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Market risk represents the risk of financial loss from adverse movement in market prices.
−Removed: The primary sources of market risk are interest rates, foreign currency exchange rates, commodity prices, and equity prices.
−Removed: Our business is exposed primarily to interest rate risk on variable rate interest bearing instruments, foreign exchange risk on non U.S.
−Removed: digital operating business and foreign denominated investments, the effect of market risk on our fee income and net carried interest allocation, equity price risk on marketable equity securities, and commodity price risk in connection with our digital operating business.
+Added: The primary sources of market risk are interest rates, foreign currency rates, commodity prices, and equity prices.
+Added: Our business is exposed primarily to interest rate risk on variable rate interest bearing instruments, foreign currency risk on non-U.S.
+Added: business in the Operating segment and foreign denominated warehoused investments, the effect of market risk on our fee income and net carried interest allocation, equity price risk on marketable equity securities, and commodity price risk in connection with the Operating segment.
The following discussion excludes the effect of market risk on assets and corresponding liabilities that were held for disposition at December 31, 2022.
Interest Rate Risk
−Removed: Instruments bearing variable interest rates include our debt obligations and loans receivable warehoused on the balance sheet for future sponsored investment vehicles, all of which are subject to interest rate fluctuations that will affect future cash flows, specifically interest expense and interest income, respectively.
−Removed: Variable Rate Debt (Corporate and Digital Operating) —At December 31, 2021, all of our corporate debt have fixed interest rates.
−Removed: There were no amounts outstanding on our corporate VFN Notes, which is a variable rate revolver.
−Removed: Similarly, investment level financing in our digital operating business are primarily fixed rate securitized notes issued by our subsidiaries, Vantage SDC and DataBank, with $571.0 million or 14% composed of variable rate debt.
−Removed: Our variable rate debt are indexed to either 1-month or 3-month LIBOR.
−Removed: We may utilize derivative instruments, generally interest rate caps, as economic hedges to limit the exposure to interest rate increases on our variable rate debt.
−Removed: There were no interest rate derivatives utilized at December 31, 2021.
−Removed: As our digital operating subsidiaries are substantially owned by third party investors, the resulting increase in interest expense from higher interest rates will be attributed predominantly to noncontrolling interests, with a minimal share of that effect attributed to our shareholders.
−Removed: Based upon the outstanding principal on our variable rate debt at December 31, 2021, a hypothetical 100 basis point increase in interest rates would increase annualized interest expense by $5.7 million on a consolidated basis or $1.1 million after attribution to noncontrolling interests.
−Removed: Variable Rate Loans Receivable and Corresponding Debt —We hold variable rate loans receivable totaling $169.6 million at December 31, 2021, all of which are warehoused on the balance sheet for future sponsored investment vehicles.
−Removed: Our variable rate loans receivable are indexed primarily to LIBOR, and a majority of these loans are partially funded through a LIBOR-based credit facility with $66.5 million drawn at December 31, 2021, which reduces our net exposure to interest rate fluctuations.
−Removed: Additionally, our LIBOR rate loans generally have contractual LIBOR floors, which establishes minimum LIBOR rates.
−Removed: At December 31, 2021, the LIBOR rates were less than 1% and were at or marginally above the LIBOR floor for these loans.
−Removed: Accordingly, a decrease in interest rates would not materially affect the amount of interest income earned on our variable rate loans.
+Added: Instruments bearing variable interest rates include our debt obligations, which are subject to interest rate fluctuations that will affect future cash flows, specifically interest expense.
+Added: Variable Rate Debt —Our corporate debt exposure to variable interest rates is limited to our VFN revolver, which had no outstanding amounts as of December 31, 2022.
+Added: Our investment level financing, which totals $4.6 billion, consists primarily of fixed rate securitized notes issued by subsidiaries in our Operating segment, Vantage SDC and DataBank.
+Added: Of this amount, $1 billion or 21% is composed of variable rate debt at December 31, 2022.
+Added: Our investment level variable rate debt is indexed to either 1-month LIBOR or Term SOFR.
+Added: As the subsidiaries in our Operating segment are substantially owned by third party investors, the resulting increase in interest expense from higher interest rates will be attributed predominantly to noncontrolling interests, with a minimal share of that effect attributed to DBRG.
+Added: Based upon the outstanding principal on our investment level variable rate debt at December 31, 2022, a hypothetical 100 basis point increase in interest rates would increase annualized interest expense by $9.9 million on a consolidated basis or $1.1 million after attribution to noncontrolling interests.
Foreign Currency Risk
−Removed: As of December 31, 2021, we have limited direct foreign currency exposure from our foreign operations in the digital operating business and foreign currency denominated investments warehoused on the balance sheet for future sponsored vehicles.
