UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 
 FORM 10-Q 
  (Mark One)x

          

          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2011 OR  o

          

          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from          to Commission File Number 001-34986 
 FXCM Inc. (Exact name of registrant as specified in its charter)  Delaware

          

          27-3268672(State or other jurisdiction of incorporation or organization)

          

          (I.R.S. Employer Identification No.)
 32 Old Slip New York, NY 10005 (Address of principal executive offices) (Zip Code) Telephone: (646) 432-2986 (Registrants telephone number, including area code) 
 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 x No o 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes o No o 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 o

          

          Accelerated filer oNon-accelerated filer x

          

          Smaller reporting company o(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 Exchange Act).Yes o No x The number of shares of the registrants Class A common stock, par value $0.01 per share, outstanding was 17,319,000 as of May 12, 2011. The number of shares of the registrants Class B common stock, par value $0.01 per share, outstanding as of May 12, 2011 was 100.
     TABLE OF CONTENTS FXCM INC. QUARTERLY REPORT ON FORM 10-Q For the quarterly period ended March 31, 2011 Table of Contents  Item Number

          

          PagePART I  FINANCIAL INFORMATIONItem 1.Financial Statements.





1FXCM Inc. Condensed Consolidated Statements of Financial Condition (Unaudited)





1FXCM Inc. Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)





2FXCM Inc. Condensed Consolidated Statements of Cash Flows (Unaudited)





3FXCM Inc. Notes to Condensed Consolidated Financial Statements (Unaudited)





4Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operation.





28Item 3.Quantitative and Qualitative Disclosures About Market Risk.





41Item 4.Controls and Procedures.





43PART II  OTHER INFORMATIONItem 1.Legal Proceedings.





44Item 1A.Risk Factors.





44Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.





44Item 3.Defaults Upon Senior Securities.





44Item 4.(Removed and Reserved).





44Item 5.Other Information.





44Item 6.Exhibits.





45SIGNATURES.





46
 i    TABLE OF CONTENTS Forward-Looking Statements This Quarterly Report contains forward-looking statements, which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as outlook, believes, expects, potential, continues, may, will, should, seeks, approximately, predicts, intends, plans, estimates, anticipates or the negative version of these words or other comparable words. Such forward-looking
statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under Item 1A. Risk Factors in our Annual Report on Form 10-K, as such factors may be updated by Quarterly Reports on Form 10-Q subsequently filed with the U.S. Securities and Exchange Commission (the SEC), including by Item 1A. Risk Factors of this Quarterly Report. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law. FXCM Inc. is a holding company that was incorporated as a Delaware corporation on August 10, 2010 and its sole asset is a controlling equity interest in FXCM Holdings, LLC. Unless the context suggests otherwise, references in this report to FXCM, the Company, we, us and our refer (1) prior to the December 2010 initial public offering (IPO) of the Class A common stock of FXCM Inc. and related transactions, to FXCM Holdings, LLC and its consolidated subsidiaries and (2) after our IPO and related transactions, to FXCM Inc. and its consolidated subsidiaries.
 ii    TABLE OF CONTENTS PART I  Item 1  Financial Statements (unaudited)   FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)  Condensed Consolidated Statements of Financial Condition (Unaudited) As of March 31, 2011 and December 31, 2010  March 31, 2011

          

          December 31, 2010(In thousands, except share data)AssetsCurrent assetsCash and cash equivalents

          

          $

          203,400

          

          

          $

          193,330Cash and cash equivalents, held for customers

          

          

          775,091

          

          

          

          641,152Due from brokers

          

          

          91

          

          

          

          125Accounts receivable, net

          

          

          12,155

          

          

          

          18,324Deferred tax asset

          

          

          7,618

          

          

          

          7,625Tax receivable

          

          

          2,821

          

          

          

          1,643Total current assets

          

          

          1,001,176

          

          

          

          862,199Deferred tax asset

          

          

