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10-Q 1 cboe930201610q.htm 10-Q Document

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2016

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

For the transition period from to

Commission File No. 001-34774

CBOE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)



Delaware		20-5446972
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

400 South LaSalle Street Chicago, Illinois		60605
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code

(312) 786-5600

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 ý 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 ý 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. (Check one):



Large accelerated filer ý		Accelerated filer ¨

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

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

Indicate the number of shares outstanding of each of the registrant’s classes of unrestricted common stock, as of the latest practicable date:



Class		October 21, 2016
Common Stock, par value $0.01		81,285,307 shares

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CBOE HOLDINGS, INC.

INDEX



		Page

	PART I - FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (Unaudited)	6
	Condensed Consolidated Statements of Income — Three and Nine Months Ended September 30, 2016 and 2015	6
	Condensed Consolidated Statements of Comprehensive Income — Three and Nine Months Ended September 30, 2016 and 2015	7
	Condensed Consolidated Balance Sheets — September 30, 2016 and December 31, 2015	8
	Condensed Consolidated Statement of Stockholders’ Equity and Redeemable Noncontrolling Interests — Nine Months Ended September 30, 2016	9
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2016 and 2015	10
	Notes to Condensed Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38
Item 4.	Controls and Procedures	38

	PART II - OTHER INFORMATION	39

Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Mine Safety Disclosures	46
Item 5.	Other Information	46
Item 6.	Exhibits	46

	Signatures	47
	Exhibits	48

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CERTAIN DEFINED TERMS

Throughout this document, unless otherwise specified or the context so requires:


•	"CBOE Holdings," "we," "us," "our" or "the Company" refers to CBOE Holdings, Inc. and its subsidiaries.


•	"CBOE" refers to Chicago Board Options Exchange, Incorporated, a wholly-owned subsidiary of CBOE Holdings, Inc.


•	"C2" refers to C2 Options Exchange, Incorporated, a wholly-owned subsidiary of CBOE Holdings, Inc.


•	"CFE" refers to CBOE Futures Exchange, LLC, a wholly-owned subsidiary of CBOE Holdings, Inc.


•	"CFTC" refers to the U.S. Commodity Futures Trading Commission.


•	"Consent Order" refers to the consent order that CBOE and C2 entered into with the SEC on June 11, 2013.


•	"FASB" refers to the Financial Accounting Standards Board.


•	"GAAP" refers to Generally Accepted Accounting Principles in the United States.


•	"OCC" refers to The Options Clearing Corporation, which is the issuer and registered clearing agency for all U.S. exchange-listed options and is the designated clearing organization for futures traded on CFE.


•	"OPRA" refers to the Options Price Reporting Authority, which is a limited liability company of member exchanges, including CBOE and C2, and is authorized by the SEC to provide consolidated options information.


•	"Our exchanges" refers to CBOE, C2 and CFE.


•	"SEC" refers to the U.S. Securities and Exchange Commission.


•	"SPX" refers to our S&P 500 Index exchange-traded options products.


•	"VIX" refers to the CBOE Volatility Index methodology.

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties. You can identify these statements by forward-looking words such as "may," "might," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," and the negative of these terms and other comparable terminology. All statements that reflect our expectations, assumptions or projections about the future other than statements of historical fact are forward-looking statements, including statements in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this report. These forward-looking statements, which are subject to known and unknown risks, uncertainties and assumptions about us, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from that expressed or implied by the forward-looking statements. In particular, you should consider the risks and uncertainties described under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015, Part II, Item 1A of this Quarterly Report on Form 10-Q and our other filings with the SEC.

While we believe we have identified the risks that are material to us, these risks and uncertainties are not exhaustive. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Some factors that could cause actual results to differ include:


•	the loss of our right to exclusively list and trade certain index options and futures products;


•	economic, political and market conditions;


•	compliance with legal and regulatory obligations, including our obligations under the Consent Order;


•	increasing price competition in our industry;


•	decreases in trading volumes or a shift in the mix of products traded on our exchanges;


•	legislative or regulatory changes;


•	increasing competition by foreign and domestic entities;


•	our dependence on third party service providers;


•	our index providers' ability to perform under our agreements;


•	our ability to operate our business without violating the intellectual property rights of others and the costs associated with protecting our intellectual property rights;


•	our ability to accommodate trading volume and transaction traffic, including significant increases, without failure or degradation of performance of our systems;


•	our ability to protect our systems and communication networks from security risks, including cyber-attacks;


•	the accuracy of our estimates and expectations;


•	our ability to maintain access fee revenues;


•	our ability to meet our compliance obligations, including managing potential conflicts between our regulatory responsibilities and our for-profit status;


•	the ability of our compliance and risk management methods to effectively monitor and manage our risks;


•	our ability to attract and retain skilled management and other personnel;


•	our ability to manage our growth and strategic acquisitions or alliances effectively:


•	the satisfaction of the conditions precedent to the consummation of our proposed acquisition of Bats Global Markets, Inc. (“Bats”), including, without limitation, the receipt of stockholder and regulatory approvals (including clearance by antitrust authorities necessary to complete the proposed transaction) on the terms desired or anticipated;

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•

unanticipated difficulties or expenditures relating to the proposed transaction, including, without limitation, difficulties that result in the failure to realize expected synergies, efficiencies and cost savings from the proposed transaction within the expected time period (if at all), whether in connection with integration, combining trading platforms, broadening distribution of product offerings or otherwise;


•	our ability to maintain an investment grade credit rating and obtain permanent financing for the proposed transaction on the anticipated terms and schedule;


•	risks relating to the value of our shares to be issued in the proposed transaction;


•	disruptions of our and Bats’ current plans, operations and relationships with market participants caused by the announcement and pendency of the proposed transaction;


•	potential difficulties in our and Bats’ ability to retain employees as a result of the announcement and pendency of the proposed transaction; and


•	legal proceedings that may be instituted against us and Bats following announcement of the proposed transaction.

We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this filing. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

CBOE Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

Three and Nine Months Ended September 30, 2016 and 2015



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share amounts)	2016			2015			2016			2015
	(unaudited)
Operating Revenues:
Transaction fees	$	111,926		$	144,823		$	347,863		$	345,162
Access fees	13,019			13,062			39,447			40,119
Exchange services and other fees	11,513			10,978			34,263			30,443
Market data fees	8,222			7,133			24,363			22,702
Regulatory fees	9,116			8,204			27,436			25,332
Other revenue	2,411			2,835			8,494			14,841
Total Operating Revenues	156,207			187,035			481,866			478,599
Operating Expenses:
Compensation and benefits	28,344			29,583			83,980			79,158
Depreciation and amortization	10,200			12,394			34,311			34,071
Technology support services	5,608			5,342			16,944			15,480
Professional fees and outside services	21,381			12,619			49,758			37,163
Royalty fees	19,399			21,840			57,849			52,744
Order routing	536			581			557			1,994
Travel and promotional expenses	2,610			1,407			7,616			6,434
Facilities costs	1,322			874			4,268			3,552
Other expenses	1,157			1,285			3,485			3,969
Total Operating Expenses	90,557			85,925			258,768			234,565
Operating Income	65,650			101,110			223,098			244,034
Other Income/(Expense):
Investment and other income	1,557			68			7,921			177
Net income from investments	306			289			830			165
Interest and other borrowing costs	(177		)	(16		)	(232		)	(16		)
Total Other Income	1,686			341			8,519			326
Income Before Income Taxes	67,336			101,451			231,617			244,360
Income tax provision	26,885			33,935			91,059			89,739
Net Income	40,451			67,516			140,558			154,621
Net loss attributable to noncontrolling interests	270			—			792			—
Net Income Excluding Noncontrolling Interests	40,721			67,516			141,350			154,621
Change in redemption value of noncontrolling interest	(270		)	—			(792		)	—
Net income allocated to participating securities	(171		)	(297		)	(584		)	(676		)
Net Income Allocated to Common Stockholders	$	40,280		$	67,219		$	139,974		$	153,945
Net Income Per Share Allocated to Common Stockholders:
Basic	$	0.50		$	0.81		$	1.72		$	1.85
Diluted	0.50			0.81			1.72			1.85
Weighted average shares used in computing income per share:
Basic	81,285			82,755			81,481			83,329
Diluted	81,285			82,755			81,481			83,329