+Added: As of December 31, 2022, we have limited direct foreign currency exposure from our foreign operations in the Operating segment and foreign currency denominated investments warehoused on the balance sheet for future sponsored vehicles.
Changes in foreign currency rates can adversely affect earnings and the value of our foreign currency denominated investments, including investments in our foreign subsidiaries.
−Removed: We have exposure to foreign currency risk from the operations of our foreign subsidiaries to the extent the U.S.
−Removed: dollar is not the functional currency.
−Removed: This applies to our subsidiaries in U.K.
−Removed: and France, which collectively operate six colocation data centers.
−Removed: For the substantial majority of our subsidiaries in Canada that operate our hyperscale data centers, the U.S dollar is the functional currency.
−Removed: The resulting effect from translation of the balance sheets and statements of operations of these subsidiaries are recorded as a component of accumulated other comprehensive income (loss) in stockholders' equity, and reclassified into earnings only upon a sale or a complete or substantially complete liquidation of the foreign subsidiary.
−Removed: These subsidiaries with non U.S.
−Removed: dollar functional currencies make up a small percentage of our digital operating business.
+Added: We have exposure to foreign currency risk from the operations of our foreign subsidiaries to the extent these subsidiaries do not transact in U.S.
+Added: This applies to our foreign subsidiaries that operate six colocation data centers in the U.K.
+Added: For the substantial majority of our subsidiaries in Canada that operate our hyperscale data centers, the U.S dollar is largely used as the transactional currency, in which case, there is generally very limited foreign currency exposure.
+Added: The remaining foreign subsidiaries in our colocation data center business that do not transact in U.S.
+Added: dollars make up only a small percentage of our overall Operating segment, which in turn is substantially owned by third party investors.
Accordingly, our exposure to foreign currency risk from the operations of our foreign subsidiaries is limited as of December 31, 2022.
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subsidiaries.
−Removed: We generally mitigate foreign currency risk on our foreign currency denominated investments by utilizing currency instruments as economic hedges, such as foreign currency put options, forward contracts and costless collars.
−Removed: The maturity date of these instruments approximate the projected dates of related cash flows from the respective investments.
−Removed: At December 31, 2021, our foreign currency denominated investments is primarily in GBP (£36.3 million) for which we have entered into foreign exchange forward contracts to mitigate our exposure.
+Added: At December 31, 2022 , our foreign currency exposure is limited to only one AUD equity investment (A$35 million).
Market Risk Effect on Fee Income and Net Carried Interest Allocation
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Generally, our management fee income is calculated based upon investors' committed capital during the commitment period of the vehicle, and thereafter, contributed or invested capital during the investing and liquidating periods.
−Removed: To a lesser extent, management fees are based upon the net asset value of vehicles in our digital liquid securities strategy, measured at fair value.
−Removed: At December 31, 2021, our digital liquid securities strategy make up 4% of our $18.3 billion FEEUM.
+Added: To a lesser extent, management fees are based upon the net asset value of vehicles in our Liquid Strategies, measured at fair value.
+Added: At December 31, 2022, our Liquid Strategies make up 5.0% of our $22 billion FEEUM.
Accordingly, most of our management fee income will not be directly affected by changes in investment fair values.
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Equity Price Risk
−Removed: At December 31, 2021, we have $201.9 million of investments in marketable equity securities, held largely by our sponsored liquid funds that are consolidated.
+Added: At December 31, 2022, we had $156 million of long positions and $41 million of short positions in marketable equity securities, held predominantly by our consolidated sponsored liquid funds.
Realized and unrealized gains and losses from marketable equity securities are recorded in other gain (loss) on the consolidated statement of operations.
−Removed: Market prices for publicly traded equity securities may be volatile and fluctuate due to a myriad of factors, including but not limited to, financial performance of the investee, industry conditions, economic and political environment, level of trades in a security, and general sentiments in the equity markets.
+Added: Market prices for publicly traded equity securities may fluctuate due to a myriad of factors, including but not limited to, financial performance of the investee, industry conditions, economic and political environment, trade volume, and general sentiments in the equity markets.
Therefore the level of volatility and price fluctuations are unpredictable.
Our funds constantly rebalance their investment portfolio to take advantage of market opportunities and to manage risk.
−Removed: Additionally, one of our funds employ a long/short equity strategy, taking long positions that serve as collateral for short positions, which in combination, reduces its market risk exposure.
−Removed: The effect of equity price decreases to earnings attributable to our shareholders is further reduced as our consolidated liquid funds are substantially owned by third party capital or noncontrolling interests.
+Added: Additionally, one of our funds employs a long/short equity strategy, taking long positions that serve as collateral for short positions, which in combination, reduces its market risk exposure.
+Added: The effect of equity price decreases to earnings attributable to our shareholders is further reduced as our consolidated liquid funds are substantially owned by third party capital, which represent noncontrolling interests.
Commodity Price Risk
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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.