          87,698

          

          

          

          90,107Office, communication and computer equipment, net

          

          

          23,143

          

          

          

          18,709Goodwill

          

          

          39,538

          

          

          

          37,937Other intangible assets, net

          

          

          26,606

          

          

          

          26,472Other assets

          

          

          12,647

          

          

          

          12,369Total assets

          

          $

          1,190,808

          

          

          $

          1,047,793Liabilities and EquityCurrent liabilitiesCustomer account liabilities

          

          $

          775,091

          

          

          $

          641,152Accounts payable and accrued expenses

          

          

          40,468

          

          

          

          37,470Due to brokers

          

          

          5,098

          

          

          

          13,314Deferred tax liability

          

          

          311

          

          

          

          1,844Due to related parties pursuant to tax receivable agreement

          

          

          3,817

          

          

          

          3,817Deferred revenue

          

          

          

          

          

          

          6,000Total current liabilities

          

          

          824,785

          

          

          

          703,597Deferred tax liability

          

          

          6,658

          

          

          

          5,770Due to related parties pursuant to tax receivable agreement

          

          

          69,489

          

          

          

          70,419Deferred revenue

          

          

          

          

          

          

          Total liabilities

          

          

          900,932

          

          

          

          779,786Commitments and ContingenciesStockholders/Members EquityClass A common stock, par value $0.01 per share; 3,000,000,000 shares authorized, 17,319,000 shares issued and outstanding as of March 31, 2011 and December 31, 2010

          

          

          173

          

          

          

          173Class B common stock, par value $0.01 per share; 1,000,000 shares authorized, 100 shares issued and outstanding as of March 31, 2011 and December 31, 2010

          

          

          1

          

          

          

          1Additional paid-in-capital

          

          

          104,281

          

          

          

          101,848Retained earnings

          

          

          1,903

          

          

          

          146Accumulated other comprehensive income

          

          

          523

          

          

          

          52Total stockholders equity

          

          

          106,881

          

          

          

          102,220Non-controlling interest

          

          

          182,995

          

          

          

          165,787Total stockholders equity

          

          

          289,876

          

          

          

          268,007Total liabilities and stockholders equity

          

          $

          1,190,808

          

          

          $

          1,047,793
 See accompanying notes to the condensed consolidated financial statements.
 1    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) For the Three Months Ended March 31, 2011 and 2010  For the Three Months Ended March 31,2011

          

          2010(Amounts in thousands, except per share data)RevenuesRetail trading revenue

          

          $

          77,735

          

          

          $

          67,748Institutional trading revenue

          

          

          7,379

          

          

          

          6,187Interest income

          

          

          941

          

          

          

          516Other income

          

          

          8,597

          

          

          

          2,509Total revenues

          

          

          94,652

          

          

          

          76,960ExpensesReferring broker fees

          

          

          21,601

          

          

          

          15,655Compensation and benefits

          

          

          22,586

          

          

          

          16,891Advertising and marketing

          

          

          7,018

          

          

          

          5,336Communication and technology

          

          

          7,359

          

          

          

          5,538General and administrative

          

          

          12,915

          

          

          

          8,433Depreciation and amortization

          

          

          4,094

          

          

          

          1,743Interest expense

          

          

          73

          

          

          

          26Total expenses

          

          

          75,646

          

          

          

          53,622Income before income taxes

          

          

          19,006

          

          

          

          23,338Income tax provision

          

          

          549

          

          

          

          2,608Net income

          

          

          18,457

          

          

          

          20,730Net income attributable to members of FXCM Holdings, LLC

          

          

          15,661

          

          

          

          20,730Net income attributable to FXCM Inc. for the three months ended March 31, 2011

          

          

          2,796

          

          

          

          Other comprehensive income, net of taxForeign currency translation gain

          

          

          2,048

          

          

          

          42Comprehensive income

          

          

          20,505

          

          

          