See notes to condensed consolidated financial statements

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CBOE Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

Three and Nine Months Ended September 30, 2016 and 2015



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2016			2015			2016			2015
	(unaudited)
Net Income	$	40,451		$	67,516		$	140,558		$	154,621

Comprehensive Income (Loss) - net of tax:
Post-retirement benefit obligation	9			14			49			(149		)

Comprehensive Income	40,460			67,530			140,607			154,472
Comprehensive loss attributable to noncontrolling interests	270			—			792			—
Comprehensive Income Excluding Noncontrolling Interests	40,730			67,530			141,399			154,472

Change in redemption value of noncontrolling interests	(270		)	—			(792		)	—
Comprehensive income allocated to participating securities	(171		)	(297		)	(584		)	(676		)
Comprehensive Income Allocated to Common Stockholders	$	40,289		$	67,233		$	140,023		$	153,796

See notes to condensed consolidated financial statements

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CBOE Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

September 30, 2016 and December 31, 2015



(in thousands, except share amounts)	September 30, 2016			December 31, 2015
	(unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	72,759		$	102,253
Accounts receivable—net allowances of 2016 - $128 and 2015 - $150	61,112			62,535
Marketing fee receivable	7,172			5,682
Income taxes receivable	52,190			27,901
Other prepaid expenses	8,495			5,122
Deferred financing costs	4,718			—
Other current assets	137			625
Total Current Assets	206,583			204,118
Investments	73,469			48,430
Land	4,914			4,914
Property and Equipment:
Construction in progress	181			885
Building	76,300			70,531
Furniture and equipment	155,608			144,597
Less accumulated depreciation and amortization	(172,178		)	(155,653		)
Total Property and Equipment—Net	59,911			60,360
Goodwill	26,468			7,655
Other Assets:
Intangible assets (less accumulated amortization—2016 - $1,466 and 2015 - $182)	9,094			2,378
Software development work in progress	24,953			13,836
Data processing software and other assets (less accumulated amortization—2016 - $168,347 and 2015 - $164,152)	35,950			43,097
Total Other Assets—Net	69,997			59,311
Total	$	441,342		$	384,788
Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued liabilities	$	66,421		$	60,104
Marketing fee payable	7,646			6,141
Deferred revenue and other liabilities	7,010			4,019
Post-retirement benefit obligation - current	27			100
Contingent consideration - current	—			2,000
Income tax payable	18			1,633
Total Current Liabilities	81,122			73,997
Long-term Liabilities:
Post-retirement benefit obligation - long-term	1,922			1,896
Contingent consideration - long-term	—			1,379
Income tax liability	47,667			39,679
Other long-term liabilities	2,713			2,883
Deferred income taxes	5,753			5,309
Total Long-term Liabilities	58,055			51,146
Commitments and Contingencies
Total Liabilities	139,177			125,143

Redeemable Noncontrolling Interests	12,600			—

Stockholders’ Equity:
Preferred stock, $0.01 par value: 20,000,000 shares authorized, no shares issued and outstanding at September 30, 2016 or December 31, 2015	—			—
Common stock, $0.01 par value: 325,000,000 shares authorized; 92,950,065 issued and 81,285,307 outstanding at September 30, 2016; 92,738,803 issued and 82,088,549 outstanding at December 31, 2015	929			927
Additional paid-in-capital	135,618			123,577
Retained earnings	686,042			603,597
Treasury stock at cost – 11,664,758 shares at September 30, 2016 and 10,650,254 shares at December 31, 2015	(532,249		)	(467,632		)
Accumulated other comprehensive loss	(775		)	(824		)
Total Stockholders’ Equity	289,565			259,645
Total	$	441,342		$	384,788

See notes to condensed consolidated financial statements

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CBOE Holdings, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity and Redeemable Noncontrolling Interests

Nine Months Ended September 30, 2016

(Unaudited)



(in thousands)	Preferred Stock		Common Stock		Additional Paid-In Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity			Redeemable Noncontrolling Interests
Balance—January 1, 2016	$	—	$	927	$	123,577		$	603,597		$	(467,632	)	$	(824	)	$	259,645		$	—
Cash dividends on common stock								(58,113		)							(58,113		)
Stock-based compensation					10,872												10,872
Excess tax benefits from stock-based compensation plan					1,171												1,171
Issuance of vested restricted stock granted to employees			2		(2		)										—
Purchase of common stock											(64,617		)				(64,617		)
Net Income excluding noncontrolling interests								141,350									141,350
Increase due to acquiring majority of outstanding equity of Vest																				12,600
Net loss attributable to redeemable noncontrolling interest																				(792		)
Redemption value adjustment								(792		)							(792		)	792
Post-retirement benefit obligation adjustment—net of tax expense of $35														49			49
Balance—September 30, 2016	$	—	$	929	$	135,618		$	686,042		$	(532,249	)	$	(775	)	$	289,565		$	12,600

See notes to condensed consolidated financial statements

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CBOE Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2016 and 2015



	Nine Months Ended
(in thousands)	September 30, 2016			September 30, 2015
	(unaudited)
Cash Flows from Operating Activities:
Net income	$	140,558		$	154,621
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization	34,311			34,071
Other amortization	57			59
Provision for deferred income taxes	409			(1,718		)
Gain on settlement of contingent consideration	(1,399		)	—
Stock-based compensation	10,872			8,987
Loss on disposition of property	9			617
Equity gain in investment	(830		)	(528		)
Impairment of investment and other assets	—			118
Change in assets and liabilities:
Accounts receivable	1,423			(7,723		)
Marketing fee receivable	(1,490		)	3,942
Income taxes receivable	(24,289		)	2,122
Prepaid expenses	(3,348		)	(3,413		)
Other current assets	488			(16		)
Accounts payable and accrued expenses	6,679			3,812
Marketing fee payable	1,505			(4,026		)
Deferred revenue and other liabilities	2,821			4,395
Post-retirement benefit obligations	(19		)	(14		)
Income tax liability	7,988			(2,029		)
Income tax payable	(1,615		)	860
Net Cash Flows provided by Operating Activities	174,130			194,137
Cash Flows from Investing Activities:
Capital and other assets expenditures	(36,433		)	(26,931		)
Acquisition of a majority interest in a business, net of cash received	(14,257		)	(2,960		)
Payment of contingent consideration from acquisition	(1,980		)	—
Investments	(24,209		)	(30,919		)
Other	(468		)	(1,827		)
Net Cash Flows used in Investing Activities	(77,347		)	(62,637		)
Cash Flows from Financing Activities:
Payment of quarterly dividends	(58,113		)	(54,413		)
Deferred financing costs	(4,718		)	—
Excess tax benefit from stock-based compensation	1,171			1,285
Payment of outstanding debt in conjunction with acquisition of a business	—			(4,040		)
Purchase of common stock from employees	(4,119		)	(3,178		)
Purchase of common stock under announced program	(60,498		)	(97,403		)
Net Cash Flows used in Financing Activities	(126,277		)	(157,749		)
Net Decrease in Cash and Cash Equivalents	(29,494		)	(26,249		)
Cash and Cash Equivalents at Beginning of Period	102,253			147,927
Cash and Cash Equivalents at End of Period	$	72,759		$	121,678
Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes	$	105,891		$	89,140

See notes to condensed consolidated financial statements

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CBOE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2016 and 2015

(Unaudited)

NOTE 1 —DESCRIPTION OF BUSINESS

CBOE Holdings, Inc. is the holding company for Chicago Board Options Exchange, Incorporated, CBOE Futures Exchange, LLC, C2 Options Exchange, Incorporated and other subsidiaries, including our majority ownership in CBOE Vest Financial Group Inc. ("Vest").

