MARKETAXESS HOLDINGS INC (MKTX) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements relating to future events and the future performance of MarketAxess that are based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Our actual results and timing of various events could differ materially from those anticipated in such forward-looking statements as a result of a variety of factors, as more fully described in this section, in “Item 1A. Risk Factors”, in “Cautionary Note Regarding Forward Looking Statements” and elsewhere in this Annual Report on Form 10-K. Except as may be required by applicable law, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

The following discussion includes a comparison of our Financial Results, Cash Flow Comparisons and Liquidity and Capital Resources for the years ended December 31, 2021 and 2020, respectively. A discussion of changes in our Financial Results and Cash Flow Comparisons from the year ended December 31, 2019 to December 31, 2020 may be found in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of Part II of our Annual Report on Form 10-K for the year ended December 31, 2020.

Executive Overview

MarketAxess operates leading electronic trading platforms delivering greater trading efficiency, a diversified pool of liquidity and significant cost savings to our clients across the global fixed-income markets. Almost 1,900 institutional investor and broker-dealer firms are active users of our patented trading technology to efficiently trade U.S. high-grade bonds, U.S. high-yield bonds, emerging market debt, Eurobonds, municipal bonds, U.S. government bonds and other fixed-income securities. Our award-winning Open Trading marketplace is widely regarded as the preferred all-to-all trading solution in the global credit markets, creating a unique liquidity pool for a broad range of credit market participants. Drawing on a diverse set of trading protocols, including request-for-quote, live order books, sessions-based trading and portfolio trading solutions, as well as our deep data and analytical resources, we believe that we connect the most robust network of participants through an advanced full trading lifecycle solution that also includes automated trading solutions, intelligent data products and a range of post-trade services.

We operate in a large and rapidly growing market that provides us with a significant opportunity for future growth. Many of our largest current product areas, and areas of future growth, have relatively low levels of trading electronification, which further increases the size of our addressable market. Our platforms’ innovative technology solutions are designed to capitalize on this addressable market by increasing the number of potential trading counterparties and providing our clients with a menu of solutions to address the full lifecycle of fixed-income trading. We offer Open Trading for most of our products and trading protocols, allowing our entire global network to interact in one large pool of trading liquidity. We believe that Open Trading drives meaningful transaction cost savings to our clients and reduces risk in fixed-income markets by creating a global, diversified pool of liquidity. Institutional investors can also send trading inquiries directly to their traditional broker-dealer counterparties through a disclosed RFQ, while simultaneously accessing additional counterparties through our anonymous Open Trading solution. We also provide a number of integrated and actionable data offerings, including Composite+ and Axess All real time pricing to assist clients with trading decisions and transaction cost analysis. We have a range of post-trade services, including straight through processing, trade matching, trade publication, regulatory transaction reporting and market and reference data across fixed-income and other products.

We derive revenue from commissions for trades executed on our platform, information services, post-trade services and other revenues. Our expenses consist of employee compensation and benefits, depreciation and amortization, technology and communication expenses, professional and consulting fees, occupancy, marketing and advertising, clearing costs and general and administrative expenses.

Our objective is to provide the leading global electronic trading platforms for fixed-income securities, connecting broker-dealers and institutional investors more easily and efficiently, while offering a broad array of trading information and technology services to market participants across the trading cycle. The key elements of our strategy are discussed in Item 1. “Business – Our Strategy.”

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Critical Factors Affecting Our Industry and Our Company

Economic, Political and Market Factors

The global fixed-income securities industry is risky and volatile and is directly affected by a number of economic, political and market factors that may result in declining trading volume. These factors could have a material adverse effect on our business, financial condition and results of operations. These factors include, among others, credit market conditions, the current interest rate environment, including the volatility of interest rates and investors’ forecasts of future interest rates, economic and political conditions in the United States, Europe and elsewhere, and the consolidation or contraction of our broker-dealer and institutional investor clients.

The global economic and credit market environments during the year ended December 31, 2021 were markedly different as compared to 2020. During 2020, the global economy experienced a period of significant turmoil and deteriorating economic conditions due to the outbreak of the COVID-19 pandemic (the “Pandemic”). The steep drop in economic activity in 2020 impacted global credit markets and resulted in sharp credit spread widening and an increase in credit market volumes. During 2021, however, the improving economic conditions resulted in lower volatility, credit spreads tightening to historical lows for a prolonged period of time, a rising interest rate environment and a decline in U.S. credit market volumes. In the year ended December 31, 2021, market volumes in U.S. high-grade and U.S. high-yield corporate bonds as reported by TRACE decreased 6.9% and 7.4%, respectively, compared to the year ended December 31, 2020. Turnover, which is the total amount traded as a percentage of the amount outstanding, in U.S. high-grade bonds remains below the pre-credit crisis levels. We believe that the benign credit market conditions in 2021 negatively impacted trading velocity and the volumes traded on our platforms.