          20,772Comprehensive income attributable to members of FXCM Holdings, LLC

          

          

          17,238

          

          

          

          20,772Comprehensive income attributable to FXCM Inc. for the three months ended March 31, 2011

          

          $

          3,267

          

          

          $

          
  Three Months EndedMarch 31,2011

          

          March 31,2010Weighted average shares of Class A common stock outstanding:Basic

          

          

          17,319

          

          

          

          Diluted

          

          

          17,319

          

          

          

          Net income per share attributable to stockholders of Class A common stock of FXCM Inc.:Basic

          

          $

          0.16

          

          

          $

          Diluted

          

          $

          0.16

          

          

          $

          Dividends declared per common share

          

          $

          0.06

          

          

          $

          
 See accompanying notes to the condensed consolidated financial statements.
 2    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Condensed Consolidated Statements of Cash Flows (Unaudited) For the Three Months Ended March 31, 2011 and 2010  For the Three Months Ended March 31,2011

          

          2010(Amounts in thousands)Cash Flows From Operating ActivitiesNet income

          

          $

          18,457

          

          

          $

          20,730Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization

          

          

          4,095

          

          

          

          1,744Stock-based compensation

          

          

          2,433

          

          

          

          Deferred tax expense

          

          

          1,618

          

          

          

          60Deferred revenue

          

          

          (6,000

          )

          

          

          (1,500

          )Changes in operating assets and liabilitiesCash and cash equivalents, held for customers

          

          

          (19,035

          )

          

          

          (33,843

          )Due from brokers

          

          

          34

          

          

          

          293Accounts receivable

          

          

          6,311

          

          

          

          329Tax receivable

          

          

          (700

          )

          

          

          Other assets

          

          

          911

          

          

          

          355Customer account liabilities

          

          

          19,915

          

          

          

          34,254Accounts payable and accrued expenses

          

          

          (821

          )

          

          

          1,529Due to brokers

          

          

          (8,216

          )

          

          

          1,554Net cash provided by operating activities

          

          

          19,002

          

          

          

          25,505Cash Flows From Investing ActivitiesFXCMJ acquisition, net of cash received

          

          

          (3,868

          )

          

          

          Purchases of office, communication and computer equipment

          

          

          (4,580

          )

          

          

          (1,623

          )Net cash used in investing activities

          

          

          (8,448

          )

          

          

          (1,623

          )Cash Flows From Financing ActivitiesPayments for IPO costs

          

          

          (30

          )

          

          

          Members distributions

          

          

          

          

          

          

          (6,777

          )Net cash used in financing activities

          

          

          (30

          )

          

          

          (6,777

          )Effect of foreign currency exchange rate changes on cash and cash equivalents

          

          

          (454

          )

          

          

          (368

          )Net increase in cash and cash equivalents

          

          

          10,070

          

          

          

          16,737Cash and Cash EquivalentsBeginning of Year

          

          

          193,330

          

          

          

          139,858End of Year

          

          $

          203,400

          

          

          $

          156,595Supplemental disclosure of non-cash activitiesCash dividends payable

          

          $

          1,039

          

          

