, The NASDAQ Stock Market data in this Quarterly Report on Form 10-Q for initial public offerings, or IPOs, is based on data generated internally by us, which includes best efforts underwritings and closed-end funds; therefore, the data may not be comparable to other publicly-available IPO data. Data in this Quarterly Report on Form 10-Q for new listings of equity securities on The NASDAQ Stock Market is based on data generated internally by us, which includes best efforts underwritings, issuers that switched from other listing venues, closed-end funds and exchange traded funds, or ETFs. Data in this Quarterly Report on Form 10-Q for IPOs and new listings of equities securities on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic also is based on data generated internally by us. IPOs and new listings data is presented as of period end. While we are not aware of any misstatements regarding industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors. We refer you to the “Risk Factors” section in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, the “Risk Factors” section in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 that was filed with the U.S. Securities and Exchange Commission, or SEC, on May 5, 2011 and the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 that was filed with the SEC on February 24, 2011.

 

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Forward-Looking Statements

The SEC encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q contains these types of statements. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words or terms of similar substance used in connection with any discussion of future expectations as to industry and regulatory developments or business initiatives and strategies, future operating results or financial performance identify forward-looking statements. These include, among others, statements relating to:

 

   

our 2011 outlook;

 

   

the scope, nature or impact of acquisitions, dispositions, investments or other transactional activities;

 

   

the integration of acquired businesses, including accounting decisions relating thereto;

 

   

the effective dates for, and expected benefits of, ongoing initiatives;

 

   

the impact of pricing changes;

 

   

tax benefits;

 

   

the cost and availability of liquidity; and

 

   

the outcome of any litigation and/or government investigation to which we are a party and other contingencies.

Forward-looking statements involve risks and uncertainties. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements include, among others, the following:

 

   

our operating results may be lower than expected;

 

   

loss of significant trading volume, market share or listed companies;

 

   

economic, political and market conditions and fluctuations, including interest rate and foreign currency risk, inherent in U.S. and international operations;

 

   

government and industry regulation;

 

   

our ability to successfully integrate acquired businesses, including the fact that such integration may be more difficult, time consuming or costly than expected, and our ability to realize synergies from business combinations and acquisitions;

 

   

covenants in our credit facilities, indentures and other agreements governing our indebtedness which may restrict the operation of our business; and

 

   

adverse changes that may occur in the securities markets generally.

Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the uncertainty and any risk related to forward-looking statements that we make. These risk factors are discussed under the caption “Part II. Item 1A. Risk Factors,” in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 that was filed with the SEC on May 5, 2011 and more fully described in the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 that was filed with the SEC on February 24, 2011. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. You should carefully read this entire Form 10-Q, including “Part 1. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the condensed consolidated financial statements and the related notes. Except as required by the federal securities laws, we undertake no obligation to update any forward-looking statement, release publicly any revisions to any forward-looking statements or report the occurrence of unanticipated events. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

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PART 1—FINANCIAL INFORMATION

Item 1. Financial Statements.

The NASDAQ OMX Group, Inc.

Condensed Consolidated Balance Sheets

(in millions, except share and par value amounts)

 

     June 30,
2011
    December 31,
2010
 
     (Unaudited)        

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 578      $ 315   

Restricted cash

     59        60   

Financial investments, at fair value

     320        253   

Receivables, net

     344        298   

Deferred tax assets

     24        13   

Open clearing contracts:

    

Derivative positions, at fair value

     1,417        4,037   

Resale agreements, at contract value

     3,560        3,441   

Other current assets

     127        93   
                

Total current assets

     6,429        8,510   

Non-current restricted cash

     105        105   

Property and equipment, net

     165        164   

Non-current deferred tax assets

     273        433   

Goodwill

     5,345        5,127   

Intangible assets, net

     1,767        1,719   

Other non-current assets

     133        149   
                

Total assets

   $ 14,217      $ 16,207   
                

Liabilities

    

Current liabilities:

    

Accounts payable and accrued expenses

   $ 180      $ 142   

Section 31 fees payable to SEC

     147        82   

Accrued personnel costs

     88        122   

Deferred revenue

     202        122   

Other current liabilities

     158        119   

Deferred tax liabilities

     27        26   

Open clearing contracts:

    

Derivative positions, at fair value

     1,417        4,037   

Repurchase agreements, at contract value

     3,560        3,441   

Current portion of debt obligations

     140        140   
                

Total current liabilities

     5,919        8,231   

Debt obligations

     2,069        2,181   

Non-current deferred tax liabilities

     712        698   

Non-current deferred revenue

     170        170   

Other non-current liabilities

     187        198   
                

Total liabilities

     9,057        11,478   
                

Commitments and contingencies

    

Equity

    

NASDAQ OMX stockholders’ equity:

    

Common stock, $0.01 par value, 300,000,000 shares authorized, shares issued: 213,379,758 at June 30, 2011 and 213,370,086 at December 31, 2010; shares outstanding: 177,064,158 at June 30, 2011 and 175,782,683 at December 31, 2010

     2        2   

Preferred stock, 30,000,000 shares authorized, series A convertible preferred stock: shares issued: 1,600,000 at June 30, 2011 and December 31, 2010; shares outstanding: none at June 30, 2011 and December 31, 2010

     —          —     

Additional paid-in capital

     3,780        3,780   

Common stock in treasury, at cost: 36,315,600 shares at June 30, 2011 and 37,587,403 shares at December 31, 2010

     (770     (796

Accumulated other comprehensive loss

     (62     (272

Retained earnings

     2,200        2,004   
                

Total NASDAQ OMX stockholders’ equity

     5,150        4,718   

Noncontrolling interests

     10        11   
                

Total equity

     5,160        4,729   
                

Total liabilities and equity

   $ 14,217      $ 16,207   
                

See accompanying notes to condensed consolidated financial statements.

 

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The NASDAQ OMX Group, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

(in millions, except per share amounts)

 

     Three Months Ended
June  30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Revenues:

        

Market Services

   $ 699      $ 766      $ 1,382      $ 1,418   

Issuer Services

     93        86        184        170   

Market Technology

     46        34        89        68   

Other

     —          —          —          1   
                                

Total revenues

     838        886        1,655        1,657   
                                

Cost of revenues:

        

Transaction rebates

     (322     (384     (631     (710

Brokerage, clearance and exchange fees

     (100     (112     (193     (197
                                

Total cost of revenues

     (422     (496     (824     (907
                                

Revenues less transaction rebates, brokerage, clearance and exchange fees

     416        390        831        750   
                                

Operating Expenses:

        

Compensation and benefits

     115        103        226        201   

Marketing and advertising

     5        5        10        9   

Depreciation and amortization

     26        25        53        50   

Professional and contract services

     22        20        43        39   

Computer operations and data communications

     16        14        34        30   

Occupancy

     23        21        46        43   

Regulatory

     8        9        17        19   

Merger and strategic initiatives

     29        1        34        1   

General, administrative and other

     14        13        27        68   
                                

Total operating expenses

     258        211        490        460   
                                

Operating income

     158        179        341        290   

Interest income

     3        2        5        5   

Interest expense

     (31     (26     (63     (51

Dividend and investment income (loss)

     —          1        (1     1   

Loss on divestiture of businesses

     —          (11     —          (11

Income from unconsolidated investees, net

     1        1        1        1   
                                

Income before income taxes

     131        146        283        235   

Income tax provision

     40        51        89        81   
                                

Net income

     91        95        194        154   

Net loss attributable to noncontrolling interests

     1        1        2        3   
                                

Net income attributable to NASDAQ OMX

   $ 92      $ 96      $ 196      $ 157   
                                

Basic and diluted earnings per share:

        

Basic earnings per share

   $ 0.52      $ 0.46      $ 1.11      $ 0.75   
                                

Diluted earnings per share

   $ 0.51      $ 0.46      $ 1.09      $ 0.74   
                                

See accompanying notes to condensed consolidated financial statements.

 

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The NASDAQ OMX Group, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(in millions)

 

     Three Months
Ended June 30,
    Six Months
Ended June  30,
 
     2011     2010     2011     2010  

Net income

   $ 91      $ 95      $ 194      $ 154   

Other comprehensive income (loss):

        

Net unrealized holding losses on available-for-sale investment securities:

        

Unrealized holding losses arising during the period

     (3     (5     (7     (5

Income tax benefit

     1        2        3        2   
                                

Total

     (2     (3     (4     (3
                                

Foreign currency translation gains (losses):

        

Net foreign currency translation gains (losses)

     23        (334     299        (391

Income tax (expense) benefit

     (1     128        (85     147   
                                

Total

     22        (206     214        (244
                                

Unrealized losses on cash flow hedges:

        

Reclassification adjustment for loss realized in net income on cash flow hedges

     —          —          —          9   

Income tax benefit recognized in net income during the period

     —          —          —          (3
                                

Total

     —          —          —          6   
                                

Total other comprehensive income (loss), net of tax

     20        (209     210        (241
                                

Comprehensive income (loss)

     111        (114     404        (87
                                

Comprehensive loss attributable to noncontrolling interests

     1        1        2        3   
                                

Comprehensive income (loss) attributable to NASDAQ OMX

   $ 112      $ (113   $ 406      $ (84
                                

See accompanying notes to condensed consolidated financial statements.

 

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The NASDAQ OMX Group, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in millions)

 

     Six Months
Ended June 30,
 
     2011     2010  

Cash flows from operating activities:

    

Net income

   $ 194      $ 154   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     53        50   

Share-based compensation

     17        17   

Excess tax benefits related to share-based compensation

     (6     (2

Provision for bad debts

     1        2   

Deferred income taxes

     (21     (5

Loss on divestiture of businesses

     —          11   

Charges related to debt refinancing

     —          37   

Net income from unconsolidated investees

     (1     (1

Loss on asset retirements

     1       3   

Accretion of debt discounts

     8        7   

Amortization of debt issuance costs

     4        3   

Other non-cash items included in net income

     —          (3

Net change in operating assets and liabilities, net of effects of acquisitions:

    

Receivables, net

     (43     (71

Other assets

     65        (61

Accounts payable and accrued expenses

     46        49   

Section 31 fees payable to SEC

     65        —     

Accrued personnel costs

     (37     (39

Deferred revenue

     70        89   

Other liabilities

     14        (17
                

Net cash provided by operating activities

     430        223   
                

Cash flows from investing activities:

    

Purchases of trading securities

     (348     (169

Proceeds from sales and redemptions of trading securities

     298        178   

Proceeds from sale of equity method investment

     —          1   

Acquisitions of businesses, net of cash and cash equivalents acquired and purchase accounting adjustments

     (2     (4

Purchases of property and equipment

     (24     (20
                

Net cash used in investing activities

     (76     (14
                

Cash flows from financing activities:

    

Purchases of noncontrolling interests

     —          (2

Proceeds from debt obligations, net of debt issuance costs

     —          1,676   

Payments of debt obligations

     (120     (1,741

Cash paid for repurchase of common stock

     —          (200

Issuances of common stock, net of treasury stock purchases

     8        4   

Excess tax benefits related to share-based compensation

     6        2   

Other financing activities

     10        3   
                

Net cash used in financing activities

     (96     (258
                

Effect of exchange rate changes on cash and cash equivalents

     5        (19
                

Net increase (decrease) in cash and cash equivalents

     263        (68

Cash and cash equivalents at the beginning of period

     315        594   
                

Cash and cash equivalents at the end of period

   $ 578      $ 526   
                

Supplemental Disclosures

    

Cash paid for:

    

Interest

   $ 36      $ 15   

Income taxes, net of refund

   $ 37      $ 99   

See accompanying notes to condensed consolidated financial statements.

 

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The NASDAQ OMX Group, Inc.