As a result of the Pandemic, we have continued to experience significant changes in our daily operations. In mid-March 2020, we successfully implemented a global work from home mandate for all our employees and we were able to continue to provide our trading platforms and other services to our clients without interruption. In particular, we believe that Open Trading liquidity was essential to the functioning of credit markets during the Pandemic, and MarketAxess played a valuable role keeping our clients connected to the market as traders moved from their centralized trading floors to home offices. We re-opened our primary offices in the fourth quarter of 2021 with an emphasis on safety and employee wellbeing. While our offices remained open through the Omicron variant surge in New York, London and elsewhere, we encouraged our employees to work from home when possible. We remain confident that we can continue to maintain business continuity and serve our clients in a virtual or hybrid environment, as necessary, to promote employee and public safety.

There has been increased demand for green bonds and other ESG-linked securities in the fixed income markets in which we operate. Based on the interest we are receiving from investors, we expected such increased demand to continue.

Because the majority of our assets are short-term in nature, they are not significantly affected by inflation. However, the rate of inflation may affect our expenses, such as employee compensation and communications expenses, which may not be readily recoverable in the prices of our services. To the extent inflation results in rising interest rates and has other adverse effects on the securities markets, it may adversely affect our financial position and results of operations.

We expect that current cash and investment balances, in combination with cash flows that are generated from operations and the ability to borrow under our 2021 Credit Agreement (as defined below), will be sufficient to meet our liquidity needs and planned capital expenditure requirements for at least the next twelve months. We ended the quarter with a strong balance sheet, no borrowings under our 2021 Credit Agreement and with capital significantly in excess of our regulatory requirements.

Competitive Landscape

The global fixed-income securities industry generally, and the electronic financial services markets in which we engage in particular, are highly competitive, and we expect competition to intensify in the future. Sources of competition for us will continue to include, among others, bond trading conducted directly between broker-dealers and their institutional investor clients over the telephone or electronically and other multi-dealer or all-to-all trading platforms. Competitors, including companies in which some of our broker-dealer clients have invested, have developed or acquired electronic trading platforms or have announced their intention to explore the development of electronic platforms or information networks that may compete with us.

We primarily compete on the basis of our client network, the liquidity provided by our dealer, and, to a growing extent, institutional investor clients, the total transaction costs associated with our services, the breadth of products, protocols and services offered, as well as the quality, reliability, security and ease of use of our platforms. We believe that our ability to grow volumes and revenues will largely depend on our performance with respect to these factors.

Our competitive position is also enhanced by the unique liquidity provided by our Open Trading functionalities and the familiarity and integration of our broker-dealer and institutional investor clients with our electronic trading platform and other systems. We have focused on the unique aspects of the credit markets we serve in the development of our platform, working closely with our clients to provide a system that is suited to their needs.

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Regulatory Environment

Our business is subject to extensive regulations in the United States and internationally, which may expose us to significant regulatory risk and cause additional legal costs to ensure compliance. The existing legal framework that governs the financial markets is periodically reviewed and amended, resulting in the enactment and enforcement of new laws and regulations that apply to our business. For example, the SEC recently proposed rules that will expand Regulation ATS and Regulation SCI to alternative trading systems (ATS) that trade government securities and amend the SEC rule regarding the definition of an “exchange” to include Communication Protocol Systems, such as our RFQ protocols. In connection with these proposed rules, we expect that we will have to operate all of our trading protocols in compliance with Regulation ATS. The fixed-income industry has also been grappling with how to comply with Rule 15c2-11 (“Publication or submission of quotations without specified information”) of the Securities Exchange Act, which had not previously been applied to debt securities. The impact of any of these reform efforts on us and our operations remains uncertain.

As a result of Brexit, we obtained authorizations from the AFM for our subsidiaries in the Netherlands in 2019. We now provide regulated services to our clients within the E.U. in reliance on the cross-border services passport held by our Dutch subsidiaries. Brexit has led to an ongoing divergence between the U.K. and E.U. financial regulations, which has made it more difficult and costly to comply with the extensive government regulation to which we are subject. The cost and complexity of operating across increasingly divergent regulatory regimes has increased and is likely to continue to increase in the future.

Compliance with regulations may require us to dedicate additional financial and operational resources, which may adversely affect our profitability. However, we believe new regulations may also increase demand for our platforms and we believe we are well positioned to benefit from those regulatory changes that cause market participants to seek electronic platforms that meet the various regulatory requirements and help them comply with their regulatory obligations.

For further description of the regulations which may limit our activities, see Part 1, Item 1. “Business—Government Regulation.”