          $

          
 See accompanying notes to the condensed consolidated financial statements.
 3    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 1. Nature of Business and Organization FXCM Inc. (the Corporation), a Delaware corporation, was incorporated on August 10, 2010 as a holding company for the purpose of facilitating an initial public offering (IPO) of the Corporations common equity. On December 1, 2010, a registration statement filed with the U.S. Securities and Exchange Commission relating to shares of Class A common stock of the Corporation to be offered and sold in an IPO was declared effective. On December 7, 2010, the Corporation completed an IPO of 17,319,000 shares of Class A common stock at a public offering price of $14.00 per share. Prior to the IPO, the
Corporation had not engaged in any business or other activities except in connection with its formation and the IPO. The Corporation was a wholly-owned subsidiary of FXCM Holdings, LLC (Holdings) prior to the consummation of the reorganization described below. Subsequent to the reorganization, Holdings is a minority-owned, controlled and consolidated subsidiary of the Corporation. Collectively, the Corporation and its consolidated subsidiaries are referred to hereinafter as the Company. Holdings The Company operates through Holdings and its global subsidiaries, which are subject to local regulatory requirements. Holdings is a Delaware limited liability company and wholly owns Forex Capital Markets, LLC (herein US), FXCM Canada, Ltd. (herein, Canada), Forex Trading, LLC (herein FXT) and ODL Group Limited (herein ODL). FXTs wholly owned subsidiaries include FXCM Asia Limited (herein HK), Forex Capital Markets Limited (herein UK), and FXCM Australia, Ltd. (herein Australia). On October 1, 2010, the Company acquired ODL, a leading broker of FX, CFDs, spread
betting, equities and equity options headquartered in the United Kingdom (the U.K.). Holdings is the parent company of ODL. ODLs wholly owned subsidiaries include ODL Securities Limited (ODL SL) and ODL Japan Co. Limited (ODL JL). On March 31, 2011, the Company acquired FXCM Japan, Inc., (FXCMJ) a Japan-based foreign exchange provider. FXCMJ was sold to the Company by GCI Capital Co., Ltd., who had previously reached an agreement with the Company to use the FXCM Japan trademark prior to the acquisition. FXCMJ is a wholly owned subsidiary of ODL JL. FXCMJs wholly owned subsidiary is GCI Technology USA, Inc. The Company is an online provider of foreign exchange (FX) trading and related services to domestic and international retail and institutional customers and offers customers access to global over-the-counter FX markets. In a FX trade, a participant buys one currency and simultaneously sells another, a combination known as a currency pair. The Companys proprietary trading platform presents its FX customers with the price quotations on several currency pairs from various global banks, financial institutions and market makers, or FX market makers. The Companys primary source of revenue is earned by adding a markup to
the price provided by FX market makers and generates its trading revenue based on the volume of transactions. The Company utilizes what is referred to as an agency execution or agency model. Under the agency model, when a customer executes a trade on the price quotation presented by the FX market maker, the Company acts as a credit intermediary, or a riskless principal, simultaneously entering into a trade with the customer and the FX market maker. This agency model has the effect of automatically hedging the Companys positions and eliminating market risk exposure. The systematic hedge gains and losses are included in retail trading revenue in the consolidated statements of operations and comprehensive income. The Company also offers FX trading services to banks, hedge funds and other institutional customers, also on an agency model basis, through its FXCM Pro division. This service allows customers to obtain optimal prices offered by external banks. The counterparties to these
trades are external financial institutions that hold customer account balances and settle the transactions. The Company receives commissions for these services without incurring credit or market risk. Additionally, the Company is engaged in various ancillary FX related services which include use of our platform, technical expertise, trading facilities and software. Through its subsidiary ODL, the Company also is a broker of CFDs spread betting, equities and equity options. Certain agreements and transactions associated with the IPO are set forth below.