The Company's principal business is operating markets that offer for trading options on various market indexes (index options), mostly on an exclusive basis, and futures contracts, as well as on non-exclusive "multiply-listed" options, such as options on the stocks of individual corporations (equity options) and options on other exchange-traded products (ETP options), such as exchange-traded funds (ETF options) and exchange-traded notes (ETN options). The Company operates CBOE, CFE and C2 as stand-alone exchanges, but reports the results of its operations in a single reporting segment.

CBOE is our primary options market and offers trading in listed options through a single system that integrates electronic trading and traditional open outcry trading on our trading floor in Chicago. This integration of electronic trading and traditional open outcry trading into a single exchange is known as our Hybrid trading model. CFE, our all-electronic futures exchange, offers trading of futures on the VIX Index and other products. C2 is our all-electronic exchange that also offers trading of listed options, and may operate with a different market model and fee structure than CBOE. All of our exchanges operate on our proprietary technology platform known as CBOE Command.

CBOE Holdings and Bats Global Markets, Inc. (“Bats”), a leading global operator of securities exchanges and other electronic markets enabled by world-class technology, entered into an Agreement and Plan of Merger, dated as of September 25, 2016 (the “Merger Agreement”), providing, among other things, that, upon the terms and subject to the conditions set forth in the Merger Agreement, a wholly-owned subsidiary of CBOE Holdings will merge with and into Bats, with Bats surviving as a wholly-owned subsidiary of CBOE Holdings (the “Merger”). The Merger Agreement also provides that, immediately following the effective time of the Merger, Bats, as the surviving corporation from the Merger, will merge with and into CBOE V, LLC (“Merger LLC”), a wholly-owned subsidiary of CBOE Holdings, Inc. (the “Subsequent Merger”), with Merger LLC surviving the Subsequent Merger as a wholly-owned subsidiary of CBOE Holdings.

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of voting common stock of Bats, par value $0.01 per share (“Bats Voting Common Stock”), and each share of non-voting common stock of Bats, par value $0.01 per share (“Bats Non-Voting Common Stock” and, together with the Bats Voting Common Stock, “Bats Common Stock”), issued and outstanding immediately prior to the Effective Time (other than shares held by CBOE Holdings, Bats or any of their respective subsidiaries, shares held by any holder of Bats Common Stock who is entitled to demand and properly demands appraisal of such shares under Delaware law and unvested restricted shares of Bats Common Stock granted under any Bats equity incentive plan) will convert into, at the election of the holder of such share, subject to proration and adjustment, either (i) 0.3201 of a share of common stock of CBOE Holdings, par value $0.01 per share (“CBOE Holdings Common Stock”), and $10.00 in cash (the “Mixed Consideration”), (ii) an amount of cash, without interest (the “Cash Consideration”), equal to the sum (rounded to two decimal places) of (a) $10.00 and (b) the product obtained by multiplying 0.3201 by the volume-weighted average price (rounded to four decimal places) of shares of CBOE Holdings Common Stock on the NASDAQ Stock Market LLC for the ten consecutive trading days ending on the second full trading day prior to the Effective Time (the “Closing VWAP”), or (iii) a number of shares of CBOE Holdings Common Stock (the “Stock Consideration”) equal to the sum of (a) 0.3201 and (b) the quotient (rounded to four decimal places) obtained by dividing $10.00 by the Closing VWAP. Holders of Bats Common Stock who do not make an election will receive the Mixed Consideration. The consideration to be paid to holders of Bats Common Stock electing to receive the Cash Consideration or the Stock Consideration in connection with the Merger is subject to automatic adjustment, as applicable, to ensure that the total amount of cash paid and the total number of shares of CBOE Holdings Common Stock issued in the Merger is the same as what would be paid and issued if all holders of Bats Common Stock were to receive the Mixed Consideration at the Effective Time.

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Financial Conduct Authority and (iv) other customary closing conditions. Bats' and CBOE Holdings' directors and officers have signed supportive voting agreements. The Merger is expected to close in the first half of 2017.

NOTE 2 — BASIS OF PRESENTATION

These interim unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, valuation of redeemable noncontrolling interests and reported amounts of revenues and expenses. On an ongoing basis, management evaluates its estimates based upon historical experience, observance of trends, information available from outside sources and various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different conditions or assumptions.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included.

The results of operations for interim periods are not necessarily indicative of the results of operations for the full year.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In addition, the ASU provides guidance on accounting for certain revenue-related costs including when to capitalize costs associated with obtaining and fulfilling a contract. ASU 2014-09 provides companies with two implementation methods. Companies can choose to apply the standard retrospectively to each prior reporting period presented (full retrospective application) or retrospectively with the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings of the annual reporting period that includes the date of initial application (modified retrospective application). This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The FASB deferred the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. Early adoption of the standard is permitted, but not before the original effective date of December 15, 2016. The Company is in the process of evaluating this guidance, though we do not expect it will materially impact our consolidated balance sheets, statements of income, comprehensive income or cash flows.

In September 2015, the FASB issued ASU 2015-16, Business Combinations. This standard simplifies the accounting for adjustments made to provisional amounts recognized in a business combination. First, it requires that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer also should record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments should be applied prospectively to adjustments to provisional amounts that are identified after December 15, 2015 and that are within the measurement period. Upon transition, an entity would be required to disclose the nature of, and reason for, the change in accounting principle. An entity would provide that disclosure in the first annual period of adoption and in the interim periods within the first annual period. The Company has adopted this guidance, though we do not expect it will materially impact our consolidated balance sheets, statements of income, comprehensive income or cash flows.

In February 2016, the FASB issued ASU 2016-02, Leases. This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset. The guidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. This update is effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company is in the process of evaluating this guidance, though we do not expect it will materially impact our consolidated balance sheets, statements of income, comprehensive income or cash flows.

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In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation. This standard simplifies several aspects of the accounting for stock-based payment transactions, including the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. This update is effective for annual and interim periods beginning after December 15, 2016 and can be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. Early adoption is permitted. The Company is in the process of evaluating this guidance, though we do not expect it will materially impact our consolidated balance sheets, statements of income, comprehensive income or cash flows.

In September 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) — Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force). This standard addresses stakeholders’ concerns regarding diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics.In particular, ASU No. 2016-15 addresses eight specific cash flow issues in an effort to reduce this diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. For public business entities that are SEC filers, the amendments are effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Note that early adoption is permitted for all entities, including adoption during an interim period. The Company is in the process of evaluating this guidance, though we do not expect it will materially impact our consolidated balance sheets, statements of income, comprehensive income or cash flows.

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NOTE 3 — GOODWILL AND INTANGIBLE ASSETS

CBOE Vest Financial Group Inc.

In January 2016, the Company, through its subsidiary CBOE Vest, LLC, acquired a majority of the outstanding equity of Vest, an asset management firm that provides options-based investments through structured protective strategies and innovative technology solutions which allows for enhanced integration of our proprietary products, strategy indexes and options expertise. The purchase price consisted of $18.9 million in cash, reflecting payments of $14.9 million to former stockholders and $4.0 million to Vest for newly issued shares, and represented an ownership interest of 60% resulting in the consolidation of the operations. The purchase price was allocated on a preliminary basis, subject to final allocation, to the assets acquired based on their fair values at the acquisition date.



(amounts in thousands)
Purchase Price	$	18,900

Fair Value of Assets Acquired:
Cash	$	4,700
Intangible assets	8,000
Goodwill	18,800
Total Assets Acquired	$	31,500
Redeemable noncontrolling interests	12,600
Net Assets Acquired	$	18,900

The remaining 40% noncontrolling interest is held by the remaining Vest stockholders. The remaining Vest stockholders have a put option that can be exercised to Vest and Vest has a call option that can be exercised to the remaining stockholders. The put and call options can be exercised after five years though they could be accelerated by certain employment-related actions. The combination of the noncontrolling interest and a redemption feature resulted in a redeemable noncontrolling interest, which is classified outside of permanent equity on the condensed consolidated balance sheet.

In addition to the tangible and intangible assets, goodwill totaling $18.8 million was recorded in connection with the acquisition. Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents potential future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill is not expected to be deductible for tax purposes.