Technology Environment

We must continue to enhance and improve our electronic trading platforms. The electronic financial services industry is characterized by increasingly complex systems and infrastructures and new business models. Our future success will depend on our ability to enhance our existing products and services, develop and/or license new products and technologies that address the increasingly sophisticated and varied needs of our existing and prospective broker-dealer and institutional investor clients and respond to technological advances and emerging industry and regulatory standards and practices on a cost-effective and timely basis. We plan to continue to focus on technology infrastructure initiatives and continually improve our platforms to further enhance our leading market position. We expect that our agile software development processes will help us continue to be a market leader in developing the technology solutions for our clients’ trading needs.

As the overall share of electronic trading grows in global credit products, we are experiencing continued demand for, and growth in, our automated trading solutions. Automated trading volumes rose to $167.2 billion in 2021, up 32.7% from $126.0 billion in 2020. In addition, the use of dealer algorithms is continuing to grow on our platforms, with approximately 18.4 million algorithmic responses in 2021, up 29.1% from the prior year.

We experience cyber-attacks and attempted data security breaches. Cybersecurity incidents could impact revenue and operating income and increase costs. We therefore continue to make investments in our cybersecurity infrastructure and training of employees, which may result in increased costs, to strengthen our cybersecurity measures.

See also Part 1, Item 1A. - “Risk Factors, Technology, IT Systems and Cybersecurity Risks.”

Trends in Our Business

The majority of our revenue is derived from commissions for transactions executed on our platforms between and among our institutional investor and broker-dealer clients and monthly distribution fees. We believe that there are five key variables that impact the notional value of such transactions on our platforms and the amount of commissions and distribution fees earned by us:

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the number of participants on our platforms and their willingness to use our platforms instead of competitors' platforms or execution methods;

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the frequency and competitiveness of the price responses by participants on our platforms;

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the number of markets that are available for our clients to trade on our platforms;

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the overall level of activity in these markets; and

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the level of commissions that we collect for trades executed through the platforms.

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We believe that overall corporate bond market trading volume is affected by various factors including the absolute levels of interest rates, the direction of interest rate movements, the level of new issues of corporate bonds and the volatility of corporate bond spreads versus U.S. Treasury securities. Because a significant percentage of our revenue is tied directly to the volume of securities traded on our platforms, it is likely that a general decline in trading volumes, regardless of the cause of such decline, would reduce our revenues and have a significant negative impact on profitability.

As further described under “— Critical Factors Affecting our Industry and our Company — Economic, Political and Market Factors” and “— Critical Factors Affecting our Industry and our Company — Competitive Landscape,” our trading volume growth rate slowed in 2021.

Commission Revenue

Commissions are recognized on a trade date basis, are generally calculated as a percentage of the notional dollar volume of bonds traded on our platforms and vary based on the type, size, yield and maturity of the bond traded, as well as individual client incentives. Bonds that are more actively traded or that have shorter maturities are generally charged lower commissions, while bonds that are less actively traded or that have longer maturities generally command higher commissions.

For Open Trading trades that we execute between and among institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller, we earn our commission through the difference in price between the two trades. For U.S. Treasury matched principal trades, commissions are invoiced and recorded on a monthly basis.

U.S. High-Grade Corporate Bond Commissions. Our U.S. high-grade corporate bond fee plans generally incorporate variable transaction fees and fixed distribution fees billed to our broker-dealer clients on a monthly basis. Certain broker-dealers participate in fee programs that do not contain monthly distribution fees and instead incorporate additional per transaction execution fees and minimum monthly fee commitments. Under these fee plans, we electronically add the transaction fee to the spread quoted by the broker-dealer client. The U.S. high-grade transaction fee is generally designated in basis points in yield and, as a result, is subject to fluctuation depending on the duration of the bond traded. The average U.S. high-grade fees per million may vary in the future due to changes in yield, years-to-maturity and nominal size of bonds traded on our platforms. Distribution fees include any unused monthly fee commitments under our variable fee plans.

Other Credit Commissions. Other credit includes Eurobonds, emerging markets bonds, high-yield bonds, municipal bonds and leveraged loans. Commissions for other credit products generally vary based on the type of the instrument traded using standard fee schedules. Our high-yield fee plan structure is similar to our U.S. high-grade fee plans. Certain dealers participate in a high-yield fee plan that incorporates a variable transaction fee and fixed distribution fee, while other dealers participate in a plan that does not contain monthly distribution fees and instead incorporates additional per transaction execution fees and minimum monthly fee commitments. Other credit distribution fees include subscription revenues associated with the MuniBrokers platform. The average other credit fees per million may vary in the future due to changes in product mix or trading protocols.

Rates Commissions. Rates includes U.S. Treasury, U.S. agency, European government bonds and credit derivatives. Commissions for rates products generally vary based on the type of the instrument traded. U.S. Treasury fee plans are typically volume tiered and can vary based on the trading protocol. The average rates fee per million may vary in the future due to changes in product mix or trading protocols.