 4    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 1. Nature of Business and Organization   (continued) Reorganization Prior to the completion of the IPO, the limited liability company agreement of Holdings was restated among other things, to modify its capital structure by reclassifying the interests held by its existing owners (i.e., the owners of Holdings prior to the IPO) into a single new class of units (Holding Units). Holdings existing owners also entered into an exchange agreement under which they (or certain permitted transferees thereof) have the right, from and after the first anniversary of the date of the closing of the IPO, (subject to the terms of the exchange agreement as described therein) to exchange their Holding Units for shares of the
Corporations Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. Following the IPO, each of the existing owners holds one share of Class B common stock. The shares of Class B common stock have no economic rights but entitle the holder, without regard to the number of shares of Class B common stock held, to a number of votes on matters presented to stockholders of the Corporation that is equal to the aggregate number of Holdings Unit of Holdings held by such holder, subject to customary adjustments for stock splits, stock dividends and reclassifications. At the time of the offering, the Corporation purchased newly-issued Holdings Units from Holdings and outstanding Holdings Units from the existing owners of Holdings, including members of its senior management, at a purchase price per unit equal to the $14.00 price per share of Class A common stock in the offering net of underwriting discounts. Since the existing owners continue to have control of over 50% of the voting shares (through their interests in the Corporation) upon completion of the exchange, the exchange of cash by the Corporation for Holdings Units of Holdings was accounted for as a transaction between entities under common control in
accordance with the guidance in ASC Subtopic 805-50. Holdings recognized the amount of cash transferred at the date of the exchange and measured the cash received at its carrying amount. The date of the exchange was December 1, 2010 (i.e., the effective date of the initial public offering). Tax Receivable Agreement As described above, the Corporation purchased Holdings Units from other members of Holdings at the time of the IPO. In addition, under the terms of the exchange agreement described above, the members of Holdings (other than the Corporation) may, from and after the first anniversary of the date of the closing of the IPO (subject to the terms of the exchange agreement), exchange their Holdings Units for shares of Class A common stock of the Corporation on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. Holdings intends to make an election under Section 754 of the Code
effective for each taxable year in which such a purchase or exchange of Holdings Units for shares of Class A common stock occurs, which is expected to result in increases to the tax basis of the assets of Holdings at the time of the purchase or subsequent exchange of Holdings Units that otherwise would not have been available. These increases in tax basis may reduce the amount of tax that the Corporation would otherwise be required to pay in the future. These increases in tax basis may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
 5    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 2. Significant Accounting Policies and Estimates A summary of the Companys significant accounting policies and estimates is as follows: Basis of Presentation The accompanying condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) and are presented in U.S. dollars. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company consolidates those entities in which it is the primary beneficiary of a variable-interest entity as required by ASC 810, Consolidations, or entities where it has a controlling financial interest. As indicated above, the Corporation operates and controls all of the businesses and affairs of Holdings and its subsidiaries. Under ASC 810, Holdings meets the definition of a variable interest entity. Further, the Corporation is the primary beneficiary of Holdings as a result of its 100% voting power and control over Holdings and as a result of its obligation to absorb losses and its right to receive benefits of Holdings that could potentially be significant to Holdings. As a result, the Corporation consolidates the financial results of Holdings and records a non-controlling interest for the economic interest in Holdings held by the existing unit