Pro forma financial information has not been provided as the Vest acquisition is not material to our consolidated

balance sheets, statements of income, comprehensive income or cash flows and did not meet the conditions of a significant

subsidiary under Rule 1-02 of Regulation S-X.

Vest - Intangible Assets

Intangible assets totaling $8.0 million were recorded in 2016 in connection with the acquisition of Vest and include: customer relationships, trade names, and technology. Intangible assets and related accumulated amortization consisted of the following as of September 30, 2016 (in thousands):



	As of September 30, 2016		Estimated Useful Lives
Customer relationships	$	3,000	9 years
Trade names	1,000		7 years
Technology	4,000		5 years
Total Intangible Assets Acquired	8,000
Less accumulated amortization	957
Total Intangibles, net	$	7,043

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For the three and nine months ended September 30, 2016, amortization of Vest intangible assets was $0.3 million and $1.0 million, respectively. The remaining weighted average useful lives of the intangible assets is 6.1 years as of September 30, 2016. The future expected amortization expense from the intangible assets related to the Vest acquisition as of September 30, 2016 is as follows (in thousands):



Year	Amortization expense
2016 (1)	$	319
2017	1,276
2018	1,276
2019	1,276
2020	1,276
Total	$	5,423

(1) Includes expected amortization for the remaining three months of 2016.

Livevol, Inc.

As a result of our acquisition of Livevol in August 2015, we recorded goodwill and intangible assets totaling $7.7 million and $2.6 million, respectively. In addition, the Company recorded contingent consideration of $3.4 million, which was based on management's estimate of the achievement by Livevol of certain performance targets at nine and eighteen months from the acquisition date. In September 2016, the Company settled the contingent consideration for $2.0 million resulting in a gain of $1.4 million, which is recorded in other income.

Livevol - Intangible Assets

Intangible assets totaling $2.6 million recorded in 2015 in connection with the acquisition of Livevol included: customer relationships, trade names, existing technology, non-compete agreements and leasehold rights. Intangible assets and related accumulated amortization consisted of the following as of September 30, 2016 (in thousands):



	As of September 30, 2016		Estimated Useful Lives
Customer relationships	$	910	13 years
Trade names	370		10 years
Technology	1,130		2-5 years
Other	150		1-4 years
Total	2,560
Less accumulated amortization	507
Total Intangibles, net	$	2,053

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For the three and nine months ended September 30, 2016, amortization of Livevol intangible assets was $0.1 million and $0.3 million, respectively. The remaining weighted average useful lives of the intangible assets is 7.7 years as of September 30, 2016. The future expected amortization expense from the intangible assets related to the Livevol acquisition as of September 30, 2016 is as follows (in thousands):



Year	Amortization expense
2016 (1)	$	109
2017	379
2018	349
2019	309
2020	206
Total	$	1,352

(1) Includes expected amortization for the remaining three months of 2016.

NOTE 4 — DEBT

In connection with entering into the Merger Agreement, CBOE Holdings entered into a commitment letter with Bank of America, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (or any of its designated affiliates) (Bank of America, N.A., and other such financial institutions that accede as lender to such debt commitment letter in accordance with its terms are referred to herein as the “Lenders”), which provides that, subject to the satisfaction and waiver of certain conditions which are usual and customary for financing of this type, the Lenders are committed to provide debt financing for the purposes of funding (i) the cash consideration to be paid in the transactions contemplated by the Merger Agreement, (ii) the refinancing of certain existing indebtedness of Bats and its subsidiaries and (iii) related fees and expenses, which debt financing consists of a senior unsecured 364-day bridge loan facility in an aggregate principal amount of up to $1.65 billion to the extent CBOE Holdings fails to generate gross cash proceeds in an aggregate principal amount of up to $1.65 billion from permanent financing including in the form of a senior unsecured term loan facility and the issuance of senior unsecured notes on or prior to the consummation of the transaction contemplated by the Merger Agreement. On September 26, 2016, the Company paid commitment and structuring fees of $5.0 million that will be amortized over the period prior to the closing of the transaction that is expected to occur in the first half of 2017.

NOTE 5 — REDEEMABLE NONCONTROLLING INTEREST

Redeemable noncontrolling interests are reported on the condensed consolidated balance sheets in mezzanine equity in "Redeemable Noncontrolling Interests." We recognize changes to the redemption value of redeemable noncontrolling interests as they occur and adjust the carrying value to equal the redemption value at the end of each reporting period. The resulting increases or decreases in the estimated redemption amount are affected by corresponding charges or credits against retained earnings, or in the absence of retained earnings, additional paid in capital. The redemption amounts have been estimated based on the fair value of the majority-owned subsidiary, determined based on a weighting of the discounted cash flow and other economic factors.

For the nine months ended September 30, 2016, the following reflects changes in our redeemable noncontrolling interests (in thousands):

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	Redeemable Noncontrolling Interest
Balance as of January 1, 2016	$	—
Increase due to acquiring majority of outstanding equity of Vest	12,600
Net loss attributable to redeemable noncontrolling interest	(792		)
Redemption value adjustment	792
Balance as of September 30, 2016	$	12,600

NOTE 6 — NET INCOME PER COMMON SHARE

The computation of basic net income allocated to common stockholders is calculated by reducing net income for the period by dividends paid or declared and undistributed net income for the period that are allocated to participating securities to arrive at net income allocated to common stockholders. Net income allocated to common stockholders is divided by the weighted average number of common shares outstanding during the period to determine net income per share allocated to common stockholders.

The computation of diluted earnings per share is calculated by dividing net income allocated to common stockholders by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. The dilutive effect is calculated using the more dilutive of the two-class or treasury stock method.

Additionally, in accordance with accounting guidance, the change in the redemption value for the noncontrolling interest in Vest reduces net income allocated to common shareholders.

The following table reconciles net income allocated to common stockholders and the number of shares used to calculate the basic and diluted net income per common share for the three and nine months ended September 30, 2016 and 2015:

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	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share amounts)	2016			2015			2016			2015
Basic EPS Numerator:
Net Income	$	40,451		$	67,516		$	140,558		$	154,621
Loss attributable to noncontrolling interests	270			—			792			—
Net Income excluding noncontrolling interests	40,721			67,516			141,350			154,621
Change in redemption value of noncontrolling interest	(270		)	—			(792		)	—
Earnings allocated to participating securities	(171		)	(297		)	(584		)	(676		)
Net Income allocated to common stockholders	$	40,280		$	67,219		$	139,974		$	153,945
Basic EPS Denominator:
Weighted average shares outstanding	81,285			82,755			81,481			83,329
Basic Net Income Per Common Share	$	0.50		$	0.81		$	1.72		$	1.85

Diluted EPS Numerator:
Net Income	$	40,451		$	67,516		$	140,558		$	154,621
Loss attributable to noncontrolling interests	270			—			792			—
Net Income excluding noncontrolling interests	40,721			67,516			141,350			154,621
Change in redemption value of noncontrolling interest	(270		)	—			(792		)	—
Earnings allocated to participating securities	(171		)	(297		)	(584		)	(676		)
Net Income allocated to common stockholders	$	40,280		$	67,219		$	139,974		$	153,945
Diluted EPS Denominator:
Weighted average shares outstanding	81,285			82,755			81,481			83,329
Dilutive common shares issued under stock program	—			—			—			—
Diluted Net Income Per Common Share	$	0.50		$	0.81		$	1.72		$	1.85

For the periods presented, the Company did not have shares of restricted stock or restricted stock units that would have an anti-dilutive effect on the computation of diluted net income per common share.

In order to complete the Company's proposed acquisition of Bats, shares of CBOE Holdings common stock are to be issued upon conversion of shares of Bats common stock in the Merger. Based on the number of shares of our common stock and Bats common stock outstanding on September 23, 2016, immediately following the completion of the Merger, our pre‑existing stockholders and former Bats stockholders would own approximately 72% and 28% of the outstanding shares of our common stock, respectively. The Merger will have no effect on the number of shares of our common stock owned by our existing stockholders.