We anticipate that average fees per million may change in the future. Consequently, past trends in commissions are not necessarily indicative of future commissions.

Information Services

We generate revenue from data licensed to our broker-dealer clients, institutional investor clients and data-only subscribers; professional and consulting services; technology software licenses; and maintenance and support services. These revenues are either for subscription-based services transferred over time, and may be net of volume-based discounts, or one-time services. Revenues for services transferred over time are recognized ratably over the contract period while revenues for services transferred at a point in time are recognized in the period the services are provided. Customers are generally billed monthly, quarterly, or annually; revenues billed in advance are deferred and recognized ratably over the contract period.

Post-trade Services

We generate revenue from regulatory transaction reporting, trade publication and trade matching services. Customers are generally billed in the current month or monthly in arrears and revenue is recognized in the period that the transactions are processed. Revenues billed in advance are deferred and recognized ratably over the contract period. We also generate one-time implementation fees for onboarding clients which are invoiced and recognized in the period the implementation is complete.

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Other Revenue

Other revenue includes revenue generated from telecommunications line charges to broker-dealer clients.

Expenses

In the normal course of business, we incur the following expenses:

Employee Compensation and Benefits. Employee compensation and benefits is our most significant expense and includes employee salaries, stock-based compensation costs, other incentive compensation, employee benefits and payroll taxes.

Depreciation and Amortization. We depreciate our computer hardware and related software, office hardware and furniture and fixtures and amortize our capitalized software development costs on a straight-line basis over three to seven years. We amortize leasehold improvements on a straight-line basis over the lesser of the life of the improvement or the remaining term of the lease. Intangible assets with definite lives, including purchased technologies, customer relationships and other intangible assets, are amortized over their estimated useful lives, which range from one to 15 years, using either a straight-line or accelerated amortization method based on the pattern of economic benefit that we expect to realize from such assets. Intangible assets are assessed for impairment when events or circumstances indicate a possible impairment.

Technology and Communications. Technology and communications expense consists primarily of costs relating to maintenance on software and hardware, our internal network connections, data center hosting costs, data feeds provided by outside vendors and U.S. treasuries technology platform licensing fees. The majority of our broker-dealer clients have dedicated high-speed communication lines to our network in order to provide fast data transfer. We charge our broker-dealer clients a monthly fee for these connections, which is recovered against the relevant expenses we incur.

Professional and Consulting Fees. Professional and consulting fees consist primarily of accounting fees, legal fees and fees paid to information technology and other consultants for services provided for the maintenance of our trading platforms, information and post-trade services products and other services.

Occupancy. Occupancy costs consist primarily of office and equipment rent, utilities and commercial rent tax.

Marketing and Advertising. Marketing and advertising expense consists primarily of print and other advertising expenses we incur to promote our products and services. This expense also includes costs associated with attending or exhibiting at industry-sponsored seminars, conferences and conventions, and travel and entertainment expenses incurred by our sales force to promote our trading platforms, information services and post-trade services.

Clearing Costs. Clearing costs consist of fees that we are charged by third-party clearing brokers and depositories for the clearing and settlement of matched principal trades, regulatory reporting fees and variable transaction fees assessed by the provider of our third-party middle office system.

General and Administrative. General and administrative expense consists primarily of general travel and entertainment, board of directors’ expenses, charitable contributions, provision for doubtful accounts and various state franchise and U.K. value-added taxes.

Expenses may grow in the future, notably in employee compensation and benefits as we increase headcount to support investment in new products, operational support and geographic expansion, depreciation and amortization due to increased investment in new products and enhancements to our trading platforms, and technology and communication costs. Expenses may also grow due to acquisitions.

Other Income (Expense)

Investment Income. Investment income consists of interest income earned on our investments.

Interest Expense. Interest expense consists of financing charges incurred on short-term borrowings.

Other, Net. Other, net consists of unrealized gains or losses on trading security investments, realized gains or losses on investments, foreign currency transaction gains or losses, investment advisory fees, credit facility administrative fees and other miscellaneous revenues and expenses.

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Critical Accounting Estimates

This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. We base our estimates and judgments on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions. Critical accounting estimates for us include stock-based compensation and contingent consideration payable.

Stock-based compensation

We maintain a stock incentive plan which provides for the grant of stock options, stock appreciation rights, restricted stock, performance shares, performance units, restricted stock units, performance stock units, or other stock-based awards as incentives and rewards to encourage employees, consultants and non-employee directors. We make critical accounting estimates related to performance shares and performance stock units.