holders to the extent that the book value of their interest in Holdings is greater than zero. The Corporations and the non-controlling unit holders economic interest in Holdings was 23% and 77%, respectively, as of March 31, 2011 and December 31, 2010. Net income attributable to the non-controlling interest on the statements of operations and comprehensive income represents the portion of earnings or loss attributable to the economic interest in Holdings held by the non-controlling unit holders. Non-controlling interest on the statements of financial condition represents the portion of net assets of Holdings attributable to the non-controlling unit-holders based on total units of Holdings owned by such unit holder. As permitted under Rule 10-01 of SEC Regulation S-X, certain footnotes or other financial information can be condensed or omitted in the interim condensed consolidated financial statements. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in FXCMs Annual Report on Form 10-K for the year ended December 31, 2010. Certain reclassifications have been made to previously reported amounts to conform to the current presentation. Use of Estimates The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash at banks and highly liquid instruments with original maturities of less than 90 days at the time of purchase. At times, these balances may exceed federally insured limits. This potentially subjects the Company to concentration risk. The Company has not experienced losses in such accounts. Cash and Cash Equivalents, held for customers Cash and cash equivalents, held for customers represents cash held to fund customer liabilities in connection with foreign currency transactions. The balance arises primarily from cash deposited by customers, customer margin balances, and cash held by FX market makers related to hedging activities. The Company records a corresponding liability in connection with this amount that is included in customer account liabilities
 6    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 2. Significant Accounting Policies and Estimates   (continued) in the consolidated statements of fnancial condition (see Note 4). A portion of the balance is not available for general use due to legal restrictions in accordance with certain jurisdictional regulatory requirements. These legally restricted balances were $645.8 million and $502.9 million as of the three months ended March 31, 2011 and the year ended December 31, 2010, respectively. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement establishes a fair value hierarchy that prioritizes the inputs of valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. These two inputs create the following fair value hierarchy: Level I: Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date. Level II: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices. Level III: Unobservable inputs for assets or liabilities. As of March 31, 2011 and December 31, 2010, substantially all of the Companys financial instruments were carried at fair value based on spot exchange rates broadly distributed in active markets, or amounts approximating fair value. Assets, including, due from brokers and others, are carried at cost or contracted amounts, which approximates fair value. Similarly, liabilities, including customer account liabilities, due to brokers and payables to others are carried at fair value or contracted amounts, which approximates fair value. The Company did not have any Level II and III financial assets or liabilities as of March 31, 2011 and December 31, 2010. The Company did not have any transfers in or out of Level I and II during the three months ended March 31, 2011, and the year ended December 31, 2010. Cash and cash equivalents and cash and cash equivalents, held for customers are deemed to be Level I financial assets. Due from/to Brokers Due from/to Brokers represents the amount of the unsettled spot currency trades that the Company has open with its financial institutions. The Company has master netting agreements with its respective counterparties under which its due to/from brokers are presented on a net-by-counterparty basis in accordance with U.S. GAAP.
 7    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 2. Significant Accounting Policies and Estimates   (continued) Office, Communication and Computer Equipment Office, communication and computer equipment consist of purchased technology hardware and software, internally developed software, leasehold improvements, furniture and fixtures and other equipment, computer equipment, licenses and communication equipment. Office, communication and computer equipment are recorded at historical cost, net of accumulated depreciation. Additions and improvements that extend the lives of assets are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Certain costs of software developed or obtained for internal use are capitalized. Depreciation is computed using the straight-line method.
The Company depreciates these assets using the following useful lives:  Computer equipment