NOTE 7 — STOCK-BASED COMPENSATION

Stock-based compensation is based on the fair value of the award on the date of grant, which is recognized over the related service period, net of estimated forfeitures. The service period is the period over which the related service is performed, which is generally the same as the vesting period.

On February 19, 2016, the Company granted 170,081 restricted stock units ("RSUs"), each of which entitles the holder to one share of common stock upon vesting, to certain officers and employees at a fair value of $61.80 per share. The RSUs vest ratably over three years, with one-third vesting on each anniversary of the grant date, and vesting accelerates upon the occurrence of a change in control. Unvested RSUs will be forfeited if the officer or employee leaves the Company prior to the applicable vesting date, except in limited circumstances. The RSUs have no voting rights but entitle the holder to receive dividend equivalents.

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In addition, on February 19, 2016, the Company granted 49,238 RSUs contingent on the achievement of performance conditions, including 24,619 RSUs, at a fair value of $61.80 per RSU, related to earnings per share during the performance period and 24,619 RSUs, at a fair value of $83.00 per RSU, related to total shareholder return during the performance period. The Company used the Monte Carlo valuation model method to estimate the fair value of the total shareholder return RSUs which incorporated the following assumptions: risk-free interest rate (0.90%), three-year volatility (21.1%) and three-year correlation with S&P 500 Index (0.41). Each of these performance shares has a performance condition under which the number of units ultimately awarded will vary from 0% to 200% of the original grant, with each unit representing the contingent right to receive one share of our common stock. The vesting period for the RSUs contingent on the achievement of performance is three years. For each of the performance awards, the RSUs will be settled in shares of our common stock following vesting of the RSU assuming that the participant has been continuously employed during the vesting period, subject to acceleration in the event of a change in control of the Company or in the event of a participant’s earlier death or disability. Participants have no voting rights with respect to RSUs until the issuance of the shares of stock. Dividends are accrued by the Company and will be paid once the RSUs contingent on the achievement of performance conditions vest.

On May 19, 2016, the Company granted 20,553 shares of stock, at a fair value of $63.29 per share, to the non-employee members of the board of directors. The shares have a one-year vesting period and vesting accelerates upon the occurrence of a change in control of the Company. Unvested portions of the stock will be forfeited if the director leaves the company prior to the applicable vesting date.

For the three and nine months ended September 30, 2016 and 2015, the Company recognized $3.8 million and $3.2 million and $10.9 million and $9.0 million in stock-based compensation expense, respectively. The three and nine months ended September 30, 2016 included $0.2 million and $0.7 million of accelerated stock-based compensation expense, respectively, for certain officers and employees as a result of attaining certain age and service based requirements in our long-term incentive plan and award agreements. Stock-based compensation expense is included in compensation and benefits in the condensed consolidated statements of income.

As of September 30, 2016, the Company had unrecognized stock-based compensation of $18.2 million. The remaining unrecognized stock-based compensation is expected to be recognized over a weighted average period of 23.1 months.

The activity in the Company’s restricted stock and restricted stock units for the nine months ended September 30, 2016 was as follows:



	Number of Shares		Weighted Average Grant Date Fair Value
Unvested at January 1, 2016	456,570		$	55.70
Granted	241,681		64.10
Vested	(211,235	)	48.14
Forfeited	(4,133	)	59.67
Unvested at September 30, 2016	482,883		$	63.34

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NOTE 8 — INVESTMENTS

At September 30, 2016 and December 31, 2015, the Company's investments were comprised of the following (in thousands):



	September 30, 2016		December 31, 2015
Equity Method
Investment in Signal Trading Systems, LLC	12,955		12,185
Investment in CBOE Stock Exchange, LLC	—		—
Total equity method investments	12,955		12,185

Cost Method
Investment in OCC	30,333		30,333
Other cost method investments	30,181		5,912
Total cost method investments	60,514		36,245

Total Investments	$	73,469	$	48,430

Equity Method

The carrying amount of our equity method investments totaled $13.0 million and $12.2 million as of September 30, 2016 and December 31, 2015, respectively, and is included in investments in our condensed consolidated balance sheet. Our equity method investments include our investments in Signal Trading Systems, LLC ("Signal") and CBOE Stock Exchange, LLC ("CBSX").

In May 2010, CBOE acquired a 50% interest in Signal from FlexTrade Systems, Inc. ("FlexTrade"). The joint venture develops and markets a multi-asset front-end order entry system, known as "Pulse," which has a particular emphasis on options trading. The Company assists in the development of the terminals and provides marketing services to the joint venture, which is accounted for under the equity method. We account for the investment in Signal under the equity method due to the substantive participating rights provided to the other limited liability company member, FlexTrade. In the nine months ended September 30, 2016, the Company recorded contributions to Signal of $1.4 million and equity earnings in Signal of $0.8 million. Additionally, the Company received a distribution of $0.5 million which reduced the carrying value of our investment.

The Company currently holds a 49.96% equity interest in CBSX in return for non-cash property contributions. CBSX ceased trading operations on April 30, 2014. CBOE is responsible for the compliance and regulation of the CBSX marketplace. In addition, the Company has a services agreement under which it provides CBSX with financial, accounting and technology support.

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Cost Method

The carrying amount of our cost method investments totaled $60.5 million and $36.2 million as of September 30, 2016 and December 31, 2015, respectively, and is included in investments in our condensed consolidated balance sheet. We account for investments under the cost-method primarily as a result of our inability to exercise significant influence. As of September 30, 2016, our cost method investments primarily reflect our 20% investment in OCC and minority investments in American Financial Exchange ("AFX"), CurveGlobal and Eris Exchange Holdings, LLC ("Eris").

As previously reported in our Annual Report on Form 10-K for the year ended December 31, 2015, the SEC approved OCC’s rule change implementing OCC's new capital plan on February 11, 2016. Certain petitioners subsequently appealed the SEC approval order for the OCC capital plan to the U.S. Court of Appeals for the D.C. Circuit and moved to stay the SEC approval order. On February 23, 2016, the Court denied the petitioners’ motion to stay. The appeal of the SEC approval order remains pending.

In 2015, CBOE Holdings, through its subsidiary Loan Markets, LLC, acquired a minority interest in AFX, an electronic marketplace for small and mid-sized banks to lend and borrow short-term funds.

In January 2016, CBOE Holdings, through its subsidiary CBOE III, LLC, acquired a minority interest in CurveGlobal, a new interest rate derivatives venture.

In May 2016, CBOE Holdings, through its subsidiary CBOE III, LLC, acquired a minority interest in Eris, the parent of a U.S. based futures exchange group.

NOTE 9 — ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

As of September 30, 2016 and December 31, 2015, accounts payable and accrued liabilities consisted of the following (in thousands):



	September 30, 2016		December 31, 2015
Compensation and benefit-related liabilities (1)	$	19,532	$	23,304
Royalties	17,076		15,409
Contract services	8,030		6,684
Acquisition related (2)	7,669		—
Accounts payable	3,087		1,762
Purchase of common stock (3)	—		1,778
Facilities	1,690		2,099
Legal	1,305		1,536
Market linkage	1,180		628
Other	6,852		6,904
Total	$	66,421	$	60,104

(1) As of September 30, 2016, primarily reflects accrued costs for 2016 incentive compensation expense. At December 31, 2015, primarily reflects 2015 annual accrued incentive compensation, which was paid in the first quarter of 2016.

(2) As of third quarter 2016, this amount reflects professional fees and outside services associated with the proposed acquisition of Bats.

(3) Reflects shares purchased at the end of the period not settled until three trading days after the trade occurs. We were not active in our share repurchase program during the third quarter.

NOTE 10 — MARKETING FEE

CBOE facilitates the collection and payment of marketing fees assessed on certain trades taking place at CBOE. Funds resulting from the marketing fees are made available to Designated Primary Market Makers and Preferred Market Makers as an economic inducement to route orders to CBOE. Pursuant to ASC 605-45, Revenue Recognition—Principal Agent Considerations, the Company reflects the assessments and payments on a net basis, with no impact on revenues or expenses.