In January 2020, annual performance share awards (“PSAs”), and in January 2021, performance stock units (together with the PSAs, “performance equity awards”) were granted to the executive officers and certain senior managers. Each performance equity award granted in January 2020 and January 2021 is earned or forfeited based on our level of achievement of certain predetermined metrics, including pre-tax adjusted operating income and market share. The vested share pay-out ranges from zero to 150%, for the awards issued in January 2020, and zero to 200%, for the awards issued in January 2021, of the performance equity award target. The number of performance equity awards that vest, if any, will be determined by the level of achievement of the performance metrics during the three-year performance periods, as certified by the Board following the conclusion of the performance period. In addition, participants must provide continued service through the vesting date (subject, to death, disability and, in the case of the awards issued in January 2021, qualified retirement exceptions). Compensation expense for performance equity awards is measured using the fair value of our stock at the grant date and estimates of future performance and actual share payouts. Each period, we make estimates of the current expected share payout and adjust the life-to-date compensation expense recognized since the grant date. As of December 31, 2021, a 10% change in the expected final share payout would increase or decrease the life-to-date compensation expense by $1.0 million. Refer to Note 11 to the Consolidated Financial Statements for more information related to changes in final share payout expectations.

Contingent consideration payable

In connection with our acquisitions of MuniBrokers and Regulatory Reporting Hub, we recognized contingent consideration payables of up to $49.6 million with payment dates ranging from 18-24 months from the acquisition dates. These contingent consideration payables are classified as Level 3 liabilities in the fair value hierarchy and are valued using unobservable inputs and estimates of various factors, including client retention rates, electronic order flow levels, future license fees we earn and discount rates. Changes in these estimates or the final figures on the payment dates could have a material impact on the contingent consideration payable liabilities we record on our balance sheet. For example, as of December 31, 2021, a 10% change in the projected annual subscription and license fees would increase or decrease the expected contingent consideration payable by approximately $2.0 million. Refer to Note 4 to the Consolidated Financial Statements for more information related to the changes in contingent consideration payable during the year ended December 31, 2021.

Recent Accounting Pronouncements

See Note 2 to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.

Segment Results

We operate electronic platforms for the trading of fixed-income securities and provide related data, analytics, compliance tools and post-trade services. We consider our operations to constitute a single business segment because of the highly integrated nature of these product and services, the financial markets in which we compete and our worldwide business activities. We believe that results by geographic region or client sector are not necessarily meaningful in understanding our business. See Note 16 to the Consolidated Financial Statements for certain geographic information about our business required by U.S. GAAP.

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Results of Operations

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

The comparability of our results of operations is impacted by our acquisitions of Regulatory Reporting Hub in November 2020 and MuniBrokers in April 2021. For additional information regarding these acquisitions, see Note 6 to the Consolidated Financial Statements. The following table summarizes our financial results for the years ended December 31, 2021 and 2020. Results for the year ended December 31, 2021 include Regulatory Reporting Hub and MuniBrokers related revenue of $17.7 million and expenses of $24.0 million, including amortization of acquired intangibles expense of $7.9 million.

A 7.0% change in the average foreign currency exchange rate of the British pound sterling compared to the U.S. dollar had the effect of increasing revenues and expenses by $5.4 million and $5.3 million, respectively, for the year ended December 31, 2021.

Revenues

Our revenues for the years ended December 31, 2021 and 2020, and the resulting dollar and percentage changes, were as follows:

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Commissions

Our commission revenues for the years ended December 31, 2021 and 2020, and the resulting dollar and percentage changes, were as follows:

U.S. high-grade variable transaction fees decreased $39.9 million due to a 9.1% decrease in trading volume and a 7.2% decrease in the variable transaction fee per million. Other credit variable transaction fees increased $14.5 million due to a 9.5% increase in trading volume offset by a 3.5% decrease in the variable transaction fee per million. Open Trading credit volume decreased by 2.0% and represented 31.8% and 33.2% of credit variable transaction fees for the years ended December 31, 2021 and 2020, respectively.

U.S. high-grade distribution fees increased $5.4 million mainly due to the migration of certain dealers from all-variable fee plans to plans that incorporate a monthly distribution fee and higher unused monthly minimum commitment fees. Other credit distribution fees increased $6.1 million due to subscription revenues associated with the MuniBrokers platform of $3.5 million and the migration of certain dealers from all-variable fee plans to plans that incorporate a monthly distribution fee.

Our trading volume for each of the years ended December 31, 2021 and 2020 was as follows:

For volume reporting purposes, transactions in foreign currencies are converted to U.S. dollars at average monthly rates. The 9.1% decrease in our U.S. high-grade volume was principally due to a decrease in overall market volume. Estimated U.S. high-grade TRACE volume decreased by 6.9% to $5.9 trillion for the year ended December 31, 2021 from $6.3 trillion for the year ended December 31, 2020. Our estimated market share of total U.S. high-grade corporate bond volume decreased to 21.0% for the year ended December 31, 2021 from 21.6% for the year ended December 31, 2020.