Notes to Condensed Consolidated Financial Statements

1. Organization and Nature of Operations

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

In the U.S., we operate The NASDAQ Stock Market, a registered national securities exchange. The NASDAQ Stock Market is the largest single cash equities securities market in the U.S. in terms of listed companies and in the world in terms of share value traded. As of June 30, 2011, The NASDAQ Stock Market was home to 2,724 listed companies with a combined market capitalization of approximately $4.7 trillion. In addition, in the U.S. we operate two additional cash equities trading markets, two options markets, a futures market and a derivatives clearinghouse. We also engage in riskless principal trading of 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 June 30, 2011, the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, together with NASDAQ OMX First North, were home to 780 listed companies with a combined market capitalization of approximately $1.1 trillion. We also operate NASDAQ OMX Armenia. In addition, NASDAQ OMX Commodities operates the world’s largest power derivatives exchange, one of Europe’s largest carbon exchanges, and N2EX, a marketplace for physical U.K. power contracts.

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

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, 2010.

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.

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

 

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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 years 2008 and 2009. 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 2008-2010 would total approximately $18 million. We expect the Finnish Tax Authority 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 June 30, 2011, we have recorded the tax benefits associated with the filing position.

In June 2009, NASDAQ OMX filed an application for an advance tax ruling with the Swedish Tax Council for Advance Tax Rulings. The application was filed to confirm whether certain interest expense is deductible for Swedish tax purposes under legislation that became effective on January 1, 2009. In June 2010, we received a favorable response from the Swedish Tax Council for Advance Tax Rulings in which all members of the Council agreed that the interest expense is deductible for Swedish tax purposes. The Swedish Tax Agency has appealed the Council’s ruling to the Swedish Supreme Administrative Court. We expect the Swedish Supreme Administrative Court to agree with the ruling from the Swedish Tax Council for Advance Tax Rulings. In the second quarter of 2011, we recorded a tax benefit of $5 million, or $0.03 per diluted share, and in the second quarter of 2010, we recorded a tax benefit of $4 million, or $0.02 per diluted share, related to this matter. In the first six months of 2011, we recorded a tax benefit of $10 million, or $0.06 per diluted share, and in the first six months of 2010, we recorded a tax benefit of $9 million, or $0.04 per diluted share, related to this matter. Since January 1, 2009, we have recorded a tax benefit of $47 million, or $0.23 per diluted share, related to this matter.

3. Recently Adopted Accounting Pronouncements

ASC Topic 820In January 2010, the Financial Accounting Standards Board, or FASB, issued amended guidance relating to FASB Accounting Standards Codification, or ASC, Topic 820, “Fair Value Measurements and Disclosures.” The amended guidance requires new disclosures as follows:

 

   

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

 

   

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

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

 

   

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

 

   

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

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

4. Acquisitions

We completed the following acquisitions in 2010. The results of operations of each transaction are included in our Condensed Consolidated Statements of Income from the dates of each acquisition. A summary of the allocation of the total purchase consideration is presented as follows:

 

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

FTEN(1)

   $ 110       $ (1   $ 46       $ 65   

SMARTS(2)

     77         (5     28         54   

Nord Pool (3)

     17         7        2         8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total for 2010

   $ 204       $ 1      $ 76       $ 127   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

In December 2010, we acquired FTEN, Inc., or FTEN, a leading provider of Real-Time Risk Management solutions for the financial securities market for $110 million. FTEN purchase consideration included $11 million held in escrow to be paid in 2012, in accordance with the purchase agreement. We acquired net assets, at fair value, totaling $3 million and recorded a current deferred tax liability of $2 million and a non-current deferred tax liability of $16 million related to purchased intangible assets, and we also recorded a non-current deferred tax asset of $14 million related to net operating loss carry forwards, resulting in total net liabilities acquired of $1 million. The total deferred tax liabilities of $18 million represent the tax effect of the

 

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  difference between the estimated assigned fair value of the acquired intangible assets ($46 million) and the tax basis ($0) of such assets. The estimated amount of $18 million is determined by multiplying the difference of $46 million by FTEN’s effective tax rate of 39.55%. The purchased intangible assets of $46 million consisted of $23 million in customer relationships, $12 million in technology, $9 million for the FTEN trade name and $2 million related to non-compete agreements.
(2)

In August 2010, we acquired SMARTS Group Holdings Pty Ltd, or SMARTS, a leading technology provider of surveillance solutions to exchanges, regulators and brokers to diversify our Market Technology business and enter the broker surveillance and compliance market. We completed our acquisition of SMARTS for $77 million, which included a $75 million initial purchase price, as well as a $2 million working capital adjustment. SMARTS purchase consideration also included $2 million held in escrow that was paid in the first quarter of 2011 and $12 million held in escrow to be paid in 2012, in accordance with the purchase agreement. We acquired net assets, at fair value, totaling $3 million and recorded a current deferred tax liability of $1 million and a non-current deferred tax liability of $7 million related to purchased intangible assets, resulting in total net liabilities acquired of $5 million. The total deferred tax liabilities of $8 million represent the tax effect of the difference between the estimated assigned fair value of the acquired intangible assets ($28 million) and the tax basis ($0) of such assets. The estimated amount of $8 million is determined by multiplying the difference of $28 million by SMARTS’ effective tax rate of 30%. The purchased intangible assets of $28 million consisted of $11 million in technology and $17 million in customer relationships.

(3)

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

In the second quarter of 2011, we finalized the allocation of the purchase price for Nord Pool. The above amounts for FTEN and SMARTS represent the preliminary allocation of the purchase price and are subject to revision during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Adjustments to the provisional values during the measurement period will be pushed back to the date of acquisition. Comparative information for periods after acquisition but before the period in which the adjustments are identified will be adjusted to reflect the effects of the adjustments as if they were taken into account as of the acquisition date. Changes to amounts recorded as assets and liabilities may result in a corresponding adjustment to goodwill. There were no adjustments to the provisional values during the three and six months ended June 30, 2011.

Acquisition of ZVM

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

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

In March 2010, we purchased the assets of North American Energy Credit and Clearing Corp. for an immaterial amount. With this purchase, NASDAQ OMX expanded its presence in the OTC energy commodity markets. The acquisition of these assets was effected through NASDAQ OMX Commodities Clearing Company, or NOCC. In March 2010, we also provided cash of $25 million to NOCC to improve its liquidity position. As of June 30, 2011 and December 31, 2010, this amount is classified as non-current restricted cash in the Condensed Consolidated Balance Sheets.

Pro Forma Results and Acquisition-related Costs

Pro forma results of operations for the acquisitions completed during 2010 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 six months ended June 30, 2011:

 

     Market
Services
     Issuer
Services
     Market
Technology
     Total  
     (in millions)  

Balance at December 31, 2010

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

Foreign currency translation adjustment

     193         14         11         218   
                                   

Balance at June 30, 2011

   $ 4,872       $ 306       $ 167       $ 5,345   
                                   

As of June 30, 2011, the amount of goodwill that is expected to be deductible for tax purposes in future periods is $101 million.

Goodwill represents the excess of the purchase price over the value assigned to the net tangible and identifiable intangible assets of a business acquired. Goodwill is allocated to the reporting units based on the assignment of the fair values of each reporting unit of the acquired company. We are required to test goodwill for impairment at the reporting unit level annually, or in interim periods if certain events occur indicating that the carrying value may be impaired. We test for impairment during the fourth quarter of our fiscal year using October 1st carrying values. We considered the need to update our most recent annual goodwill impairment test as of June 30, 2011 and concluded that none of the impairment indicators triggered a revised impairment analysis. As such, we concluded the assumptions used during the annual assessment remained appropriate. There was no impairment of goodwill for the three and six months ended June 30, 2011 and 2010. Although there is no impairment as of June 30, 2011, events such as economic weakness and unexpected significant declines in operating results of reporting units may result in our having to perform a goodwill impairment test for some or all of our reporting units prior to the required annual assessment. These types of events and the resulting analysis could result in goodwill impairment charges in the future.

Purchased Intangible Assets

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

 

     June 30, 2011      December 31, 2010  
     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

   $ 38      $ (8   $ 30        9       $ 72      $ (41   $ 31        6   

Customer relationships

     853        (175     678        21         853        (152     701        21   

Other

     6        (1     5        8         6        (1     5        8   

Foreign currency translation adjustment

     20        (2     18           (15     4        (11  
                                                     

Total finite-lived intangible assets

   $ 917      $ (186   $ 731         $ 916      $ (190   $ 726     
                                                     

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

     (13     —          (13        (56     —          (56  
                                                     

Total indefinite-lived intangible assets

   $ 1,036      $ —        $ 1,036         $ 993      $ —        $ 993     
                                                     

Total intangible assets

   $ 1,953      $ (186   $ 1,767         $ 1,909      $ (190   $ 1,719     
                                                     

Amortization expense for purchased finite-lived intangible assets was $13 million for the three months ended June 30, 2011 and $28 million for the six months ended June 30, 2011 compared to $13 million for the three months ended June 30, 2010 and $27 million for the six months ended June 30, 2010.

 

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The estimated future amortization expense (excluding the impact of foreign currency translation adjustments of $18 million as of June 30, 2011) of purchased finite-lived intangible assets as of June 30, 2011 is as follows:

 

     (in millions)  

2011(1)

   $ 25   

2012

     51   

2013

     50   

2014

     48   

2015

     46   

2016 and thereafter

     493   
        

Total

   $ 713   
        

 

(1)

Represents the estimated amortization to be recognized for the remaining six months of 2011.

6. Investments

Trading Securities

Trading securities, which are included in financial investments, at fair value in the Condensed Consolidated Balance Sheets, were $295 million as of June 30, 2011 and $220 million as of December 31, 2010. These securities are primarily comprised of Swedish government debt securities, of which $233 million as of June 30, 2011 and $190 million as of December 31, 2010, are restricted assets to meet regulatory capital requirements primarily for NASDAQ OMX Stockholm’s clearing operations.

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. In May 2010, we completed the exchange of our equity interest in NASDAQ Dubai Limited, or NASDAQ Dubai, for a 1% investment in DFM. See “Investment in NASDAQ Dubai” below for further discussion.

As of June 30, 2011 and December 31, 2010, the cost basis of this security was $36 million. As of June 30, 2011, the fair value was $25 million and as of December 31, 2010, the fair value was $33 million. The gross change of $11 million between the cost basis and fair value as of June 30, 2011 is reflected as an unrealized holding loss in accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets, net of taxes. We reviewed the carrying value of this investment security to determine whether an other-than-temporary decline in value exists. We considered factors affecting the investee, factors affecting the industry the investee operates in and general market trends. We also considered the length of time the market value has been below the cost basis and the near-term prospects for recovery of unrealized losses. As of June 30, 2011 and December 31, 2010, we have not recognized an other-than-temporary decline in value on this investment security.

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 $29 million as of June 30, 2011 and $27 million as of December 31, 2010, which consisted primarily of our equity interest in European Multilateral Clearing Facility N.V., a leading European clearinghouse in which we own a 22% equity stake. 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 $1 million for both the three and six months ended June 30, 2011 and 2010.

Investment in NASDAQ Dubai

In May 2010, we participated in the realignment of the ownership structure of NASDAQ Dubai, in which NASDAQ Dubai became a wholly-owned subsidiary of DFM, a publicly traded company controlled by Borse Dubai Limited, a Dubai company, or Borse Dubai. We received a 1% equity interest in DFM in exchange for our equity interest in NASDAQ Dubai. Our existing technology and trademark licensing arrangements with Borse Dubai and NASDAQ Dubai remain unchanged.

 

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

7. Deferred Revenue

Deferred revenue represents cash payments received that are yet to be recognized as revenue. At June 30, 2011, 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)  

Fiscal year ended:

              

2011(1)

   $ 8       $ 19       $ 96       $ 30       $ 153   

2012

     12         30         2         43         87   

2013

     8         23         —           34         65   

2014

     6         11         —           21         38   

2015

     4         2         —           12         18   

2016 and thereafter

     3         —           —           8         11   
                                            
   $ 41       $ 85       $ 98       $ 148       $ 372   
                                            

 

(1)

Represents deferred revenue that is anticipated to be recognized over the remaining six months of 2011.