          

          3 to 5 yearsSoftware

          

          2 to 5 yearsLeasehold improvements

          

          Lesser of the estimated economic useful life or the term of the leaseFurniture and fixtures and other equipment

          

          3 to 5 yearsLicenses

          

          2 to 3 yearsCommunication equipment

          

          3 to 5 years
 Valuation of Other Long-Lived Assets The Company also assesses potential impairments of its other long-lived assets, including office, communication and computer equipment, when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss is recognized when the carrying amount of the long-lived asset exceeds its fair value and is not recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any required impairment loss is measured as the amount by which the carrying
amount of a long-lived asset exceeds its fair value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results. There was no impairment of other long-lived assets in the three months and year ended March 31, 2011 and December 31, 2010. Business Combination The Company accounts for business acquisitions in accordance with ASC 805, Business Combinations, and records assets acquired and liabilities assumed at their fair values as of the acquisition date. The Company records any excess purchase price over the value assigned to net tangible and identifiable intangible assets of a business acquired as goodwill. Acquisition related costs are expensed as incurred. Refer to Note 3 for further details. Goodwill The Company recorded goodwill from the acquisition of ODL, a leading broker of FX, CFDs, spread betting equities and equity options headquartered in the United Kingdom and FXCM Japan, Inc. The Company acquired FXCM Japan, Inc. (the Acquisition) on March 31, 2011 (the Acquisition Date). Refer to Note 3 for further details. Goodwill represents the excess purchase price over the value assigned to the net tangible and identifiable intangible assets of a business acquired. Goodwill is allocated to our reporting units based on the assignment of the fair values of each reporting unit of the acquired company. The Company is required
to test goodwill for impairment at the reporting unit level annually, or in interim periods if certain events occur indicating that the carrying value may be impaired. The Company tests for impairment during the fourth quarter of our fiscal year using October 1 carrying values. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill is less than the carrying value. The determination of fair value includes considerations of projected cash flows, relevant trading multiples of comparable companies and the trading price of our common stock and other
 8    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 2. Significant Accounting Policies and Estimates   (continued) factors. There was no impairment of goodwill for the three months ended March 31, 2011 and year ended December 31, 2010. Although there is no impairment as of March 31, 2011, events such as economic weakness and unexpected significant declines in operating results of reporting units may result in our having to perform a goodwill impairment test for some or all of our reporting units prior to the required annual assessment. These types of events and the resulting analysis could result in goodwill impairment charges in the future. See Note 7 below, for further discussion. Other Intangible Assets, net Intangible assets, net, primarily include customer relationships, non-compete agreements and trade name acquired from ODL and FXCM Japan, Inc. in the acquisitions described below (see Note 3). The customer relationships, non-compete agreements and trade name are finite-lived intangibles and are amortized on a straight-line basis over their estimated average useful life of 6 to 9 years, 2 to 3 years and 1 year, respectively. The useful life of these intangibles is based on the period they are expected to contribute to future cash flows as determined by the Companys historical experience. For these finite-lived intangible assets subject to amortization, impairment is considered upon certain triggering events and is recognized if the carrying amount is not recoverable and the carrying amount exceeds the fair value of the
intangible asset. There was no impairment of finite-lived intangible assets for the three months ended March 31, 2011 and year ended December 31, 2010. The FX trading license is an indefinite-lived asset that is not amortized but tested for impairment. The Companys policy is to test for impairment at least annually or in interim periods if certain events occur indicating that the fair value of the asset may be less than its carrying amount. An impairment test on this indefinite-lived asset is performed during the fourth quarter of the Companys fiscal year using the October 1 carrying value. Impairment exists if the carrying value of the indefinite-lived intangible asset exceeds its fair value. There was no impairment of indefinite-lived intangible assets for the three months ended March
31, 2011 and year ended December 31, 2010. Equity Method Investment Investments where the Company is deemed to exercise significant influence (generally defined as owning a voting interest of 20% to 50%), but no control, are accounted for using the equity method of accounting. The Company records its pro-rata share of earnings or losses each period and records any dividends as a reduction in the investment balance. These earnings or losses are included in other income in the consolidated statements of operations and comprehensive income. The carrying amount of equity method investments was $3.6 million as of March 31, 2011 and December 31, 2010 and is reflected in other assets in the consolidated statements of
financial condition. Accounts Receivable, net As of March 31, 2011 and December 31, 2010, accounts receivable, net, consisted primarily of amounts due from institutional customers relating to the Companys foreign exchange business, and fees receivable from the Companys white label service to third parties and payments for order flow, described in Retail Trading Revenue below. Receivables are shown net of reserves for uncollectible accounts. The reserve for bad debts is maintained at a level that management believes to be sufficient to absorb estimated losses in the accounts receivable portfolio. The reserve is increased by the provision for bad debts which is charged