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Other credit volumes increased by 9.5% for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily due to increases of 15.6% in emerging markets bond volume and 11.7% in Eurobond volume due to higher estimated market share which offset decreases in overall estimated market volumes. U.S. high-yield bond volume decreased 3.6% due to lower estimated market volume. Our estimated market share of U.S. high-yield TRACE volume increased to 15.2% for the year ended December 31, 2021 from 14.6% for the year ended December 31, 2020. Rates volume increased 4.0% due to higher estimated market volume.

Our average variable transaction fee per million for the years ended December 31, 2021 and 2020 was as follows:

The decrease in U.S. high-grade average variable transaction fee per million was mainly due to a decrease in the average duration of bonds traded on our platforms and the migration of certain of our broker-dealer clients from an all-variable fee plan to a plan that incorporates a monthly distribution fee. The decrease in other credit average variable transaction fee per million was mainly due to a larger percentage of trading volume in emerging market bonds that command lower fees per million and the migration of certain of our broker-dealer clients from an all-variable fee plan to a plan that incorporates a monthly distribution fee.

Information Services. Information services revenue increased $3.8 million for the year ended December 31, 2021 mainly due to net new data contract revenue of $3.6 million and the positive impact of foreign exchange of $1.3 million, offset by lower non-recurring data sales of $1.1 million.

Post-Trade Services. Post-trade services revenue increased $19.5 million for the year ended December 31, 2021 principally due to additional regulatory transaction reporting revenue of $13.0 million generated by Regulatory Reporting Hub, which was acquired on November 30, 2020, net new post -trade services contract revenue of $5.2 million and the positive impact of foreign exchange of $1.5 million.

Other. Other revenue was $0.8 million and $0.9 million for the years ended December 31, 2021 and 2020, respectively.

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Expenses

The following table summarizes our expenses for the years ended December 31, 2021 and 2020. Expenses for the year ended December 31, 2021 include $24.0 million of expenses related to Regulatory Reporting Hub and MuniBrokers, including amortization of acquired intangibles expense of $7.9 million.

Employee compensation and benefits increased by $14.0 million primarily due increases in salaries, taxes and benefits on higher employee headcount of $16.4 million and stock-based compensation of $1.4 million, offset by lower employee incentive compensation of $3.8 million, which is impacted by operating performance.

Depreciation and amortization increased by $17.5 million primarily due to higher amortization of acquired intangibles of $9.7 million and higher amortization of software development costs of $6.3 million. For the years ended December 31, 2021 and 2020, $17.5 million and $15.0 million, respectively, of equipment purchases and leasehold improvements and $33.1 million and $30.6 million, respectively, of software development costs were capitalized.

Technology and communications expenses increased by $8.4 million primarily due to higher software subscription costs of $4.2 million, higher market data costs of $1.6 million, higher cloud hosting costs of $1.2 million and higher platform technology licensing costs of $1.1 million.

Professional and consulting fees increased by $9.6 million primarily due to higher acquisition-related integration consulting fees of $4.5 million, higher IT consulting fees of $3.3 million and higher recruiting fees of $1.5 million.

Marketing and advertising expense increased $1.1 million due to the resumption of certain advertising and travel and entertainment costs which had been reduced in 2020 due to the Pandemic.

Clearing costs decreased by $5.0 million primarily due to lower clearing expenses due to the benefits from our conversion to self-clearing. While Open Trading credit volume decreased 2.0% compared to the year ended December 31, 2020, clearing costs decreased by 23.7%. Clearing costs as a percentage of Open Trading matched principal trading revenue from credit products decreased from 9.8% to 7.6%.

General and administrative expenses increased by $1.8 million primarily due to higher corporate charitable contributions and the resumption of certain administrative costs which had been reduced in 2020 due to the Pandemic.

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Other Income (Expense)

Our other income (expense) for the years ended December 31, 2021 and 2020, and the resulting dollar and percentage changes, were as follows:

Investment income decreased by $2.0 million primarily due to lower investment balances.

Interest expense decreased by $0.3 million due to lower financing activity related to our clearing arrangements.

Other, net decreased by $1.2 million primarily due to an increase in credit facility fees and administration costs.

Provision for Income Taxes.

The provision for income taxes and effective tax rate for the years ended December 31, 2021 and 2020 were as follows:

The provision for income taxes reflected $11.7 million and $24.1 million of excess tax benefits related to share-based compensation awards that vested or were exercised during the years ended December 31, 2021 and 2020, respectively. During the years ended December 31, 2021 and 2020, we recorded a benefit from unrecognized tax benefits of $1.2 million and provision for unrecognized tax benefits of $9.5 million, respectively. Our consolidated effective tax rate can vary from period to period depending on the geographic mix of our earnings, changes in tax legislation and tax rates and the amount and timing of excess tax benefits related to share-based payments, among other factors.