(2)

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

Our deferred revenue during the six months ended June 30, 2011 and 2010 is 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)              

Balance at January 1, 2011

   $ 42      $ 83      $ 21      $ 146      $ 292   

Additions (1)

     7        22        189        25        243   

Amortization (1)

     (8     (20     (113     (30     (171

Translation adjustment

     —          —          1        7        8   
                                        

Balance at June 30, 2011

   $ 41      $ 85      $ 98      $ 148      $ 372   
                                        

Balance at January 1, 2010

   $ 46      $ 76      $ 18      $ 125      $ 265   

Additions (1)

     6        25        185        14        230   

Amortization (1)

     (9     (19     (104     (8     (140

Translation adjustment

     —          —          —          (10     (10
                                        

Balance at June 30, 2010

   $ 43      $ 82      $ 99      $ 121      $ 345   
                                        

 

(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 six months ended June 30, 2011:

 

     December 31,
2010
    Additions      Payments,
Conversions,
Accretion and
Other
    June 30,
2011
 
     (in millions)  

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

   $ —        $ —         $ —        $ —     

2.50% convertible senior notes due August 15, 2013

     388        —           7        395   

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

     398        —           1        399   

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

     598        —           —          598   

$700 million senior unsecured term loan facility credit agreement due January 15, 2013 (average interest rate of 2.26% for the six months ended June 30, 2011)(2)

     570        —           (120     450   

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

     367        —           —          367   
                                 

Total debt obligations

     2,321        —           (112     2,209   

Less current portion

     (140     —           —          (140
                                 

Total long-term debt obligations

   $ 2,181      $ —         $ (112   $ 2,069   
                                 

 

(1)

As of June 30, 2011 and December 31, 2010, approximately $0.5 million aggregate principal amount of the 3.75% convertible notes remained outstanding.

(2)

See “Senior Unsecured Notes and Credit Facility” below for further discussion.

(3)

See “5.25% Senior Unsecured Notes” 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 2013. The interest rate on the notes is 2.50% per annum payable semi-annually in arrears on February 15 and August 15 and the notes will mature on August 15, 2013. In 2009, we repurchased $47 million aggregate principal amount of the 2.50% convertible senior notes. As a result of the $47 million repurchase, the remaining aggregate principal amount outstanding on these notes as of June 30, 2011 and December 31, 2010 was $428 million.

The notes are convertible in certain circumstances specified in the indenture for the notes. Upon conversion, holders will receive, at the election of NASDAQ OMX, cash, common stock or a combination of cash and common stock. It is our current intent and policy to settle the principal amount of the notes in cash. The conversion rate will initially be 18.1386 shares of common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $55.13 per share of common stock. At June 30, 2011 and December 31, 2010, the 2.50% convertible senior notes are convertible into 7,757,283 shares of our common stock, subject to adjustment upon the occurrence of specified events. Subject to certain exceptions, if we undergo a “fundamental change” as described in the indenture, holders may require us to purchase their notes at a price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest.

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

 

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The changes in the liability and equity components of our 2.50% convertible senior notes during the six months ended June 30, 2011 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
 

December 31, 2010

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

Accretion of debt discount

     —           (7     7         —           —           —     
                                                    

June 30, 2011

   $ 428       $ 33      $ 395       $ 80       $ 32       $ 48   
                                                    

The unamortized debt discount on the convertible debt was $33 million as of June 30, 2011 and $40 million as of December 31, 2010 and is included in debt obligations in the Condensed Consolidated Balance Sheets. This amount will be accreted as part of interest expense through the maturity date of the convertible debt of August 15, 2013. The effective annual interest rate on the 2.50% convertible senior notes was 6.53% for the three and six months ended June 30, 2011 and 2010, which includes the accretion of the debt discount in addition to the annual contractual interest rate of 2.50%.

As of June 30, 2011 and December 31, 2010, the equity component of the convertible debt included in additional paid-in capital in the Condensed Consolidated Balance Sheets was $48 million. This amount is calculated as follows: $80 million of excess principal of the convertible debt over the carrying amount less $32 million of deferred taxes. The deferred tax liability is determined by multiplying the $80 million of excess principal of the convertible debt over the carrying amount by the U.S. marginal tax rate of 39.55%.

Interest expense recognized on our 2.50% convertible senior notes in the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2011 and 2010 is as follows:

 

     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
     2011      2010      2011      2010  
     (in millions)  

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

           

Accretion of debt discount

   $ 3       $ 3       $ 7       $ 7   

Contractual interest

     3         3         5         5   
                                   

Total interest expense recognized on our 2.50% convertible senior notes

   $ 6       $ 6       $ 12       $ 12   
                                   

Debt Issuance Costs

In 2008, in conjunction with the issuance of the 2.50% convertible senior notes, we incurred debt issuance costs of $10 million. These costs, which are capitalized and included in other non-current assets in the Condensed Consolidated Balance Sheets, are being amortized over the life of the debt obligation. Amortization expense, which is recorded as additional interest expense for these costs, was immaterial for both the three months ended June 30, 2011 and 2010 and $1 million for both the six months ended June 30, 2011 and 2010.

Senior Unsecured Notes and Credit Facility

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

The Notes

The Notes were issued at a discount in two separate series consisting of $400 million aggregate principal amount of 4.00% senior notes due 2015, 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 June 30, 2011, 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.

 

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

Credit Facility

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

Under our credit facility, we are required to pay quarterly principal payments of $35 million on our Term Loans. We made required payments of $70 million, as well as an optional payment of $50 million, during the first six months of 2011 on our Term Loans.

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

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

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

Debt Issuance and Other Costs

We incurred debt issuance and other costs of $21 million in connection with the issuance of the Notes and the entry into the new credit facility. These costs, which are capitalized and included in other 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 $1 million for both the three months ended June 30, 2011 and 2010, $3 million for the six months ended June 30, 2011 and $2 million for the six months ended June 30, 2010.

In January 2010, as a result of the repayment of our senior secured credit facilities in place as of December 31, 2009, we recorded a pre-tax charge of $40 million, which included the write-off of the remaining unamortized balance of debt issuance costs incurred of $28 million, costs to terminate our float-to-fixed interest rate swaps previously designated as a cash flow hedge of $9 million and other costs of $3 million. These charges are included in general, administrative and other expense in the Condensed Consolidated Statements of Income for the six months ended June 30, 2010.

5.25% Senior Unsecured Notes

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

The 2018 Notes were issued at a discount. As a result of the discount, the proceeds received from the issuance were less than the aggregate principal amount. As of June 30, 2011, 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 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 indenture), the terms require us to repurchase all or part of each holder’s notes for cash equal to 101% of the aggregate principal amount purchased plus accrued and unpaid interest, if any.

 

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Debt Issuance Costs

We incurred debt issuance costs of $3 million in connection with the issuance of the 2018 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 obligation. Amortization expense, which is recorded as additional interest expense for these costs, was immaterial for both the three and six months ended June 30, 2011.

Bridge Facility

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

Other Credit Facilities

In addition to the $250 million revolving credit commitment discussed above, we have credit facilities related to our clearinghouses in order to meet liquidity and regulatory requirements. These credit facilities, which are available in multiple currencies, primarily Swedish Krona and U.S. dollar, totaled $460 million ($208 million in available liquidity and $252 million to satisfy regulatory requirements), of which $10 million was utilized at June 30, 2011. At December 31, 2010, these facilities totaled $440 million ($196 million in available liquidity and $244 million to satisfy regulatory requirements), none of which was utilized.

Debt Covenants

At June 30, 2011, we were in compliance with the covenants of all of our debt obligations.

9. Pension and Other Benefit Programs

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 benefit costs from the NASDAQ OMX Benefit Plans recognized in compensation and benefits expense in the Condensed Consolidated Statements of Income:

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
     2011     2010     2011     2010  
     (in millions)  

Components of net periodic benefit cost

        

Interest cost

   $ 2      $ 1      $ 3      $ 3   

Expected return on plan assets

     (1     (1     (2     (2

Recognized net actuarial loss

     —          1        1        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 1      $ 1      $ 2      $ 3   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 $4 million for the three months ended June 30, 2011, $3 million for the three months ended June 30, 2010 and $7 million for both the six months ended June 30, 2011 and 2010.

 

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As part of the acquisition of Nord Pool’s derivatives, clearing and consulting subsidiaries, we assumed the obligation for several pension plans providing benefits for these employees. The benefit cost for these plans was immaterial for both the three months ended June 30, 2011 and 2010 and was $1 million for both the six months ended June 30, 2011 and 2010.

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 June 30, 2011 and 2010 and $2 million for both the six months ended June 30, 2011 and 2010.

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, when we meet our 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 $1 million for both the three months ended June 30, 2011 and 2010 and $2 million for both the six months ended June 30, 2011 and 2010.

Employee Stock Purchase Plan

We have an employee stock purchase plan, or ESPP, under which approximately 3.7 million shares of our common stock have been reserved for future issuance as of June 30, 2011.

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.

10. Share-Based Compensation

We have a share-based compensation program that provides our board of directors broad discretion in creating employee equity incentives. Share-based awards, or equity awards, include employee stock options, restricted stock (which includes awards and units) and performance share units, or PSUs. Grants of equity awards are designed to reward employees for their long-term contributions and provide incentives for them to remain with us. For accounting purposes, we consider PSUs to be a form of restricted stock. Restricted stock is generally time-based and vests over two to five-year periods beginning on the date of the grant. Stock options are also generally time-based and expire ten years from the grant date. Stock option and restricted stock awards generally include performance-based accelerated vesting features based on achievement of specific levels of corporate performance. If NASDAQ OMX exceeds the applicable performance parameters, the grants vest on the third anniversary of the grant date, if NASDAQ OMX meets the applicable performance parameters, the grants vest on the fourth anniversary of the grant date, and if NASDAQ OMX does not meet the applicable performance parameters, the grants vest on the fifth anniversary of the grant date.

PSUs are based on performance measures that impact the amount of shares that each recipient will receive upon vesting. PSUs are granted at the fair market value of our stock on the grant date and compensation cost is recognized over the performance period and, in certain cases, an additional vesting period. For each grant of PSUs, an employee may receive from 0% to 150% of the target amount granted, depending on the achievement of performance measures. We report the target number of PSUs granted, unless we have determined that it is more likely than not, based on the actual achievement of performance measures, that an employee will receive a different amount of shares underlying the PSUs, in which case we report the amount of shares the employee is likely to receive.

Summary of 2011 Equity Awards

In March 2011, we granted non-qualified stock options and/or restricted stock to most active employees. Both the stock options and restricted stock granted included a performance-based accelerated vesting feature based on achievement of specific levels of corporate performance, as described above.

During the first six months of 2011, certain executive officers received grants of 617,940 PSUs. Of these PSUs granted, 100,000 units are subject to a three year performance period and vest at the end of the performance period. The remaining 517,940 units are subject to a one year performance period and generally will vest ratably on an annual basis on December 31, 2012 through December 31, 2014.

During 2010, certain executive officers received grants of PSUs which were subject to a one year performance period. These grants exceeded the applicable performance parameters. As a result, an additional 19,142 units were considered granted in February 2011.

 

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See “Summary of Stock Option Activity” and “Summary of Restricted Stock and PSU Activity” below for further discussion.

Common Shares Available Under Our Equity Incentive Plan

As of June 30, 2011, we had approximately 6.0 million shares of common stock authorized for future issuance under our equity incentive plan.

