MARKETAXESS HOLDINGS INC

In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”) requiring lessees to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases with lease terms greater than 12 months. The Company adopted ASU 2016-02 effective January 1, 2019 using a modified retrospective transition approach and will not restate comparative periods. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard which allowed it to carry forward the historical lease classification. The Company recorded new operating lease right-of-use assets of $79.5 million, eliminated a deferred rent liability of $11.7 million and recorded lease liabilities associated with the future minimum payments required under operating leases of $91.2 million. The adoption of this guidance did not have a material effect on the Company's Consolidated Statements of Operations or Consolidated Statements of Cash Flows.

In addition to the grants above, 76,868 stock options and 18,914 performance shares were granted to the Company’s President and Chief Operating Officer in January 2019 with an aggregate  grant date fair value of $5.8 million as determined by an independent third party using a Monte Carlo simulation model.  The exercise price is $272.88 for 35,678 of the stock options and $294.71 for the remaining 41,189 stock options, which is equal to 125% and 135%, respectively, of the fair market value of the Company’s common stock on the grant date.  The performance share award provides that the number of shares earned will be based on the Company’s achievement of certain share price levels during the five-year performance period.  The performance level is $272.88 for 8,969 of the performance shares and $294.71 for the remaining 9,945 performance shares, which is equal to 125% and 135%, respectively, of the fair market value of the Company’s common stock on the grant date. Subject to the terms of the award agreements, the performance shares will vest and options will vest and become exercisable only upon the grantee’s continued employment with the Company through January 24, 2024. The options expire on July 22, 2024.   Key assumptions used for the Monte Carlo model included a risk free interest rate of 2.6%, a dividend yield of 0.8%, volatility of 25.8% for the stock options and volatility of 25.9% for the performance shares.

The Company has operating leases for corporate offices with initial lease terms ranging from one-year to 15 years.    Certain leases contain options to extend the initial term at the Company’s discretion. The Company accounts for the option to extend when it is reasonably certain of being exercised. The Company’s lease agreements do not contain any material residual value guarantees, restrictions or covenants.    

The Company determines whether an arrangement is, or includes, a lease at contract inception. Operating lease right-of-use assets and liabilities are recognized at commencement date and are initially measured based on the present value of lease payments over the defined lease term. As the Company's leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at the adoption date in determining the present value of lease payments. The weighted average remaining lease term and weighted average discount rate were 14.2 years and 6.0%, respectively, for operating leases as of March 31, 2019.

During the first quarter of 2019, our business was impacted by a number of factors, including lower volatility and tightening credit spreads. New issue activity was slightly lighter than normal for the first quarter, and investment managers experienced significant inflows, resulting in increased secondary trading volumes. In addition, the continued flattening of the yield curve in 2019 resulted in lower duration of bonds traded on the platform, which has a negative impact on our fee capture rate. Our results of operations are also impacted by the overall level of activity in our core products. In the first quarter of 2019, market volumes in the U.S. high-grade and U.S. high-yield markets as reported by Financial Industry Regulatory Authority’s Trade Reporting and Compliance Engine (“TRACE”) increased 12.6% and 5.1%, respectively, compared to the first quarter of 2018.