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Liquidity and Capital Resources

During the past two years, we have met our funding requirements through cash on hand, internally generated funds and short-term borrowings. Cash and cash equivalents and investments totaled $542.8 million at December 31, 2021. Our investments are generally invested in U.S. treasury securities. We limit the amounts that can be invested in any single issuer and invest in short- to intermediate-term instruments whose fair values are less sensitive to interest rate changes.

In October 2021, we entered into a new three-year revolving credit facility (the “2021 Credit Agreement”) provided by a syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent, that provides aggregate commitments totaling $500.0 million, consisting of a revolving credit facility and a $5.0 million letter of credit sub-limit for standby letters of credit. The 2021 Credit Agreement replaced our credit agreement entered into in November 2020 (the “2020 Credit Agreement”) and will mature on October 15, 2024, with our option to request up to two additional 364-day extensions at the discretion of each lender and subject to customary conditions. The 2020 Credit Agreement also provided aggregate commitments totaling $500.0 million. As of December 31, 2021, we had $1.0 million in letters of credit outstanding and $499.0 million in available borrowing capacity under the 2021 Credit Agreement. The 2021 Credit Agreement requires that we satisfy certain covenants, which include a leverage ratio. We were in compliance with all applicable covenants at December 31, 2021. See Note 13 to the Consolidated Financial Statements for a discussion of the 2020 Credit Agreement and the 2021 Credit Agreement.

In connection with its self-clearing operations, our U.S. broker-dealer subsidiary entered into an agreement (the “Collateralized Agreement”) with its settlement bank to provide loans up to an aggregate of $200.0 million on an uncommitted basis. Borrowings under the Collateralized Agreement are collateralized by securities pledged by the broker-dealer subsidiary to the settlement bank, subject to applicable haircuts and concentration limits. As of December 31, 2021, the broker-dealer subsidiary had no borrowings outstanding and $200.0 million in available borrowing capacity under the Collateralized Agreement. See Note 13 to the Consolidated Financial Statements for a discussion of the Collateralized Agreement.

Under arrangements with their settlement banks, certain of our U.S. and U.K. operating subsidiaries may receive overnight financing in the form of bank overdrafts. As of December 31, 2021, we had no overdrafts payable outstanding.

As a result of our self-clearing and settlement activities, we are required to finance certain transactions, maintain deposits with various clearing organizations and clearing broker-dealers and maintain a special reserve bank account for the benefit of customers pursuant to Rule 15c3-3 of the Exchange Act. As of December 31, 2021, the aggregate amount of the positions financed, deposits and customer reserve balances associated with our self-clearing and settlement activities was $226.0 million. These requirements can fluctuate based on trading activity, market volatility or other factors which may impact our liquidity or require us to use our capital resources.

During the past two years, our cash flows were as follows:

Cash Flows for the Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

The $122.4 million decrease in net cash provided by operating activities was primarily due to decreases in net sales and maturities of trading investments of $73.5 million, net income of $41.5 million, net receivables from broker-dealers, clearing organizations and customers of $11.4 million and deferred taxes of $7.0 million, offset by an increase in depreciation and amortization of $17.5 million and a decrease in accounts payable, accrued expenses and other liabilities of $5.8 million.

The $136.6 million decrease in net cash provided by (used in) investing activities was primarily attributable to a decrease in net proceeds from sales and maturities of securities available-for-sale of $137.8 million and an increase in capital expenditures of $5.0 million, offset by lower cash used for acquisitions of $6.2 million.

The $44.7 million increase in net cash (used in) financing activities was principally due to increases in repurchases of our common stock of $47.1 million and cash dividends paid on common stock of $9.2 million, offset by decreases in exercises of stock options of $3.1 million and withholding tax payments on restricted stock vesting and stock option exercises of $8.5 million.

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Past trends of cash flows are not necessarily indicative of future cash flow levels. A decrease in cash flows may have a material adverse effect on our liquidity, business and financial condition.

Other Factors Influencing Liquidity and Capital Resources

We believe that our current resources are adequate to meet our liquidity needs and requirements, including commitments for capital expenditures, in the short-term (during the next 12 months). However, our future liquidity and capital requirements will depend on a number of factors, including liquidity requirements associated with our self-clearing operations and expenses associated with product development and expansion and new business opportunities that are intended to further diversify our revenue stream. We may also acquire or invest in technologies, business ventures or products that are complementary to our business. In the event we require any additional financing, it will take the form of equity or debt financing. Any additional equity offerings may result in dilution to our stockholders. Any debt financings, if available at all, may involve restrictive covenants with respect to dividends, issuances of additional capital and other financial and operational matters related to our business. In addition, in the long-term (beyond 12 months), we believe our liquidity needs and requirements will be affected by the factors enumerated above.