Summary of Share-Based Compensation Expense

The following table shows the total share-based compensation expense resulting from equity awards and the 15.0% discount for the ESPP for the three and six months ended June 30, 2011 and 2010 in the Condensed Consolidated Statements of Income:

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
     2011     2010     2011     2010  
     (in millions)  

Share-based compensation expense before income taxes

   $ 10      $ 10      $ 17      $ 17   

Income tax benefit

     (4     (4     (7     (7
                                

Share-based compensation expense after income taxes

   $ 6      $ 6      $ 10      $ 10   
                                

We estimated the fair value of stock option awards using the Black-Scholes valuation model with the following assumptions:

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 
     2011     2010     2011     2010  

Expected life (in years)

     5        5        5        5   

Weighted-average risk free interest rate

     1.85     2.53     2.16     2.28

Expected volatility

     27.0     32.0     27.0     32.0

Dividend yield

     —          —          —          —     

Weighted-average fair value at grant date

   $ 6.95      $ 6.81      $ 7.06      $ 6.36   

Our computation of expected life is based on historical exercise patterns. The interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. Our computation of expected volatility is based on a market-based implied volatility. Our credit facilities limit our ability to pay dividends. Before our credit facilities were in place, it was not our policy to declare or pay cash dividends on our common stock.

Summary of Stock Option Activity

A summary of stock option activity for the six months ended June 30, 2011 is as follows:

 

     Number of
Stock
Options
    Weighted-
Average
Exercise Price
     Weighted-
Average
Remaining
Contractual Term
     Aggregate
Intrinsic  Value
 
                  (in years)      (in millions)  

Outstanding at January 1, 2011

     10,112,842      $ 16.92         5.7       $ 89   
                      

Granted (1)

     1,267,430        25.28         

Exercises

     (867,712     9.34         

Forfeitures or expirations

     (313,607     27.10         
                

Outstanding at June 30, 2011

     10,198,953      $ 18.29         6.0       $ 87   
                                  

Exercisable at June 30, 2011

     5,185,438      $ 13.60         3.4       $ 73   
                                  

 

(1)

Primarily reflects our company-wide equity grant issued in March 2011, which includes a performance-based accelerated vesting feature based on achievement of specific levels of corporate performance, as described above.

We received net cash proceeds of $3 million from the exercise of 404,355 stock options for the three months ended June 30, 2011 and received net cash proceeds of $8 million from the exercise of 867,712 stock options for the six months ended June 30, 2011.

 

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We received net cash proceeds of $1 million from the exercise of 101,406 stock options for the three months ended June 30, 2010 and received net cash proceeds of $2 million from the exercise of 252,689 stock options for the six months ended June 30, 2010. We present excess tax benefits from the exercise of stock options, if any, as financing cash flows.

The aggregate intrinsic value in the above table represents the total pre-tax intrinsic value (i.e., the difference between our closing stock price on June 30, 2011 of $25.30 and the exercise price, times the number of shares) based on stock options with an exercise price less than NASDAQ OMX’s closing price of $25.30 as of June 30, 2011, which would have been received by the option holders had the option holders exercised their stock options on that date. This amount can change based on the fair market value of our common stock. The total number of in-the-money stock options exercisable as of June 30, 2011 was 4.1 million.

As of June 30, 2010, 6.5 million outstanding stock options were exercisable and the weighted-average exercise price was $12.65.

Total fair value of stock options vested was immaterial for both the three months ended June 30, 2011 and 2010 and was $1 million for both the six months ended June 30, 2011 and 2010. The total pre-tax intrinsic value of stock options exercised was $8 million for the three months ended June 30, 2011, $1 million for the three months ended June 30, 2010, $14 million for the six months ended June 30, 2011 and $3 million for the six months ended June 30, 2010.

At June 30, 2011, $17 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 1.8 years.

Summary of Restricted Stock and PSU Activity

The following table summarizes our restricted stock and PSU activity for the six months ended June 30, 2011:

 

     Number of
Restricted

Stock
    Weighted-Average
Grant  Date
Fair Value
     Number of
PSUs
    Weighted-Average
Grant  Date
Fair Value
 

Unvested balances at January 1, 2011

     2,759,091      $ 22.00         1,098,629      $ 24.25   

Granted

     1,348,425 (1)      25.36         637,082 (2)      25.18   

Vested

     (300,426     24.35         (67,057     35.94   

Forfeited

     (319,654     21.97         (135,693     28.22   
  

 

 

      

 

 

   

Unvested balances at June 30, 2011

     3,487,436      $ 23.17         1,532,961      $ 23.77   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1)

Restricted stock granted in 2011 primarily reflects our company-wide grant issued in March 2011, which included a performance-based accelerated vesting feature based on achievement of specific levels of corporate performance, as described above.

(2)

PSUs granted in 2011 primarily reflect awards issued to certain executive officers, as described above.

At June 30, 2011, $63 million of total unrecognized compensation cost related to restricted stock and PSUs is expected to be recognized over a weighted-average period of 2.0 years.

11. Earnings Per Common Share

The following table sets forth the computation of basic and diluted earnings per share:

 

     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
     2011      2010      2011      2010  
     (in millions, except share and per share amounts)  

Numerator:

           

Net income attributable to NASDAQ OMX

   $ 92       $ 96       $ 196       $ 157   

Accretion of series A convertible preferred stock

     —           —           —           (1
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to common shareholders

   $ 92       $ 96       $ 196       $ 156   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted-average common shares outstanding for basic earnings per share(1)

     176,648,140         205,516,508         176,372,002         208,325,318   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average effect of dilutive securities:

           

Employee equity awards

     3,835,658         3,863,988         3,755,620         3,640,021   

3.75% convertible notes assumed converted into common stock

     34,482         34,482         34,482         34,482   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding for diluted earnings per share(1)

     180,518,280         209,414,978         180,162,104         211,999,821   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Three Months Ended
June  30,
     Six Months Ended
June  30,
 
     2011      2010      2011      2010  
     (in millions, except share and per share amounts)  

Basic and diluted earnings per share:

           

Basic earnings per share

   $ 0.52       $ 0.46       $ 1.11       $ 0.75   
                                   

Diluted earnings per share

   $ 0.51       $ 0.46       $ 1.09       $ 0.74   
                                   

 

(1)

The decrease in the weighted-average common shares outstanding for basic and diluted earnings per share primarily reflects the weighted-average impact of the share repurchase from Borse Dubai and other purchases related to our share repurchase program completed in 2010. See “Share Repurchase Program and Share Repurchase from Borse Dubai,” of Note 12, “NASDAQ OMX Stockholders’ Equity,” for further discussion.

Stock options to purchase 10,198,953 shares of common stock, 5,020,397 shares of restricted stock and PSUs, and convertible notes convertible into 34,482 shares of common stock were outstanding at June 30, 2011. For the three months ended June 30, 2011, we included 6,703,343 of the outstanding stock options and 4,538,137 shares of restricted stock and PSUs in the computation of diluted earnings per share, on a weighted-average basis, as their inclusion was dilutive. For the six months ended June 30, 2011, we included 6,709,093 of the outstanding stock options and 3,073,607 shares of restricted stock and PSUs in the computation of diluted earnings per share, on a weighted-average basis, as their inclusion was dilutive. The remaining stock options and shares of restricted stock and PSUs are antidilutive, and as such, they were properly excluded.

The 3.75% convertible notes are accounted for under the if-converted method, as we previously have settled the convertible notes in shares of our common stock. For the three and six months ended June 30, 2011 and 2010, all of the shares underlying the outstanding 3.75% convertible notes were included in the computation of diluted earnings per share, as their inclusion was dilutive.

The 2.50% convertible senior notes are accounted for under the treasury stock method as it is our intent and policy to settle the principal amount of the notes in cash. Based on the settlement structure of the 2.50% convertible senior notes, which permits the principal amount to be settled in cash and the conversion premium to be settled in shares of our common stock or cash, we will reflect the impact of the convertible spread portion of the convertible notes in the diluted calculation using the treasury stock method. For the three and six months ended June 30, 2011 and 2010, the conversion spread of our 2.50% convertible senior notes was out of the money, and as such, they were properly excluded from the computation of diluted earnings per share.

Stock options to purchase 10,889,062 shares of common stock, 4,246,954 shares of restricted stock and PSUs, and convertible notes convertible into 34,482 shares of common stock were outstanding at June 30, 2010. For the three months ended June 30, 2010, we included 5,329,285 of the outstanding stock options and 3,189,143 shares of restricted stock and PSUs in the computation of diluted earnings per share, on a weighted-average basis, as their inclusion was dilutive. For the six months ended June 30, 2010, we included 5,327,685 of the outstanding stock options and 2,795,276 shares of restricted stock and PSUs in the computation of diluted earnings per share, on a weighted-average basis, as their inclusion was dilutive. The remaining stock options and shares of restricted stock and PSUs are antidilutive, and as such, they were properly excluded.

12. NASDAQ OMX Stockholders’ Equity

Common Stock

At June 30, 2011, 300,000,000 shares of our common stock were authorized, 213,379,758 shares were issued and 177,064,158 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.

In 2008, we issued 60,561,515 shares of common stock to Borse Dubai and a trust for Borse Dubai’s economic benefit in connection with the OMX AB business combination. In December 2010, we purchased 22,781,000 shares of our common stock from Borse Dubai. See “Share Repurchase Program and Share Repurchase from Borse Dubai” below for further discussion. In addition, Borse Dubai agreed to sell in a private transaction 8,000,000 shares of our stock to Nomura International plc. Nomura International plc agreed, under a forward sale agreement, to sell these 8,000,000 shares to Investor AB. As a result of the settlement of this forward sale agreement, Investor AB’s ownership in NASDAQ OMX increased to 17,004,142 shares. During the second quarter of 2011, all shares held by the trust for Borse Dubai’s economic benefit were transferred to Borse Dubai. As of June 30, 2011, Borse Dubai held 29,780,515 shares of our common stock.

In addition, as of December 31, 2010, SLP held 10,539,614 shares of our common stock, and subsequently sold these shares in February 2011. Investor AB purchased 1,000,000 of the shares sold by SLP and owns 18,004,142 shares of our common stock as of June 30, 2011.

 

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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 36,315,600 shares of common stock in treasury as of June 30, 2011 and 37,587,403 shares as of December 31, 2010.

Share Repurchase Program and Share Repurchase from Borse Dubai

Under the share repurchase program authorized by our board of directors during 2010, we were authorized to repurchase up to $550 million of our outstanding common stock. During 2010, we repurchased 15,050,647 shares of our common stock at an average price of $19.95, for an aggregate purchase price of $300 million. In December 2010, our board of directors also approved the repurchase of 22,781,000 shares of our common stock from Borse Dubai for $21.82 per share for an aggregate purchase price of approximately $497 million. The share repurchase from Borse Dubai expanded, accelerated and completed our share repurchase program. The shares repurchased under the share repurchase program and from Borse Dubai are available for general corporate purposes.

Other Repurchases of Common Stock

For the six months ended June 30, 2011, we repurchased 97,598 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 June 30, 2011 and December 31, 2010, 1,600,000 shares of series A convertible preferred stock were issued and none were outstanding.

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 at June 30, 2011.

 

     Balance as of
June 30,
2011
     Fair Value Measurements  
            (Level 1)      (Level 2)      (Level 3)  
            (in millions)  

Financial Assets Measured at Fair Value on a Recurring Basis

           

Derivative positions, at fair value(1)

   $ 1,417       $ —         $ 1,417       $ —     

Financial investments, at fair value(2)

     320         320         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,737       $ 320       $ 1,417       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities Measured at Fair Value on a Recurring Basis

           

Derivative positions, at fair value(1)

   $ 1,417       $ —         $ 1,417       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,417       $ —         $ 1,417       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Represents net amounts associated with our clearing operations in the derivative markets of NASDAQ OMX Commodities and NASDAQ OMX Stockholm. Receivables and payables attributable to outstanding derivative positions have been netted to the

 

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  extent that such a legal offset right exists and, at the same time, if it is our intention to settle these items. See “Derivative Positions, at Fair Value” below for further discussion.
(2)

Primarily comprised of Swedish government debt securities of $295 million. These securities are classified as trading securities and $233 million are restricted assets to meet regulatory capital requirements primarily for NASDAQ OMX Stockholm’s clearing operations. Also includes our 1% available-for-sale investment security in DFM of $25 million. See Note 6, “Investments,” for further discussion of our trading investment securities and available-for-sale investment security.

