Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Currency and Derivative Risk
We have global operations and substantial portions of our revenues, expenses, assets and liabilities are generated and denominated in non-U.S. dollar currencies.
The following table shows the percentage breakdown of our revenue and operating expenses denominated in currencies other than the U.S. dollar for the years ended December 31, 2025, 2024 and 2023:
Year Ended
December 31,
2025 2024 2023
% of revenue denominated in foreign currencies (1)
30% 29% 28%
% of operating expenses denominated in foreign currencies (2)
16% 16% 16%
(1) Revenue in foreign currencies is primarily denominated in euros.
(2) Operating expenses in foreign currencies are primarily denominated in British pounds sterling.
Revenues, expenses, assets and liabilities denominated in non-functional currencies are recorded in the appropriate functional currency for the legal entity at the rate of exchange prevailing at the transaction date. Monetary assets and liabilities that are denominated in non-functional currencies are then remeasured at the end of each reporting period at the exchange rate prevailing at the end of the reporting period. Foreign currency remeasurement gains or losses on monetary assets and liabilities in nonfunctional currencies are recognized in the consolidated statements of income within general and administrative expenses. Realized and unrealized losses from foreign currency remeasurement of transactions in nonfunctional currencies recognized in the consolidated statements of income within general and administrative expense totaled a gain of $3.9 million, a loss of $4.5 million and a loss of $1.6 million for the years ended December 31, 2025, 2024 and 2023, respectively.
Since our consolidated financial statements are presented in U.S. dollars, we also translate all non-U.S. dollar functional currency revenues, expenses, assets and liabilities into U.S. dollars. All non-U.S. dollar functional currency revenue and expense amounts are translated into U.S. dollars monthly at the average exchange rate for the month. All non-U.S. dollar functional currency assets and liabilities are translated at the rate prevailing at the end of the reporting period. Gains or losses on translation in the financial statements, when the functional currency is other than the U.S. dollar, are included as a component of other comprehensive income. Accordingly, increases or decreases in the value of the U.S. dollar against the other currencies will affect our operating revenues, operating income and the value of balance sheet items.
Aside from U.S. dollars, a significant portion of our revenues are denominated in euros and a significant portion of our expenses are denominated in British pound sterling. The following table shows the average foreign currency exchange rates to the U.S. dollar for the years ended December 31, 2025, 2024 and 2023:
Year Ended
December 31,
2025 2024 2023
Euros $ 1.13 $ 1.08 $ 1.08
British pound sterling $ 1.32 $ 1.28 $ 1.24
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The following table shows the change in revenue and operating income caused by fluctuations in foreign currency rates used in translation during the years ended December 31, 2025, 2024 and 2023:
Year Ended
Impact of Foreign Currency Rate Fluctuations (dollars in thousands) December 31,
2025 2024 2023
Increase (decrease) in revenue $ 22,900 $ (1,400) $ 6,300
Increase (decrease) in operating income $ 18,200 $ (4,300) $ 6,100
The following table shows the impact a hypothetical 10% increase or decrease in the U.S. dollar against all other currencies and a hypothetical 10% increase or decrease in only euro or only British pound sterling exchange rates would have on the translation of actual revenue and operating income for the years ended December 31, 2025, 2024 and 2023:
Year Ended
Hypothetical 10% Change in Value of U.S. Dollar (dollars in thousands) December 31,
2025 2024 2023
All currencies
Effect of 10% change on revenue +/- $ 69,600 +/- $ 55,800 +/- $ 41,800
Effect of 10% change on operating income +/-
$ 48,100 +/-
$ 36,600 +/- $ 27,000
Euros
Effect of 10% change on revenue +/- $ 60,900 +/- $ 48,500 +/- $ 37,500
Effect of 10% change on operating income +/- $ 59,200 +/- $ 46,900 +/- $ 35,600
British pound sterling
Effect of 10% change on revenue +/- $ 3,300 +/- $ 2,900 +/- $ 1,700
Effect of 10% change on operating income +/- $ 12,300 +/- $ 10,800 +/- $ 8,700
We have derivative risk relating to our foreign exchange derivative contracts. We enter into foreign currency forward contracts to mitigate our U.S. dollar and British pound sterling versus euro exposure, generally with a duration of not more than 12 months. In June 2023, we also entered into a foreign currency call option on Australian dollars, in order to partially mitigate the Company’s U.S. dollar versus Australian dollar foreign exchange exposure on the then-anticipated payment of the Australian dollar denominated purchase price for the Yieldbroker acquisition. The out-of-the-money foreign currency call option was unwound in August 2023 and we recognized losses during the year ended December 31, 2023 totaling $1.3 million relating to this option. We do not use derivative instruments for trading or s peculative purposes.
As of December 31, 2025 and 2024, the notional amount of our foreign currency forward contracts was $339.8 million and $238.2 million , respectively. Realized and unrealized gains on foreign currency forward contracts totaled a loss of $21.0 million, a gain of $15.0 million and a gain of $0.8 million for the years ended December 31, 2025, 2024 and 2023, respectively.
By using derivative instruments to hedge exposures to foreign currency fluctuations, we are exposed to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, we are not exposed to the counterparty’s credit risk in those circumstances. We attempt to minimize counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties whose credit rating is at least upper-medium investment grade. As of December 31, 2025 and 2024 , the counterparty on each of the foreign exchange derivative contracts was an affiliate of LSEG.
Credit Risk
Cash and cash equivalents includes cash and highly liquid investments held by a limited number of global financial institutions, including cash amounts in excess of federally insured limits. To mitigate this concentration of credit risk, the Company invests through high-credit-quality financial institutions, monitors the concentration of credit exposure of investments with any single obligor and diversifies as determined appropriate.
We have credit risk relating to our receivables, which are primarily receivables from financial institutions, including investment managers and brokers and dealers. As of December 31, 2025 and 2024, the allowance for credit losses with regard to these receivables totaled $0.6 million and $0.4 million, respectively.
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In the normal course of our business we, as an agent, execute transactions with, and on behalf of, other brokers and dealers. If these transactions do not settle because of failure to perform by either counterparty, we may be obligated to discharge the obligation of the non-performing party and, as a result, may incur a loss if the market value of the instrument is different than the contractual amount. This credit risk exposure can be directly impacted by volatile trading markets, as our clients may be unable to satisfy their contractual obligations during volatile trading markets.
Additionally, in the normal course of business, the Company, as an introducing broker, executes transactions on behalf of or with clients of the Company, which are cleared by a clearing broker. Under the arrangement between the Company and the clearing broker, the Company is responsible for losses that may result from the clearing broker’s rejection, reversal or cancellation of a transaction. If there are temporary errors or delays in the processing or settlement of transactions, the clearing broker may require, usually with two business days notice, that the Company provide cash deposits until the errors are resolved.
We also have credit risk relating to our investments in a digital asset loan receivable and available-for-sale debt securities. As of December 31, 2025, the Company maintained an allowance for credit loss with regards to its digital asset loan receivable totaling $0.2 million. There was no allowance for credit losses recorded on available-for-sale debt securities as of December 31, 2025 and 2024.
Our policy is to monitor our market exposure and counterparty risk. Counterparties are evaluated for creditworthiness and risk assessment prior to our initiating contract activities. The counterparties’ creditworthiness is then monitored on an ongoing basis, and credit levels are reviewed to ensure that there is not an inappropriate concentration of credit outstanding to any particular counterparty.
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