Certain of our U.S. subsidiaries are registered as a broker-dealer or a SEF and therefore are subject to the applicable rules and regulations of the SEC, FINRA and the CFTC. These rules contain minimum net capital requirements, as defined in the applicable regulations, and also may require that a significant part of the registrants’ assets be kept in relatively liquid form. Certain of our foreign subsidiaries are regulated by the FCA in the U.K. or other foreign regulators and must maintain financial resources, as defined in the applicable regulations, in excess of the applicable financial resources requirement. As of December 31, 2021, each of our subsidiaries that are subject to these regulations had net capital or financial resources in excess of their minimum requirements. As of December 31, 2021, our subsidiaries maintained aggregate net capital and financial resources that were $561.2 million in excess of the required levels of $22.0 million.

Each of our U.S. and foreign regulated subsidiaries are subject to local regulations which generally prohibit repayment of borrowings from our affiliates, paying cash dividends, making loans to our affiliates or otherwise entering into transactions that result in a significant reduction in regulatory net capital or financial resources without prior notification to or approval from such regulated entity’s principal regulator. As of December 31, 2021, the amount of unrestricted cash held by our non-U.S. subsidiaries was $303.6 million.

We execute bond transactions between our institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller in trades. Our U.S. broker-dealer subsidiary operates under a self-clearing model for the settlement of such transactions. Our subsidiaries also settle their transactions through third-party clearing brokers or settlement agents. Settlement typically occurs within one to two trading days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded. Under both the self-clearing and the third-party clearing models, we may be exposed to credit risk in the event a counterparty does not fulfill its obligation to complete a transaction or if there is an error in executing a matched principal transaction. Pursuant to the terms of the securities clearing agreements, each third-party clearing broker has the right to charge us for any losses they suffer resulting from a counterparty’s failure on any of our trades. We did not record any liabilities or losses with regard to counterparty failures for the years ended December 31, 2021 and 2020. Substantially all our open securities failed-to-deliver and securities failed-to-receive transactions as of December 31, 2021 have subsequently settled at the contractual amounts.

In the normal course of business, we enter into contracts that contain a variety of representations, warranties and indemnification provisions. Our maximum exposure from any claims under these arrangements is unknown, as this would involve claims that have not yet occurred. However, based on past experience, we expect the risk of material loss to be remote.

In January 2019, our Board authorized a two-year share repurchase program for up to $100.0 million that commenced in April 2019 and expired on March 31, 2021. In January 2021, our Board authorized a new share repurchase program for up to $100.0 million that commenced on April 1, 2021 and was exhausted in January 2022. In January 2022, our Board authorized a new share repurchase program for up to $150.0 million. We expect repurchases under the new program to commence in the first quarter of 2022. Shares repurchased under each program will be held in treasury for future use.

On November 30, 2020, we acquired Regulatory Services GmbH, the pan-European regulatory reporting business of Deutsche Börse Group. The purchase price consists of $22.5 million in cash paid at closing and up to $24.6 million in contingent consideration payable in cash within 18 months of the closing. On April 9, 2021, we acquired MuniBrokers, a central electronic venue serving municipal bond brokers and dealers. The purchase price consists of $17.1 million in cash paid at closing and up to $25.0 million in contingent consideration payable in cash within approximately two years of the closing.

See Item 5 of this Annual Report on Form 10-K for additional discussion of our repurchases of our common stock and our dividend policy.

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Non-GAAP Financial Measures

In addition to reporting financial results in accordance with GAAP, we use certain non-GAAP financial measures called earnings before interest, taxes, depreciation and amortization (“EBITDA”) and free cash flow. We define free cash flow as cash flow from operating activities excluding the net change in trading investments and net change in securities failed-to-deliver and securities failed-to-receive from broker-dealers, clearing organizations and customers, less expenditures for furniture, equipment and leasehold improvements and capitalized software development costs. We believe these non-GAAP financial measures, when taken into consideration with the corresponding GAAP financial measures, are important in understanding our operating results. EBITDA and free cash flow are not measures of financial performance or liquidity under GAAP and therefore should not be considered an alternative to net income or cash flow from operating activities as an indicator of operating performance or liquidity. We believe that EBITDA and free cash flow provide useful additional information concerning profitability of our operations and business trends and the cash flow available to pay dividends, repurchase stock and meet working capital requirements.

The table set forth below presents a reconciliation of our net income to EBITDA, as defined, for the years ended December 31, 2021 and 2020:

The table set forth below presents a reconciliation of our net cash provided by operating activities to free cash flow, as defined, for the years ended December 31, 2021 and 2020:

Contractual Obligations and Commitments

As of December 31, 2021, we had the following contractual obligations and commitments:

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