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 at December 31, 2010:

 

     Balance as of
December  31,
2010
     Fair Value Measurements  
            (Level 1)      (Level 2)      (Level 3)  
            (in millions)  

Financial Assets Measured at Fair Value on a Recurring Basis

           

Derivative positions, at fair value(1)

   $ 4,037       $ —         $ 4,037       $ —     

Financial investments, at fair value(2)

     253         253         —           —     
                                   

Total

   $ 4,290       $ 253       $ 4,037       $ —     
                                   

Financial Liabilities Measured at Fair Value on a Recurring Basis

           

Derivative positions, at fair value(1)

   $ 4,037       $ —         $ 4,037       $ —     
                                   

Total

   $ 4,037       $ —         $ 4,037       $ —     
                                   

 

(1)

Represents net amounts associated with our clearing operations in the derivative markets of NASDAQ OMX Commodities and NASDAQ OMX Stockholm. Receivables and payables attributable to outstanding derivative positions have been netted to the extent that such a legal offset right exists and, at the same time, if it is our intention to settle these items. See “Derivative Positions, at Fair Value” below for further discussion.

(2)

Primarily comprised of Swedish government debt securities of $220 million. These securities are classified as trading securities and $190 million are restricted assets to meet regulatory capital requirements primarily for NASDAQ OMX Stockholm’s clearing operations. Also includes our 1% available-for-sale investment security in DFM of $33 million. See Note 6, “Investments,” for further discussion of our trading investment securities and available-for-sale investment security.

Open Clearing Contracts at NASDAQ OMX Commodities and NASDAQ OMX Stockholm

Derivative Positions, at Fair Value

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

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

The fair value of these derivative contracts with NASDAQ OMX Commodities and NASDAQ OMX Stockholm is reported gross in the Condensed Consolidated Balance Sheets as a receivable pertaining to the purchasing party and a payable pertaining to the

 

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selling party. Such receivables and payables attributable to outstanding derivative positions have been netted to the extent that such a legal offset right exists and, at the same time, that it is our intention to settle these items. Our derivative positions, at fair value in the Condensed Consolidated Balance Sheets were $1,417 million at June 30, 2011 and $4,037 million at December 31, 2010. See “Collateral Received for Clearing Operations, 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 and collateral received.

The following table presents the fair value of our outstanding derivative positions at June 30, 2011 and December 31, 2010 prior to netting:

 

     June 30, 2011      December 31, 2010  
     Asset      Liability      Asset      Liability  
     (in millions)  

Commodity forwards and options(1) (2)

   $ 969       $ 969       $ 3,437       $ 3,437   

Fixed-income options and futures(2) (3)

     276         276         578         578   

Stock options and futures(2) (3)

     220         220         237         237   

Index options and futures(2) (3)

     112         112         208         208   
                                   

Total

   $ 1,577       $ 1,577       $ 4,460       $ 4,460   
                                   

 

(1)

We determine the fair value of our forward contracts using standard valuation models that are based on market-based observable inputs including LIBOR rates and the spot price of the underlying instrument.

(2)

We determine the fair value of our option contracts using standard valuation models that are based on market-based observable inputs including implied volatility, interest rates and the spot price of the underlying instrument.

(3)

We determine the fair value of our futures contracts based upon quoted market prices and average quoted market yields.

Resale and Repurchase Agreements, at Contract Value

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

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

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

We record resale and repurchase agreements at contract value plus interest gross in the 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 resale and repurchase agreements have been netted to the extent that such a legal offset right exists and, at the same time, that it is our intention to settle these items. Our resale and repurchase agreements, at contract value in the Condensed Consolidated Balance Sheets were $3,560 million at June 30, 2011 and $3,441 million at December 31, 2010. The resale and repurchase agreements are recorded at their contractual amounts plus interest which approximates fair value, as the fair value of these items is 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 are fully collateralized. The resale and repurchase agreements generally mature in less than 30 days. See “Collateral Received for Clearing Operations, Guarantees Issued and Credit

 

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Facilities Available,” of Note 15, “Commitments, Contingencies and Guarantees,” for further discussion of our guarantees on the fulfillment of these contracts and collateral received.

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. The fair value of our debt obligations was estimated using discounted cash flow analyses based on our assumed incremental borrowing rates for similar types of borrowing arrangements and a Black-Scholes valuation technique that is utilized to calculate the convertible option value for the 3.75% convertible notes and the 2.50% convertible senior notes. At June 30, 2011, the carrying value of our debt obligations, before the $33 million unamortized debt discount on the 2.50% convertible senior notes, was approximately $20 million less than fair value. The difference primarily relates to an increase in the fair value of the 2.50% convertible senior notes and our Term Loans as a result of changes in current market interest rates during the period, partially offset by a decrease in fair value on the 2.50% convertible senior notes due to the convertible option feature which is equivalent to a conversion price of approximately $55.13 as compared to the closing price of our common stock of $25.30 at June 30, 2011. At December 31, 2010, the carrying value of our debt obligations, before the $40 million unamortized debt discount on the 2.50% convertible senior notes, was approximately $17 million less than fair value, primarily due to an increase in the fair value of the 2.50% convertible senior notes as a result of changes in current market interest rates during the period, partially offset by a decrease in fair value on the 2.50% convertible senior notes due to the convertible option feature which is equivalent to a conversion price of approximately $55.13 as compared to the closing price of our common stock of $23.73 at December 31, 2010. For further discussion of our debt obligations, see Note 8, “Debt Obligations.”

14. Derivative Financial Instruments and Hedging Activities

In the ordinary course of business, we may enter into various types of derivative contracts. These derivative contracts include:

 

   

Futures and foreign currency forward contracts which are commitments to buy or sell at a future date a financial instrument, commodity or currency at a contracted price and may be settled in cash or through delivery.

 

   

Interest rate swap contracts which are agreements between two parties to exchange one stream of future interest payments for another based on a specified principal amount over a set period of time.

 

   

Foreign currency option contracts which give the purchaser, for a fee, the right, but not the obligation, to buy or sell within a limited time a financial instrument or currency at a contracted price that may also be settled in cash, based on differentials between specified indices or prices.

NASDAQ OMX may use these derivative financial instruments to manage exposure to various market risks, primarily foreign currency exchange rate fluctuations and changes in interest rates on our variable rate debt. Such instruments are an integral component of our market risk and related asset/liability management strategy and processes.

Fair Value Hedges

Depending on market conditions, we may use foreign currency futures, forward and option contracts to limit our exposure to foreign currency exchange rate fluctuations on contracted revenue streams (hedged item) relating to our Market Technology sales. When the contracted revenue streams meet the definition of a firm commitment, these derivative contracts may be designated as fair value hedges if the applicable hedge criteria are met. Changes in fair value on the derivatives and the related hedged items are recognized in the Condensed Consolidated Statements of Income. As of June 30, 2011 and December 31, 2010, there were no outstanding fair value hedges.

Cash Flow Hedges

In the third quarter of 2008, we entered into interest rate swap agreements that effectively converted $200 million of our senior secured credit facilities in place as of December 31, 2009, which was floating rate debt, to a fixed rate basis through August 2011, thus reducing the impact of interest rate changes on future interest expense. As of December 31, 2009, these interest rate swaps were in a net liability position of $9 million and were recorded in other non-current liabilities in the Condensed Consolidated Balance Sheets. In the first quarter of 2010, in connection with the repayment of our senior secured credit facilities in place as of December 31, 2009, we terminated our interest rate swaps and reclassified into earnings the unrealized loss of $9 million which was included in accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets at December 31, 2009. This loss is included in general, administrative and other expense in the Condensed Consolidated Statements of Income for the six months ended June 30, 2010. See “Senior Unsecured Notes and Credit Facility,” of Note 8, “Debt Obligations,” for further discussion.

All derivative contracts used to manage interest rate risk are measured at fair value and are recorded in assets or liabilities as appropriate with the offset in accumulated other comprehensive loss within NASDAQ OMX stockholders’ equity in the Condensed Consolidated Balance Sheets. Any hedge ineffectiveness would impact earnings through interest expense. There was no material

 

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hedge ineffectiveness recorded in earnings for both the three and six months ended June 30, 2011 and 2010. As of June 30, 2011 and December 31, 2010, there were no outstanding cash flow hedges.

Net Investment Hedges

Net assets of our foreign subsidiaries are exposed to volatility in foreign currency exchange rates. We may utilize net investment hedges to offset the translation adjustment arising from remeasuring our investment in foreign subsidiaries. As of June 30, 2011 and December 31, 2010, there were no outstanding net investment hedges.

Derivatives Not Designated as Hedges

NASDAQ OMX may also enter into economic hedges that either do not qualify or are not designated for hedge accounting treatment. This type of hedge is undertaken when hedge accounting requirements cannot be achieved or management decides not to apply hedge accounting.

We use foreign exchange forward contracts to manage foreign currency exposure of intercompany loans. These contracts are not designated as hedges for financial reporting purposes. The change in fair value of these contracts is recognized in general, administrative and other expense in the Condensed Consolidated Statements of Income and offsets the foreign currency impact recognized on the intercompany loans.

We did not enter into any material economic hedges that did not qualify or were not designated for hedge accounting during the three and six months ended June 30, 2011 and 2010.

15. Commitments, Contingencies and Guarantees

Collateral Received for Clearing Operations, Guarantees Issued and Credit Facilities Available

Collateral Received for Clearing Operations

Through our clearing operations in the derivative markets with NASDAQ OMX Commodities, NASDAQ OMX Stockholm and our majority-owned subsidiary International Derivatives Clearing Group, or IDCG, (through International Derivatives Clearinghouse, LLC), as well as riskless principal trading at NOCC and the resale and repurchase market with NASDAQ OMX Stockholm, 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 and the resale and repurchase agreements are not used for financing purposes by NASDAQ OMX Stockholm. The structure and operations of NASDAQ OMX Commodities and NASDAQ OMX Stockholm differ from most other clearinghouses. See “Derivative Positions, at Fair Value,” and “Resale and Repurchase Agreements, at Contract Value,” of Note 13, “Fair Value of Financial Instruments,” for further discussion.

We require market participants at NASDAQ OMX Commodities and NASDAQ OMX Stockholm to provide collateral and meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations. Total customer pledged collateral with NASDAQ OMX Commodities and NASDAQ OMX Stockholm was $6.9 billion at June 30, 2011 and $8.7 billion at December 31, 2010. This pledged collateral is held by a third-party custodian bank for the benefit of the clearing members and is accessible by NASDAQ OMX in the event of default. NASDAQ OMX Commodities and NASDAQ OMX Stockholm do not receive any interest on these funds as the risks and rewards of collateral ownership, including interest, belong to the counterparty.

We also require market participants at IDCG and NOCC to meet certain minimum financial standards to mitigate the risk if 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 $20 million at June 30, 2011 and $15 million at December 31, 2010, is included in restricted cash with an offsetting liability included in other current liabilities in the Condensed Consolidated Balance Sheets, as the risks and rewards of collateral ownership, including interest income, belong to IDCG and NOCC. Clearing member pledged cash collateral, included in IDCG’s guaranty fund, was $8 million at both June 30, 2011 and December 31, 2010. This cash is included in non-current restricted cash with an offsetting liability included in other non-current liabilities in the Condensed Consolidated Balance Sheets, as the risks and rewards of collateral ownership, including interest income, belong to IDCG.