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As of September 30, 2016 and December 31, 2015, amounts assessed by the Company on behalf of others included in current assets totaled $7.2 million and $5.7 million, respectively, and payments due to others included in current liabilities totaled $7.6 million and $6.1 million, respectively.

NOTE 11 — DEFERRED REVENUE

The following table summarizes the activity in deferred revenue for the nine months ended September 30, 2016 (in thousands):



	Balance at December 31, 2015		Cash Additions		Revenue Recognition			Balance at September 30, 2016
Other – net	$	4,019	$	9,533	$	(9,542	)	$	4,010
Liquidity provider sliding scale (1)	—		11,400		(8,400		)	3,000
Total deferred revenue	$	4,019	$	20,933	$	(17,942	)	$	7,010

(1) Liquidity providers are eligible to participate in the sliding scale program, which involves prepayment of transaction fees, and receive reduced fees based on the achievement of certain volume thresholds within a calendar month. The prepayment of 2016 transaction fees totaled $11.4 million. This amount is amortized and recorded ratably, as transaction fees, over the respective twelve month period.

NOTE 12 — EMPLOYEE BENEFITS

Employees are eligible to participate in the Chicago Board Options Exchange SMART Plan (“SMART Plan”). The SMART Plan is a defined contribution plan, which is qualified under Internal Revenue Code Section 401(k). In addition, eligible employees may participate in the Supplemental Employee Retirement Plan, Executive Retirement Plan and Deferred Compensation Plan. Each plan is a defined contribution plan that is non-qualified under Internal Revenue Code. The Company contributed $4.2 million and $3.4 million to the defined contribution plans for the nine months ended September 30, 2016 and 2015, respectively.

The Company has a post-retirement medical plan for former members of senior management. The Company recorded immaterial post-retirement benefits expense for the nine months ended September 30, 2016 and 2015.

NOTE 13 — INCOME TAXES

Income tax provision includes United States federal, state and local taxes and is based on reported pre-tax income. For the three and nine months ended September 30, 2016 and 2015, the Company recorded income tax provisions of $26.9 million and $91.1 million and $33.9 million and $89.7 million, respectively. For the three months ended September 30, 2016 and 2015, the effective tax rate was 39.9% and 33.4%, respectively. The effective tax rate for the nine months ended September 30, 2016 and 2015 was 39.3% and 36.7%, respectively. The higher effective rate in 2016 is primarily due to a net increase in unrecognized tax benefits compared to a net decrease for the same period in 2015.

Income tax expense is provided on an interim basis based upon our estimate of the annual effective income tax rate, adjusted each quarter for discrete items. In determining the estimated annual effective income tax rate, we analyze various factors, including projections of our annual earnings and taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, and our ability to use tax credits.

As of September 30, 2016 and December 31, 2015, the Company had $37.3 million and $31.9 million, in unrecognized tax benefits, respectively, all of which would favorably impact the effective tax rate if recognized. As of September 30, 2016 and December 31, 2015, the Company has recognized a liability for interest and penalties of $10.3 million and $7.7 million, respectively.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Federal income tax returns are generally not subject to examination by the Internal Revenue Service ("IRS") for tax years prior to 2010. Tax years open to examination by state and local taxing authorities vary by jurisdiction. We are generally not subject to state or local tax examinations for tax years prior to 2007. The IRS is currently examining tax years 2008 through 2013. The New York State Department of Taxation and Finance is currently examining the returns filed for tax years 2007 through 2012. Tax returns for

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tax years 2010 through 2012 are currently under examination by the New Jersey Division of Taxation. We have been notified by the Illinois Department of Revenue that it intends to examine our tax returns filed for the 2013 and 2014 tax years.

NOTE 14 — FAIR VALUE MEASUREMENTS

Fair value is the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the Company’s own credit risk.

The Company applied FASB ASC 820, Fair Value Measurement and Disclosure, which provides guidance for using fair value to measure assets and liabilities by defining fair value and establishing the framework for measuring fair value. ASC 820 applies to financial and non-financial instruments that are measured and reported on a fair value basis. The three-level hierarchy of fair value measurements is based on whether the inputs to those measurements are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The fair-value hierarchy requires the use of observable market data when available and consists of the following levels:


•	Level 1—Unadjusted inputs based on quoted markets for identical assets or liabilities.


•	Level 2—Observable inputs, either direct or indirect, not including Level 1, corroborated by market data or based upon quoted prices in non-active markets.


•	Level 3—Unobservable inputs that reflect management’s best assumptions of what market participants would use in valuing the asset or liability.

The Company has included a tabular disclosure for financial assets that are measured at fair value on a recurring basis in the condensed consolidated balance sheet as of September 30, 2016 and December 31, 2015. The Company holds no financial liabilities that are measured at fair value on a recurring basis.



(amounts in thousands)	Level 1		Level 2		Level 3		Total
Assets at fair value:
Money market funds	$	52,500	$	—	$	—	$	52,500
Total assets at fair value at September 30, 2016	$	52,500	$	—	$	—	$	52,500



(amounts in thousands)	Level 1		Level 2		Level 3		Total
Assets at fair value:
Money market funds	$	84,000	$	—	$	—	$	84,000
Total assets at fair value at December 31, 2015	$	84,000	$	—	$	—	$	84,000

In 2015, CBOE Holdings, through its subsidiary Loan Markets, LLC, acquired a minority interest in AFX. The investment, measured at fair value on a non-recurring basis, is classified as level 3 as the fair value was based on both observable and unobservable inputs.

In January 2016, CBOE Holdings, through its subsidiary CBOE III, LLC, acquired a minority interest in CurveGlobal. The investment, measured at fair value on a non-recurring basis, is classified as level 3 as the fair value was based on both observable and unobservable inputs.

In May 2016, CBOE Holdings, through its subsidiary CBOE III, LLC, acquired a minority interest in Eris. The investment, measured at fair value on a non-recurring basis, is classified as level 3 as the fair value was based on both observable and unobservable inputs.

The Company recorded contingent consideration of $3.4 million through June 30, 2016, categorized as level 3, which was based on management's estimate of the achievement by Livevol of certain performance targets at nine and eighteen months

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from the acquisition date. In September 2016, the company settled the contingent consideration for $2.0 million resulting in a gain of $1.4 million which is recorded in other income.

NOTE 15 — LEGAL PROCEEDINGS

As of September 30, 2016, the end of the period covered by this report, the Company was subject to various legal proceedings and claims, as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business. For a description of each of these proceedings, please see Note 12 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015.

The Company reviews its legal proceedings and claims, regulatory reviews and inspections and other legal proceedings on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. The Company does not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote. The Company's assessment of whether a loss is reasonably possible or probable is based on its assessment of the ultimate outcome of the matter following all appeals.

As of September 30, 2016, the Company does not believe that there is a reasonable possibility that any material loss exceeding the amounts already recognized for these reviews, inspections or other legal proceedings, if any, has been incurred. While the consequences of certain unresolved proceedings are not presently determinable, the outcome of any litigation is inherently uncertain and an adverse outcome from certain matters could have a material effect on our earnings in any given reporting period. However, in the opinion of management, the ultimate liability is not expected to have a material effect on our financial position, liquidity or capital resources.

The following information updates the legal proceedings disclosures in our Annual Report on Form 10-K for the year ended December 31, 2015 and subsequent Quarterly Reports on Form 10-Q.

Lanier Litigation

On May 23, 2014, Harold R. Lanier sued 14 securities exchanges, including CBOE, in the United States District Court for the Southern District of New York (the "Court") on behalf of himself and a putative class consisting of all persons in the United States who entered into contracts to receive market data through certain data plans at any time since May 19, 2008 to the present. The complaint alleged that the market data provided under the CQ Plan and CTA Plans was inferior to the data that the exchanges provided to those that directly receive other data from the exchanges, which the plaintiffs alleged is a breach of their “subscriber contracts” and a violation of the exchanges’ obligations under the CQ and CTA Plans. The plaintiffs sought monetary and injunctive relief. On May 30, 2014, Mr. Lanier filed two additional suits in the same Court, alleging substantially the same claims and requesting the same types of relief against the exchanges who participate in the UTP and the OPRA data plans. CBOE was a defendant in each of these suits, while C2 was only a defendant in the suit regarding the OPRA Plan. On April 28, 2015, the Court dismissed Lanier’s complaint with prejudice because it was preempted by the federal regulatory scheme and because the claims were precluded by the terms of the applicable subscriber agreements. Mr. Lanier appealed the orders dismissing each of his three cases and, on September 2, 2015, he filed his opening appellate briefs in those cases. The defendants’ response briefs were filed November 24, 2015 and briefing on the appeals has concluded. The oral arguments on the appeals were heard on March 3, 2016. On September 23, 2016, the Court of Appeals ruled in favor of the defendants and affirmed the Court’s dismissal of Lanier’s complaints with prejudice. On October 7, 2016, Lanier filed a petition for rehearing only in the action related to the OPRA Plan and the Court of Appeals ruling with respect to the other two complaints is now final.

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NOTE 16 — SUBSEQUENT EVENTS

On October 26, 2016, the Company announced that its board of directors declared a quarterly cash dividend of $0.25 per share. The dividend is payable December 16, 2016 to stockholders of record at the close of business on December 2, 2016.

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CBOE HOLDINGS, INC. AND SUBSIDIARIES

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

The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto, included in Item 1 in this Quarterly Report on Form 10-Q, and the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, and as contained in that report, the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This discussion contains forward-looking information. Please see “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

RESULTS OF OPERATIONS

Three months ended September 30, 2016 compared to the three months ended September 30, 2015

Overview

The following summarizes our financial performance for the three months ended September 30, 2016 compared to the same period in 2015.



	2016			2015			Inc./(Dec.)			Percent Change
	(in millions, except per share amounts)
Total Operating Revenues	$	156.2		$	187.0		$	(30.8	)	(16.5	)%
Total Operating Expenses	90.6			85.9			4.7			5.4	%
Operating Income	65.6			101.1			(35.5		)	(35.1	)%
Total Other Income	1.7			0.3			1.4			394.4	%
Income Before Income Taxes	67.3			101.4			(34.1		)	(33.6	)%
Income Tax Provision	26.9			33.9			(7.0		)	(20.8	)%
Net Income	$	40.4		$	67.5		$	(27.1	)	(40.1	)%
Net Income Allocated to Common Stockholders	$	40.3		$	67.2		$	(26.9	)	(40.1	)%
Operating Margin	42.0		%	54.1		%
Net Income Percentage	25.9		%	36.1		%
Diluted Net Income Per Share Allocated to Common Stockholders	$	0.50		$	0.81


•	Total operating revenues decreased primarily due to lower transaction fees partially offset by higher market data fees.


•	Total operating expenses increased primarily due to higher professional fees and outside services, partially offset by lower compensation and benefits, depreciation and amortization, and royalty fees. The increase in professional fees and outside services was mainly due to acquisition-related costs, which resulted in a lower operating margin for the quarter.

Recent Developments

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The completion of the Merger is subject to certain conditions, including, among others, (i) adoption by Bats stockholders of the Merger Agreement, (ii) approval by CBOE Holdings stockholders of the issuance of CBOE Holdings common stock in connection with the Merger, (iii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and regulatory approval by the SEC, Financial Industry Regulatory Authority ("FINRA") and the U.K. Financial Conduct Authority and (iv) other customary closing conditions. Bats' and CBOE Holdings' directors and officers have signed supportive voting agreements. The Merger is expected to close in the first half of 2017.

Operating Revenues

Total operating revenues for the three months ended September 30, 2016 were $156.2 million, a decrease of $30.8 million, or 16.5%, compared with the same period in 2015. The following summarizes changes in total operating revenues for the three months ended September 30, 2016 compared to the same period in 2015.



	2016		2015		Inc./(Dec.)			Percent Change
			(in millions)
Transaction fees	$	111.9	$	144.8	$	(32.9	)	(22.7	)%
Access fees	13.0		13.1		(0.1		)	(0.3	)%
Exchange services and other fees	11.6		11.0		0.6			4.9	%
Market data fees	8.2		7.1		1.1			15.3	%
Regulatory fees	9.1		8.2		0.9			11.1	%
Other revenue	2.4		2.8		(0.4		)	(15.0	)%
Total Operating Revenues	$	156.2	$	187.0	$	(30.8	)	(16.5	)%

Transaction Fees

Transaction fees totaled $111.9 million for the three months ended September 30, 2016, compared with $144.8 million for the same period in 2015, a decrease of $32.9 million, or 22.7%. The decrease in transaction fees was primarily due to decreases in average revenue per contract of 12.4% and 11.8% in total trading volume. The decrease in average revenue per contract resulted primarily from a shift in the mix of products traded. As a percentage of total trading volume, index options and futures contracts, which generate our highest options and overall average revenue per contract, respectively, accounted for 40.7% of trading volume during the third quarter of 2016 down from 44.6% in the third quarter of 2015.

Average revenue per contract, discussed in more detail below, is impacted by our fee structures, which includes volume based incentive programs, mix of products traded, the account type (customer, firm, market-maker, etc.) and the manner in which a trade is executed. The implementation of fee changes, which may increase or decrease our average revenue

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per contract, is primarily to ensure that we are competitive in the options marketplace and to ultimately improve and continue to drive order flow to our exchanges. We cannot predict the trading patterns of exchange participants, which may be based on factors outside our control, but we can attempt to price our products at levels that are competitive in our market.

Trading volume is impacted by many factors, including: macroeconomic events, market volatility, regulatory actions or considerations, availability of capital, competition and pricing.

The following summarizes transaction fees by product category for the three months ended September 30, 2016 compared to the same period in 2015.



	2016		2015		Inc./(Dec.)			Percent Change
			(in millions)
Equities	$	4.8	$	10.0	$	(5.2	)	(52.7	)%
Indexes	74.1		94.2		(20.1		)	(21.3	)%
Exchange-traded products	6.4		13.1		(6.7		)	(50.8	)%
Total options transaction fees	85.3		117.3		(32.0		)	(27.3	)%
Futures	26.6		27.5		(0.9		)	(3.1	)%
Total transaction fees	$	111.9	$	144.8	$	(32.9	)	(22.7	)%

Trading Volume

Our average daily volume ("ADV") for the three months ended September 30, 2016 was 4.63 million contracts, down 11.8% compared with 5.25 million contracts for the same period in 2015. Total trading days for the three months ended September 30, 2016 and 2015 were sixty-four.

The following summarizes changes in total trading volume and ADV by product category for the three months ended September 30, 2016 compared to the same period in 2015.



	2016		2015		Volume Percent Change		ADV Percent Change
	Volume	ADV	Volume	ADV	Volume Percent Change		ADV Percent Change
		(in millions)
Equities	94.6	1.48	94.5	1.48	0.1	%	0.1	%
Indexes	104.9	1.64	132.8	2.08	(21.1	)%	(21.1	)%
Exchange-traded products	81.2	1.27	91.7	1.43	(11.4	)%	(11.4	)%
Total options contracts	280.7	4.39	319.0	4.99	(12.0	)%	(12.0	)%
Futures	15.6	0.24	16.7	0.26	(6.7	)%	(6.7	)%
Total contracts	296.3	4.63	335.7	5.25	(11.8	)%	(11.8	)%

The following provides the percentage of volume by product category for the three months ended September 30, 2016 and 2015.



	2016		2015
Equities	31.9	%	28.1	%
Indexes	35.4	%	39.6	%
Exchange-traded products	27.4	%	27.3	%
Futures	5.3	%	5.0	%
Total	100.0	%	100.0	%

Average Revenue Per Contract

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Average revenue per contract was $0.378 for the three months ended September 30, 2016, a decrease of 12.4% compared with $0.431 for the same period in 2015. Average revenue per contract represents transaction fees divided by total contracts cleared.