Guarantees Issued and Credit Facilities Available

In addition to the collateral pledged by market participants discussed above, 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. At June 30, 2011, financial guarantees issued to us totaled $5 million. Credit facilities, which are available in multiple currencies, primarily Swedish Krona and U.S. dollar, totaled $460 million ($208 million in available liquidity and $252 million to satisfy regulatory requirements), of which $10 million was utilized at June 30, 2011. At December 31, 2010, these facilities totaled $440 million ($196 million in available liquidity and $244 million to satisfy regulatory requirements), none of which was utilized.

 

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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 as of June 30, 2011 of $20 million, 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 related to the delivery of software technology and support services. We have received financial guarantees from various financial institutions to support the above guarantees. At December 31, 2010, the total of these guarantees was $24 million.

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 and SMARTS, we entered into escrow agreements to secure the payments of post-closing adjustments and other closing conditions. At June 30, 2011, these escrow agreements provide for future payments of $23 million in 2012 and are included in other 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 legal 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 and 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, our Nordic and Baltic exchanges and NASDAQ OMX First North 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.

 

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

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 mergers, strategic initiatives and financing activities. See below for further discussion.

The following table presents certain information regarding these operating segments for the three and six months ended June 30, 2011 and 2010.

 

     Market
Services
    Issuer
Services
     Market
Technology
     Corporate
Items and
Eliminations
    Consolidated  
     (in millions)  

Three months ended June 30, 2011

            

Total revenues

   $ 699      $ 93       $ 46       $ —        $ 838   

Cost of revenues

     (422     —           —           —          (422
                                          

Revenues less transaction rebates, brokerage, clearance and exchange fees

     277        93         46         —          416   
                                          

Income (loss) before income taxes (1)

   $ 123      $ 32       $ 4       $ (28   $ 131   
                                          

Three months ended June 30, 2010

            

Total revenues

   $ 766      $ 86       $ 34       $ —        $ 886   

Cost of revenues

     (496     —           —           —          (496
                                          

Revenues less transaction rebates, brokerage, clearance and exchange fees

     270        86         34         —          390   
                                          

Income (loss) before income taxes (2)

   $ 122      $ 30       $ 3       $ (9   $ 146   
                                          

Six months ended June 30, 2011

            

Total revenues

   $ 1,382      $ 184       $ 89       $ —        $ 1,655   

Cost of revenues

     (824     —           —           —          (824
                                          

Revenues less transaction rebates, brokerage, clearance and exchange fees

     558        184         89         —          831   
                                          

Income (loss) before income taxes (1)

   $ 247      $ 63       $ 6       $ (33   $ 283   
                                          

Six months ended June 30, 2010

            

Total revenues

   $ 1,418      $ 170       $ 68       $ 1      $ 1,657   

Cost of revenues

     (907     —           —           —          (907
                                          

Revenues less transaction rebates, brokerage, clearance and exchange fees

     511        170         68         1        750   
                                          

Income (loss) before income taxes (3)

   $ 223      $ 60       $ 5       $ (53   $ 235   
                                          

 

(1)

The corporate items and eliminations for the three and six months ended June 30, 2011 primarily include merger and strategic initiatives expense.

(2)

The corporate items and eliminations for the three months ended June 30, 2010 primarily include charges of $11 million related to loss on divestiture of businesses as a result of our decision to close the businesses of our pan-European multilateral trading facility NASDAQ OMX Europe, or NEURO ($6 million) and Agora-X ($5 million).

(3)

For the six months ended June 30, 2010, corporate items and eliminations primarily include charges of $40 million related to the repayment of our senior secured credit facilities in place as of December 31, 2009 and $11 million related to loss on divestiture of businesses as a result of our decision to close the businesses of both NEURO ($6 million) and Agora-X ($5 million). See “Senior Unsecured Notes and Credit Facility,” of Note 8, “Debt Obligations,” for further discussion of the charges related to the repayment of our senior secured credit facilities.

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.”

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of the financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included in this Form 10-Q.

Business Overview

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

In the U.S., we operate The NASDAQ Stock Market, a registered national securities exchange. The NASDAQ Stock Market is the largest single cash equities securities market in the U.S. in terms of listed companies and in the world in terms of share value traded. As of June 30, 2011, The NASDAQ Stock Market was home to 2,724 listed companies with a combined market capitalization of approximately $4.7 trillion. In addition, in the U.S. we operate two additional cash equities trading markets, two options markets, a futures market and a derivatives clearinghouse. We also engage in riskless principal trading of 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 June 30, 2011, the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, together with NASDAQ OMX First North, were home to 780 listed companies with a combined market capitalization of approximately $1.1 trillion. We also operate NASDAQ OMX Armenia. In addition, NASDAQ OMX Commodities operates the world’s largest power derivatives exchange, one of Europe’s largest carbon exchanges, and N2EX, a marketplace for physical U.K. power contracts.

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

Market Services

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

Issuer Services

Our Issuer Services segment includes our Global Listing Services and Global Index Group businesses. We operate a variety of listing platforms around the world to provide multiple global capital raising solutions for private and public companies. Our main listing markets are The NASDAQ Stock Market and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic. We offer a consolidated global listing application to companies to enable them to apply for listing on The NASDAQ Stock Market and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, as well as NASDAQ Dubai. In addition, through our Corporate Solutions business, we offer companies access to innovative products and services that ease transparency, maximize board efficiency and facilitate corporate governance.

Market Technology

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

 

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Business Environment

We serve listed companies, market participants and investors by providing high quality cash equity, derivative and commodities markets, thereby facilitating economic growth and corporate entrepreneurship. We also provide market technology to exchanges and markets around the world. In broad terms, our business performance is impacted by a number of drivers including macroeconomic events affecting the risk and return of financial assets, investor sentiment, government and private sector demands for capital, the regulatory environment for capital markets, and changing technology in the financial services industry. Our future revenues and net income will continue to be influenced by a number of domestic and international economic trends including:

 

   

Trading volumes, particularly in U.S. and Nordic cash equity and derivative securities, which are driven primarily by overall macroeconomic conditions;

 

   

The number of companies seeking equity financing, which is affected by factors such as investor demand, the global economy and availability of diverse sources of financing, as well as tax and regulatory policies;

 

   

The emergence of new market participants seeking opportunities in the recovering global economy;

 

   

The steady optimism of our technology customers about the outlook for capital markets and economic stability;

 

   

Continuing pressure in transaction fee pricing due to intense competition in the U.S. and Europe;

 

   

Competition for listings and trading related to pricing, product features and service offerings;

 

   

Regulatory changes imposed upon certain types of instruments, transactions, or capital market participants; and

 

   

Technological advancements and members’ demand for speed, efficiency, and reliability.

Currently our business drivers are defined by investors’ cautious outlook about the slowing pace of global economic recovery and governments’ ability to fund their sovereign debt. The lack of confidence in the prospects for growth results in sporadic increases in the level of market volatility and declining trading volumes in cash equities. The IPO market is less negatively impacted than our cash equities trading businesses while equity derivatives trading volumes remain strong in the U.S. Additional impacts on our business drivers include the international enactment and implementation of new legislative and regulatory initiatives, and the continued rapid evolution and deployment of new technology in the financial services industry. The business environment that influenced our financial performance for the second quarter of 2011 may be characterized as follows:

 

   

A modest increase in the pace of new equity issuance in the U.S. with 25 IPOs on The NASDAQ Stock Market, up from 23 in the second quarter of 2010. Year to date new equity issuance is stronger, with 47 IPOs, up from 38 at this time last year. IPO activity increased slightly in the Nordics from the second quarter of 2010, with five IPOs on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic;

 

   

Matched share volume for all our U.S. cash equity markets decreased 32.6% relative to the second quarter of 2010 driven by a steep decline in overall U.S. volume and a slight decline in our market share due to intense competition from both off-exchange trading and from other U.S. exchanges;

 

   

Matched equity options volume for our two U.S. options exchanges increased 15.1% relative to the second quarter of 2010 driven by a combined market share increase of 3.8 percentage points on NASDAQ OMX PHLX and the NASDAQ Options Market;

 

   

A decrease of 1.3% relative to the second quarter of 2010 in the number of cash equity transactions on our Nordic and Baltic exchanges;

 

   

A decrease of 11.9% relative to the second quarter of 2010 in the SEK value of cash equity transactions on our Nordic and Baltic exchanges resulting from decreased volume levels;

 

   

A decline of 7.1% experienced by our Nordic and Baltic exchanges relative to the second quarter of 2010 in the number of traded and cleared equity and fixed-income contracts (excluding Eurex);

 

   

Intense competition among U.S. exchanges and dealer-owned systems for cash equity trading volume and strong competition between multilateral trading facilities and exchanges in Europe for equity trading volume;

 

   

Globalization of exchanges, customers and competitors extending the competitive horizon beyond national markets; and

 

   

Market trends requiring continued investment in technology to meet customers’ demands for speed, capacity, and reliability as markets adapt to a global financial industry, as increasing numbers of new companies are created, and as emerging countries show ongoing interest in developing their financial markets.

Financial Summary

The following summarizes significant changes in our financial performance for the three and six months ended June 30, 2011 when compared with the same periods in 2010. In countries with currencies other than the U.S. dollar, revenues and expenses are translated using monthly average exchange rates. The following discussion of results of operations isolates the impact of year-over-year foreign currency fluctuations to better measure the comparability of operating results between periods. Operating results

 

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excluding the impact of foreign currency fluctuations are calculated by translating the current period’s results by the prior period’s exchange rates.

 

   

Revenues less transaction rebates, brokerage, clearance and exchange fees increased $26 million, or 6.7%, to $416 million in the second quarter of 2011, compared with $390 million in the same period in 2010, reflecting an operational increase in revenues of $3 million and a favorable impact from foreign exchange of $23 million. The increase in operational revenues was primarily due to:

 

   

an increase in access services revenues of $13 million;

 

   

an increase in Market Technology revenues of $5 million, primarily from broker surveillance revenues; and

 

   

an increase in Issuer Services revenues of $4 million, primarily from Corporate Solutions revenues, partially offset by;

 

   

a decrease in cash equity trading revenues less transaction rebates, brokerage, clearance and exchange fees of $20 million.

 

   

Revenues less transaction rebates, brokerage, clearance and exchange fees increased $81 million, or 10.8%, to $831 million in the first six months of 2011, compared with $750 million in the same period in 2010, reflecting an operational increase in revenues of $47 million and a favorable impact from foreign exchange of $34 million. The increase in operational revenues was primarily due to:

 

   

an increase in access services revenues of $27 million;

 

   

an increase in derivative trading and clearing revenues less transaction rebates, brokerage, clearance and exchange fees of $18 million;

 

   

an increase in Issuer Services revenues of $10 million, primarily from Corporate Solutions revenues; and

 

   

an increase in Market Technology revenues of $9 million, primarily from broker surveillance revenues, partially offset by;

 

   

a decrease in cash equity trading revenues less transaction rebates, brokerage, clearance and exchange fees of $15 million.

 

   

Operating expenses increased $47 million, or 22.3%, to $258 million in the second quarter of 2011, compared with $211 million in the same period in 2010, reflecting an increase in operating expenses of $31 million and an unfavorable impact from foreign exchange of $16 million. The operational increase in operating expenses was primarily due to an increase in merger and strategic initiatives expense primarily reflecting costs incurred in connection with our joint proposal to acquire NYSE Euronext. In May 2011, following discussions with the Antitrust Division of the U.S. Department of Justice, NASDAQ OMX and IntercontinentalExchange, Inc. announced the withdrawal of a joint proposal made in April 2011 to acquire NYSE Euronext.