The following summarizes average revenue per contract by product category for the three months ended September 30, 2016 compared to the same period in 2015.



	2016		2015		Percent Change
Equities	$	0.050	$	0.106	(52.8	)%
Indexes	0.707		0.709		(0.3	)%
Exchange-traded products	0.079		0.143		(44.4	)%
Total options average revenue per contract	0.304		0.368		(17.4	)%
Futures	1.709		1.647		3.8	%
Total average revenue per contract	$	0.378	$	0.431	(12.4	)%

Factors contributing to the change in total average revenue per contract for the three months ended September 30, 2016 compared to the same period in 2015 include:


•	Volume Mix — We experienced a shift in the mix of products traded. As a percentage of total volume, index options and futures contracts accounted for 40.7% of total trading volume, down from 44.6% in the prior year period. Index options and futures contracts represent our highest options average revenue per contract and highest average revenue per contract, respectively.


•	Rate structure — Our rate structure includes sliding scales, volume discounts, volume incentive programs and caps on fees as part of our effort to increase liquidity and market share in multiply-listed options (equities and exchange-traded products). The decrease in average revenue per contract in multiply-listed options was primarily a result of higher volume discounts and incentives.

Exchange Services and Other Fees

Exchange services and other fees for the three months ended September 30, 2016 increased $0.6 million to $11.6 million from $11.0 million for the same period in 2015. The increase was primarily a result of revenue generated from Livevol technology services, which was acquired on August 7, 2015 and higher fees for technology services.

Market Data Fees

Market data fees for the three months ended September 30, 2016 increased to $8.2 million from $7.1 million for the same period in 2015. For the three months ended September 30, 2016 and 2015, income derived from our market data services, which provide current and historical options and futures data, totaled $4.3 million and $3.8 million, respectively. OPRA income, which is allocated based on each exchange's share of total cleared options transactions, totaled $3.9 million and $3.3 million, respectively. The Company’s share of total cleared options transactions increased to 25.5% from 22.7% for the same period in 2015.

Regulatory Fees

Regulatory fees for the three months ended September 30, 2016 and 2015 were $9.1 million and $8.2 million, respectively. The increase in regulatory fees is primarily the result of an increase in our options regulatory fees resulting from increased costs associated with the regulation of CBOE and C2.

Concentration of Revenue

All contracts traded on our exchanges must be cleared through clearing members of OCC. At September 30, 2016, there were one hundred five Trading Permit Holders that are clearing members of the OCC. Two clearing members accounted for 41% of transaction and other fees collected through the OCC for the three months ended September 30, 2016. The next largest clearing member accounted for approximately 14% of transaction and other fees collected through the OCC. No one

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Trading Permit Holder using the services of the top two clearing members represented more than 27% of transaction and other fees collected through the OCC, for the respective clearing member, in the three months ended September 30, 2016. Should a clearing member withdraw from CBOE, we believe the Trading Permit Holder portion of that clearing member's trading activity would likely transfer to another clearing member.

The two largest clearing members mentioned above clear the majority of the market-maker sides of transactions at CBOE, C2 and at all of the U.S. options exchanges. If either of these clearing members were to withdraw from the business of market-maker clearing and market-makers were unable to transfer to another clearing member, this could create significant disruption to the U.S. options markets, including ours.

Operating Expenses

Total operating expenses increased $4.7 million, or 5.4%, to $90.6 million for the three months ended September 30, 2016 from $85.9 million for the same period in 2015. This increase was primarily due to higher professional fees and outside services, partially offset by lower compensation and benefits, depreciation and amortization, and royalty fees.

The following summarizes changes in operating expenses for the three months ended September 30, 2016 compared to the same period in 2015.



	2016		2015		Inc./(Dec.)			Percent Change
			(in millions)
Compensation and benefits	$	28.4	$	29.6	$	(1.2	)	(4.2	)%
Depreciation and amortization	10.2		12.4		(2.2		)	(17.7	)%
Technology support services	5.6		5.3		0.3			5.0	%
Professional fees and outside services	21.4		12.6		8.8			69.4	%
Royalty fees	19.4		21.8		(2.4		)	(11.2	)%
Order routing	0.5		0.6		(0.1		)	(7.7	)%
Travel and promotional expenses	2.6		1.4		1.2			85.5	%
Facilities costs	1.3		0.9		0.4			51.3	%
Other expenses	1.2		1.3		(0.1		)	(7.7	)%
Total Operating Expenses	$	90.6	$	85.9	$	4.7		5.4	%

Compensation and Benefits

For the three months ended September 30, 2016, compensation and benefits were $28.4 million, or 18.1% of total operating revenues, compared with $29.6 million, or 15.8% of total operating revenues, for the same period in 2015. This represented a decrease of $1.2 million, or 4.2%, from the prior period, which primarily resulted from lower annual incentive compensation, which is aligned with our financial performance relative to our targets, partially offset by increased staffing levels and higher stock-based compensation, including accelerated stock-based compensation expense.

Depreciation and Amortization

For the three months ended September 30, 2016, depreciation and amortization costs were $10.2 million compared with $12.4 million for the same period in 2015. This represented a decrease of $2.2 million, which was due to the final write-off at June 30, 2016 of certain assets that had a shorter than expected useful life, partially offset by the amortization of intangible assets related to the acquisitions of Livevol and Vest.

Professional Fees and Outside Services

Professional fees and outside services for the three months ended September 30, 2016 were $21.4 million compared with $12.6 million for the same period in 2015, an increase of $8.8 million, which primarily resulted from higher legal and professional fees, mainly acquisition-related costs, and higher contract services related to certain regulatory services provided by FINRA for CBOE and C2.

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Royalty Fees

Royalty fees for the three months ended September 30, 2016 were $19.4 million compared with $21.8 million for the same period in 2015. This represented a decrease of $2.4 million, which primarily resulted from lower trading volume in licensed products.

Operating Income

As a result of the items above, operating income for the three months ended September 30, 2016 was $65.6 million compared to $101.1 million for the same period in 2015, a decrease of $35.5 million.

Other Income

Other income reflected income of $1.7 million for the three months ended September 30, 2016 compared with income of $0.3 million for the same period in 2015. The increase in other income resulted from a gain on settlement of contingent consideration related to the acquisition of Livevol.

Income before Income Taxes

Income before income taxes for the three months ended September 30, 2016 was $67.3 million compared to $101.4 million for the same period in 2015, a decrease of $34.1 million.

Income Tax Provision

For the three months ended September 30, 2016, the income tax provision was $26.9 million compared to $33.9 million for the same period in 2015. The effective tax rate was 39.9% and 33.4% for the three months ended September 30, 2016 and 2015, respectively. In the third quarter of 2015, the Company considered its tax positions relative to research and development credits claimed for tax years ended 2008 through 2013 to have been effectively settled and therefore recognized the related tax benefit. In the third quarter of 2016, the Company determined that the likelihood of the taxing authority reexamining that tax position is no longer remote. Consequently, the Company no longer considers its 2008-2013 research and development tax credit positions to be effectively settled and therefore recorded a related increase in unrecognized tax benefits during the third quarter of 2016.

Net Income

As a result of the items above, net income allocated to common stockholders for the three months ended September 30, 2016 was $40.3 million compared to $67.2 million for the same period in 2015, a decrease of $26.9 million. Basic and diluted net income per share allocated to common stockholders were $0.50 and $0.81 for the three months ended September 30, 2016 and 2015, respectively.

Nine months ended September 30, 2016 compared to the nine months ended September 30, 2015

Overview

The following summarizes changes in financial performance for the nine months ended September 30, 2016 compared to the same period in 2015.

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	2016		2015		Inc./(Dec.)			Percent Change
	(in millions, except per share amounts)
Total Operating Revenues	$	481.9	$	478.6	$	3.3		0.7	%
Total Operating Expenses	258.8		234.6		24.2			10.3	%
Operating Income	223.1		244.0		(20.9		)	(8.6	)%
Total Other Income	8.5		0.3		8.2			--
Income Before Income Taxes	231.6		244.3		(12.7		)