 

   

Operating expenses increased $30 million, or 6.5%, to $490 million in the first six months of 2011, compared with $460 million in the same period in 2010, reflecting an increase in operating expenses of $8 million and an unfavorable impact from foreign exchange of $22 million. The operational increase in operating expenses was primarily due to an increase in merger and strategic initiatives expense primarily reflecting costs incurred in connection with our joint proposal to acquire NYSE Euronext and an increase in compensation and benefits costs. Partially offsetting these increases was a decrease in general, administrative and other expense in the first six months of 2011 primarily due to charges incurred in the first quarter of 2010 in connection with the January 2010 repayment of our senior secured credit facilities in place as of December 31, 2009.

 

   

Interest expense increased $5 million, or 19.2%, to $31 million in the second quarter of 2011, compared with $26 million in the same period in 2010 and increased $12 million, or 23.5%, to $63 million in the first six months of 2011, compared with $51 million in the same period in 2010. These increases were primarily due to additional interest expense related to the 2018 Notes issued in December 2010.

 

   

Loss on divestiture of businesses was $11 million for both the second quarter and first six months of 2010. This charge was due to our decision to close the businesses of both NEURO and Agora-X during the second quarter of 2010.

These current and prior year items are discussed in more detail below.

 

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NASDAQ OMX’s Operating Results

Key Drivers

The following table includes key drivers for our Market Services, Issuer Services and Market Technology segments. In evaluating the performance of our business, our senior management closely watches these key drivers.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Market Services

        

Cash Equity Trading

        

NASDAQ securities

        

Average daily share volume (in billions)

     2.00        2.53        2.02        2.44   

Matched market share executed on NASDAQ

     28.8     28.8     27.8     28.9

Matched market share executed on NASDAQ OMX BX

     1.8     3.2     1.6     3.4

Matched market share executed on NASDAQ OMX PSX

     1.2     —          1.0     —     

Market share reported to the FINRA/NASDAQ Trade Reporting Facility

     32.2     39.0     32.4     38.8

Total market share(1)

     64.0     71.0     62.9     71.2

New York Stock Exchange, or NYSE, securities

        

Average daily share volume (in billions)

     3.91        5.96        4.22        5.40   

Matched market share executed on NASDAQ

     14.0     14.0     12.8     14.5

Matched market share executed on NASDAQ OMX BX

     2.1     4.1     2.0     4.2

Matched market share executed on NASDAQ OMX PSX

     0.8     —          0.8     —     

Market share reported to the FINRA/NASDAQ Trade Reporting Facility

     27.8     33.5     28.9     33.5

Total market share(1)

     44.7     51.6     44.6     52.3

NYSE Amex and regional securities

        

Average daily share volume (in billions)

     1.29        1.84        1.32        1.66   

Matched market share executed on NASDAQ

     18.5     21.7     17.6     21.6

Matched market share executed on NASDAQ OMX BX

     1.9     3.5     1.8     3.0

Matched market share executed on NASDAQ OMX PSX

     2.0     —          1.7     —     

Market share reported to the FINRA/NASDAQ Trade Reporting Facility

     25.5     30.0     26.3     31.0

Total market share(1)

     47.9     55.2     47.4     55.7

Total U.S.-listed securities

        

Average daily share volume (in billions)

     7.19        10.33        7.56        9.50   

Matched share volume (in billions)

     99.7        147.9        194.5        274.1   

Matched market share executed on NASDAQ

     18.9     19.0     17.7     19.4

Matched market share executed on NASDAQ OMX BX

     2.0     3.8     1.9     3.8

Matched market share executed on NASDAQ OMX PSX

     1.1     —          1.0     —     

NASDAQ OMX Nordic and NASDAQ OMX Baltic securities

        

Average daily number of equity trades

     320,451        324,560        329,713        301,278   

Average daily value of shares traded (in billions)

   $ 4.0      $ 3.7      $ 4.1      $ 3.7   

Derivative Trading and Clearing

        

U.S. Equity Options

        

Total industry average daily volume (in millions)

     15.8        15.7        16.5        14.9   

NASDAQ OMX PHLX matched market share

     24.3     21.7     23.9     21.5

The NASDAQ Options Market matched market share

     4.6     3.4     4.9     3.0

NASDAQ OMX Nordic and NASDAQ OMX Baltic

        

Average Daily Volume:

        

Options, futures and fixed-income contracts

     428,041        460,790        442,282        440,872   

Finnish option contracts traded on Eurex

     109,682        138,493        144,958        122,866   

NASDAQ OMX Commodities

        

Clearing Turnover:

        

Power contracts (TWh)(2)

     383        499        837        1,190   

Carbon contracts (1000 tCO2)(2)

     12,114        9,557        16,150        21,436   

 

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     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Issuer Services

           

Initial public offerings

           

NASDAQ

     25         23         47         38   

Exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic

     5         4         6         7   

New listings

           

NASDAQ (3)

     40         59         74         100   

Exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic(4)

     13         6         17         12   

Number of listed companies

           

NASDAQ (5)

     2,724         2,831         2,724         2,831   

Exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic(6)

     780         788         780         788   

Market Technology

           

Order intake (in millions)(7)

   $ 56       $ 12       $ 62       $ 62   

Total order value (in millions)(8)

   $ 483       $ 453       $ 483       $ 453   

 

(1)

Includes transactions executed on NASDAQ’s, NASDAQ OMX BX’s and NASDAQ OMX PSX’s systems plus trades reported through the FINRA/NASDAQ Trade Reporting Facility.

(2)

Primarily transactions executed on Nord Pool and reported for clearing to NASDAQ OMX Commodities measured by Terawatt hours (TWh) and one thousand metric tons of carbon dioxide (1000 tCO2).

(3)

New listings include IPOs, including those completed on a best efforts basis, issuers that switched from other listing venues, closed-end funds and separately listed ETFs.

(4)

New listings include IPOs and represent companies listed on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic and companies on the alternative markets, NASDAQ OMX First North.

(5)

Number of listed companies for NASDAQ at period end, including separately listed ETFs.

(6)

Represents companies listed on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic and companies on the alternative markets of NASDAQ OMX First North at period end.

(7)

Total contract value of orders signed.

(8)

Represents total contract value of orders signed that are yet to be recognized as revenue. Market Technology deferred revenue, as discussed in Note 7, “Deferred Revenue” to the condensed consolidated financial statements, represents cash payments received that are yet to be recognized as revenue for these signed orders.

 

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Segment Operating Results

Of our total second quarter 2011 revenues less transaction rebates, brokerage, clearance and exchange fees of $416 million, 66.6% was from our Market Services segment, 22.4% was from our Issuer Services segment and 11.0% was from our Market Technology segment. Of our total second quarter 2010 revenues less transaction rebates, brokerage, clearance and exchange fees of $390 million, 69.2% was from our Market Services segment, 22.1% was from our Issuer Services segment and 8.7% was from our Market Technology segment.

Of our total first six months of 2011 revenues less transaction rebates, brokerage, clearance and exchange fees of $831 million, 67.2% was from our Market Services segment, 22.1% was from our Issuer Services segment, and 10.7% was from our Market Technology segment. Of our total first six months of 2010 revenues less transaction rebates, brokerage, clearance and exchange fees of $750 million, 68.1% was from our Market Services segment, 22.7% was from our Issuer Services segment, 9.1% was from our Market Technology segment and 0.1% related to other revenues.

The following table shows our revenues by segment, cost of revenues for our Market Services segment and total revenues less transaction rebates, brokerage, clearance and exchange fees:

 

     Three Months Ended
June  30,
    Percentage
Change
    Six Months Ended
June  30,
    Percentage
Change
 
     2011     2010       2011     2010    
     (in millions)           (in millions)        

Market Services

   $ 699      $ 766        (8.7 )%    $ 1,382      $ 1,418        (2.5 )% 

Cost of revenues

     (422     (496     (14.9 )%      (824     (907     (9.2 )% 
                                    

Market Services revenues less transaction rebates, brokerage, clearance and exchange fees

     277        270        2.6     558        511        9.2

Issuer Services

     93        86        8.1     184        170        8.2

Market Technology

     46        34        35.3     89        68        30.9

Other

     —          —          —          —          1        #  
                                    

Total revenues less transaction rebates, brokerage, clearance and exchange fees

   $ 416      $ 390        6.7   $ 831      $ 750        10.8
                                    

 

# Denotes a variance equal to or greater than 100.0%.

 

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MARKET SERVICES

The following table shows total revenues less transaction rebates, brokerage, clearance and exchange fees from our Market Services segment:

 

     Three Months Ended
June  30,
    Percentage
Change
    Six Months Ended
June  30,
    Percentage
Change
 
     2011     2010       2011     2010    
                 (in millions)              

Transaction Services

            

Cash Equity Trading Revenues:

            

U.S. cash equity trading(1)

   $ 387      $ 498        (22.3 )%    $ 751      $ 901        (16.6 )% 

Cost of revenues:

            

Transaction rebates

     (258     (336     (23.2 )%      (500     (627     (20.3 )% 

Brokerage, clearance and exchange fees (1)

     (93     (108     (13.9 )%      (177     (188     (5.9 )% 
                                                

Total U.S. cash equity cost of revenues

     (351     (444     (20.9 )%      (677     (815     (16.9 )% 
                                                

U.S. cash equity trading revenues less transaction rebates, brokerage, clearance and exchange fees

     36        54        (33.3 )%      74        86        (14.0 )% 

European cash equity trading

     23        22        4.5     47        45        4.4
                                                

Total cash equity trading revenues less transaction rebates, brokerage, clearance and exchange fees

     59        76        (22.4 )%      121        131        (7.6 )% 
                                                

Derivative Trading and Clearing Revenues:

            

U.S. derivative trading and clearing(2)

     115        92        25.0     239        166        44.0

Cost of revenues:

            

Transaction rebates

     (64     (48     33.3     (131     (83     57.8

Brokerage, clearance and exchange fees (2)

     (7     (4     75.0     (16     (9     77.8
                                                

Total U.S. derivative trading and clearing cost of revenues

     (71     (52     36.5     (147     (92     59.8
                                                

U.S. derivative trading and clearing revenues less transaction rebates, brokerage, clearance and exchange fees

     44        40        10.0     92        74        24.3
                                                

European derivative trading and clearing

     31        29        6.9     63        56        12.5
                                                

Total derivative trading and clearing revenues less transaction rebates, brokerage, clearance and exchange fees

     75        69        8.7     155        130        19.2
                                                

Access Services Revenues

     55        41        34.1     108        80        35.0
                                                

Total Transaction Services revenues less transaction rebates, brokerage, clearance and exchange fees

     189        186        1.6     384        341        12.6
                                                

Market Data Revenues:

            

Net U.S. tape plans

     30        30        —          57        61        (6.6 )% 

U.S. market data products

     32        32        —          64        63        1.6

European market data products

     21        17        23.5     43        35        22.9
                                                

Total Market Data revenues

     83        79        5.1     164        159        3.1
                                                

Broker Services Revenues

     4        4        —          9        8        12.5

Other Market Services Revenues

     1        1        —          1        3        (66.7 )% 
                                                

Total Market Services revenues less transaction rebates, brokerage, clearance and exchange fees

   $ 277      $ 270        2.6   $ 558      $ 511        9.2
                                                

 

(1)

Includes Section 31 fees of $74 million in the second quarter of 2011, $81 million in the second quarter of 2010, $139 million in the first six months of 2011 and $136 million in the first six months of 2010. Section 31 fees are recorded as U.S. cash equity trading revenues with a corresponding amount recorded in cost of revenues.

(2)

Includes Section 31 fees of $6 million in the second quarter of 2011, $3 million in the second quarter of 2010, $13 million in the first six months of 2011 and $7 million in the first six months of 2010. Section 31 fees are recorded as U.S. derivative trading and clearing revenues with a corresponding amount recorded in cost of revenues.

 

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Transaction Services

Transaction Services revenues less transaction rebates, brokerage, clearance and exchange fees increased in both the second quarter and the first six months of 2011 compared with the same periods in 2010 primarily due to increases in access services revenues and derivative trading and clearing revenues less transaction rebates, brokerage, clearance and exchange fees, partially offset by a decline in U.S. cash equity trading revenues less transaction rebates, brokerage, clearance and exchange fees.

U.S. Cash Equity Trading Revenues

U.S. cash equity trading revenues less transaction rebates, brokerage, clearance and exchange fees decreased in the second quarter and first six months of 2011 compared with the same periods in 2010. The decrease in the second quarter of 2011 was primarily due to a decline in industry trading volumes. The decrease in the first six months of 2011 was also primarily due to a decline in industry trading volumes, as well as a decline in our matched market share, partially offset by modified rates.

U.S. cash equity trading revenues decreased in the second quarter of 2011 compared with the same period in 2010 primarily due to a decline in industry trading volumes and a decrease in Section 31 pass-through fee revenues.

U.S. cash equity trading revenues decreased in the first six months of 2011 compared with the same period in 2010 primarily due to a decline in industry trading volumes and a decline in our matched market share, partially offset by an increase in Section 31 pass-through fee revenues.

We record Section 31 fees as U.S. cash equity trading revenues with a corresponding amount recorded as cost of revenues. We are assessed these fees from the SEC and pass them through to our customers in the form of incremental fees. Pass-through fees can increase or decrease due to rate changes by the SEC, the percentage of overall industry trading volumes processed on our systems, and differences in actual dollar value of shares traded. Since the amount recorded in revenues is equal to the amount recorded in cost of revenues, there is no impact from the fees on our revenues less transaction rebates, brokerage, clearance and exchange fees. Section 31 fees were $74 million in the second quarter of 2011 and $139 million in the first six months of 2011 compared with $81 million in the second quarter of 2010 and $136 million in the first six months of 2010. The decrease in the second quarter of 2011 compared with the same period in 2010 was primarily due to lower dollar value traded on the NASDAQ and NASDAQ OMX BX trading systems, partially offset by higher Section 31 fee rates. The increase in the first six months of 2011 compared with the same period in 2010 was primarily due to higher Section 31 fee rates, partially offset by lower dollar value traded on the NASDAQ and NASDAQ OMX BX trading systems.

For NASDAQ and NASDAQ OMX PSX we credit a portion of the per share execution charge to the market participant that provides the liquidity and for NASDAQ OMX BX we credit a portion of the per share execution charge to the market participant that takes the liquidity. These transaction rebates decreased in the second quarter and first six months of 2011 compared with the same periods in 2010. The decrease in the second quarter of 2011 compared with the same period in 2010 was primarily due to declines in matched share volume on NASDAQ’s trading system due to a decline in industry trading volumes. The decrease in the first six months of 2011 compared with the same period in 2010 was also primarily due to declines in matched share volume on NASDAQ’s trading system due to a decline in industry trading volumes, as well as a decline in our matched market share, partially offset by higher average rebate rates due to changes in our pricing program on the NASDAQ, NASDAQ OMX BX and NASDAQ OMX PSX trading systems.

Brokerage, clearance and exchange fees decreased in the second quarter of 2011 compared with the same period in 2010 primarily due to a decrease in the amount of volume routed by NASDAQ due to declines in industry trading volumes and a decrease in Section 31 pass-through fees.

Brokerage, clearance and exchange fees decreased in the first six months of 2011 compared with the same period in 2010 primarily due to a decrease in the amount of volume routed by NASDAQ due to declines in industry trading volumes, partially offset by an increase in Section 31 pass-through fees.

European Cash Equity Trading Revenues

European cash equity trading revenues include trading revenues from equity products traded on the NASDAQ OMX Nordic and NASDAQ OMX Baltic exchanges and NEURO (for periods prior to closing our NEURO business). European cash equity trading revenues increased in the second quarter and first six months of 2011 compared with the same periods in 2010 primarily due to a favorable impact from foreign exchange of $3 million in the second quarter of 2011 and $5 million in the first six months of 2011, partially offset by a decrease in trading activity and lower average fees.

U.S. Derivative Trading and Clearing Revenues

U.S. derivative trading and clearing revenues and revenues less transaction rebates, brokerage, clearance and exchange fees increased in the second quarter and first six months of 2011 compared with the same periods in 2010. The increase in the second

 

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quarter of 2011 was primarily due to an increase in market share. The increase in the first six months of 2011 was primarily due to increases in market share and industry trading volumes.

Similar to U.S. cash equity trading, Section 31 fees are recorded as derivative trading and clearing revenues with a corresponding amount recorded as cost of revenues. We are assessed these fees from the SEC and pass them through to our customers in the form of incremental fees. Since the amount recorded in revenues is equal to the amount recorded in cost of revenues, there is no impact on our revenues less transaction rebates, brokerage, clearance and exchange fees. Section 31 fees were $6 million in the second quarter of 2011 and $13 million in the first six months of 2011 compared with $3 million in the second quarter of 2010 and $7 million in the first six months of 2010.

Transaction rebates, in which we credit a portion of the per share execution charge to the market participant, increased in the second quarter and first six months of 2011 compared with the same periods in 2010. The increase in the second quarter of 2011 was primarily due to an increase in market share. The increase in the first six months of 2011 was primarily due to increases in market share and industry trading volumes.

Brokerage, clearance and exchange fees increased in the second quarter and first six months of 2011 compared with the same periods in 2010 primarily due to an increase in Section 31 pass-through fee revenues.

European Derivative Trading and Clearing Revenues

European derivative trading and clearing revenues include trading and clearing revenues from derivative products traded on NASDAQ OMX Stockholm, as well as clearing revenues from resale and repurchase agreements on NASDAQ OMX Stockholm, trading and clearing revenues from derivative products on NASDAQ OMX Copenhagen and revenues from NASDAQ OMX Commodities. European derivative trading and clearing revenues increased in the second quarter and first six months of 2011 compared with the same periods in 2010 primarily due to a favorable impact from foreign exchange of $5 million in the second quarter of 2011 and $7 million in the first six months of 2011, as well as higher activity for short-term fixed-income products, partially offset by lower trading activity for index options and futures.

European derivative trading and clearing revenues included:

 

   

trading and clearing revenues for options and futures contracts of $13 million in both the second quarter of 2011 and 2010, $26 million in the first six months of 2011 and $25 million in the first six months of 2010;

 

   

trading and clearing revenues for energy and carbon products of $11 million in the second quarter of 2011 and $22 million in the first six months of 2011 compared with $10 million in the second quarter of 2010 and $20 million in the first six months of 2010. Beginning in May 2010, trading and clearing revenues for energy and carbon products include revenues from Nord Pool;

 

   

trading and clearing revenues from fixed-income products of $6 million in the second quarter of 2011 and $11 million in the first six months of 2011 compared with $5 million in the second quarter of 2010 and $9 million in the first six months of 2010; and

 

   

other revenues and fees of $1 million in the second quarter of 2011 and $4 million in the first six months of 2011 compared with $1 million in the second quarter of 2010 and $2 million in the first six months of 2010.

Access Services Revenues

Access services revenues increased in the second quarter and first six months of 2011 compared with the same periods in 2010 primarily due to an increase in revenues resulting from our acquisition of FTEN in December 2010 and increased demand for services.

Market Data

Market Data revenues increased in the second quarter and first six months of 2011 compared with the same periods in 2010. In the second quarter of 2011, net U.S. tape plans revenues and U.S. market data products revenues remained flat while European market data products revenue increased. In the first six months of 2011, increases in U.S. and European market data products revenues were partially offset by a decrease in net U.S. tape plans revenues.

The increase in U.S. market data products revenues in the first six months of 2011 compared with the same period in 2010 was primarily due to growth of new products such as BX TotalView, options data feeds and global access products.

The increase in European market data products revenues in the second quarter of 2011 compared with the same period in 2010 was primarily due to modified fees for market data products and a favorable impact from foreign exchange of $3 million. The increase in European market data products revenues in the first six months of 2011 compared with the same period in 2010 was primarily due to modified fees for market data products and a favorable impact from foreign exchange of $4 million.

 

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The decline in net U.S. tape plans revenues in the first six months of 2011 compared with the same period in 2010 was primarily due to lower plan shareable revenues and declines in NASDAQ’s trading and quoting market share of U.S. cash equities, as calculated under the SEC-mandated market data revenue quoting and trading formula.

Broker Services

Broker Services revenues remained flat in the second quarter of 2011 and increased slightly in the first six months of 2011 when compared with the same periods in 2010.

ISSUER SERVICES

The following table shows revenues from our Issuer Services segment:

 

     Three Months Ended
June 30,
     Percentage
Change
    Six Months Ended
June 30,
     Percentage
Change
 
     2011      2010        2011      2010     
     (in millions)            (in millions)         

Global Listing Services Revenues:

                

Annual renewal

   $ 29       $ 28         3.6   $ 58       $ 56         3.6

Listing of additional shares

     10         10         —          20         19         5.3

Initial listing

     4         5         (20.0 )%      8         9         (11.1 )% 
                                        

Total U.S. listing services

     43         43         —          86         84         2.4

European listing services

     14         12         16.7     27         25         8.0

Corporate Solutions

     23         19         21.1     45         37         21.6
                                        

Total Global Listing Services revenues

     80         74         8.1     158         146         8.2

Global Index Group Revenues

     13         12         8.3     26         24         8.3
                                        

Total Issuer Services revenue

   $ 93       $ 86         8.1   $ 184       $ 170         8.2
                                        

Global Listing Services

Global Listing Services revenues increased in the second quarter and first six months of 2011 compared with the same periods in 2010 primarily due to an increase in Corporate Solutions and European listing revenues.

U.S. Listing Services Revenues

Annual renewal revenues increased slightly in the second quarter and first six months of 2011 compared with the same periods in 2010. Annual renewals are recognized ratably over a 12-month period.

Listing of additional shares revenues were flat in the second quarter and increased slightly in the first six months of 2011 compared with the same periods in 2010. Listing of additional shares revenues are amortized on a straight-line basis over an estimated service period of four years. Therefore, revenues for each period will vary depending on the change in the total shares outstanding for companies listed on The NASDAQ Stock Market in each of the preceding four years.

Initial listing revenues decreased slightly in the second quarter and first six months of 2011 compared with the same periods in 2010. Initial listing revenues are amortized on a straight-line basis over an estimated service period of six years. Therefore, revenues for each year will vary depending on the number of new listings, which include IPOs, in each of the preceding six years. New listings were 40 during the second quarter of 2011 and 74 during the first six months of 2011 compared with 59 during the second quarter of 2010 and 100 during the first six months of 2010. The decrease in new listings during the second quarter and first six months of 2011 will impact future revenues as these revenues are amortized on a straight-line basis over the estimated service period of six years.

European Listing Services Revenues

European listing services revenues increased in the second quarter and first six months of 2011 compared with the same periods in 2010 primarily reflecting a favorable impact from foreign exchange. European listing services revenues are recognized ratably over a 12-month period.

Corporate Solutions Revenues

Corporate Solutions revenues increased in the second quarter and first six months of 2011 compared with the same periods in 2010 primarily due to expanding customer utilization of Shareholder.com and Directors Desk, as well as revenues from our acquisition of ZVM in December 2010.

 

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Global Index Group Revenues

Global Index Group revenues increased in the second quarter and first six months of 2011 compared with the same periods in 2010 primarily due to an increase in underlying assets associated with NASDAQ OMX-licensed ETFs and other financial products.

MARKET TECHNOLOGY

The following table shows revenues from our Market Technology segment:

 

     Three Months Ended
June  30,
     Percentage
Change
    Six Months Ended
June  30,
     Percentage
Change
 
     2011      2010        2011      2010     
     (in millions)            (in millions)         

Market Technology Revenues:

                

License, support and facility management

   $ 30       $ 24         25.0   $ 57       $ 49         16.3

Delivery project

     6         4         50.0     12         8         50.0

Change request, advisory and broker surveillance

     10         6   <