against operating results and decreased by the amount of charge-offs, net of recoveries. The amount charged against operating results is based on several factors including, but not limited to, a continuous assessment of the collectability of each account, the length of time a receivable is past due and our historical experience with the particular customer. Based on managements assessment of the collectability of each account, there were no uncollectible accounts as of March 31, 2011 and December 31, 2010. The reserve amount netted against
 9    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 2. Significant Accounting Policies and Estimates   (continued) receivables in the consolidated statement of financial condition was not material at March 31, 2011. There was no reserve netted against receivables in the consolidated statements of financial condition as of December 31, 2010. Other Assets Other assets include prepaid expenses, equity method investments, employee advances, and deposits for rent security (see Note 9). Accounts Payable and Accrued Expenses Accounts payable and accrued expenses include operating expenses payable, bonus payable, commissions payable which represents balances owed to referring brokers for trades transacted by customers that were introduced to the Company by such brokers, IPO related costs payable, regulatory fees payable, payables for a portion of the cash consideration relating to the business acquisitions (see Note 3), and taxes payable (see Note 10). Foreign Currency Foreign denominated assets and liabilities are re-measured into the functional currency at exchange rates in effect at the statement of financial condition dates through the statements of operations and comprehensive income. Gains or losses resulting from foreign currency transactions are re-measured using the rates on the dates on which those elements are recognized during the period, and are included in retail trading revenue in the consolidated statements of operations and comprehensive income. The Company recorded a loss of $0.7 million for the three months ended March 31, 2011 and a gain of $0.8 million for the three months ended March 31, 2010. Translation gains or losses resulting from translating the Companys subsidiaries financial statements from the local functional currency to the reporting currency, net of tax, are included in other comprehensive income. Assets and liabilities are generally translated at the balance sheet date while revenues and expenses are generally translated at an applicable average rate. Guarantees At the inception of guarantees, if any, the Company will record the fair value of the guarantee as a liability, with the offsetting entry being recorded based on the circumstances in which the guarantee was issued. Revenue Recognition The Company makes foreign currency markets for customers trading in foreign exchange spot markets (Foreign Currencies) and through its subsidiary ODL SL, engages in equity and related brokerage activities. Foreign Currencies are recorded on the trade date and positions are marked to market daily with related gains and losses, including gains and losses on open spot transactions, recognized currently in income. Commissions earned on brokerage activities are recorded on a trade date basis and are recognized currently in income. Retail Trading Revenue Retail trading revenue is earned by adding a markup to the price provided by FX market makers generating trading revenue based on the volume of transactions and is recorded on trade date. The retail trading revenue is earned utilizing an agency model. Under the agency model, when a customer executes a trade on the best price quotation presented by the FX market maker, the Company acts as a credit intermediary, or a riskless principal, simultaneously entering into a trade with the customer and the FX market maker. This agency model has the effect of automatically hedging the Companys positions and eliminating market risk exposure. Retail trading
revenues principally represent the difference of the Companys realized
 10    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 2. Significant Accounting Policies and Estimates   (continued) and unrealized foreign currency trading gains or losses on its positions with customers and the systematic hedge gains and losses from the trades entered into with the FX market makers. Retail trading revenue also includes fees earned from arrangements with other financial institutions to provide platform, back office and other trade execution services. This service is generally referred to as a white label arrangement. The Company earns a percentage of the markup charged by the financial institutions to their customers. Fees from this service are recorded when earned on a trade date basis. Additionally, the Company earns income from trading in
contracts for difference (CFDs), payments for order flow, rollovers and spread betting. The Companys policy is to hedge its CFD positions with other financial institutions based on internal guidelines. Income or loss on CFDs represents the difference between the Companys realized and unrealized trading gains or losses on its positions and the hedge gains or losses with the other financial institutions. Income or loss on CFDs is recorded on a trade date basis. Income or loss on rollovers is the interest differential customers earn or pay on overnight currency pair positions held and the markup that the Company receives on interest paid or received on currency pair positions held overnight. Income or loss on rollovers is recorded on a trade date basis. Income earned on order flow represents payments received from certain FX market makers in exchange for routing trade orders to these firms for execution. The Companys order routing software ensures that
payments for order flow do not affect the routing of orders in a manner that is detrimental to its retail customers. The Company recognizes payments for order flow as earned. Spread betting is where a customer takes a position against the value of an underlying financial instrument moving either upward or downward in the market. Income on spread betting is recorded as earned. Institutional Trading Revenue Institutional trading revenue relates to commission income generated by facilitating spot foreign currency trades on behalf of institutional customers through the services provided by the FXCM Pro division. FXCM Pro allows these customers to obtain the best execution price from external banks and routes the trades to outside financial institutions for settlement. The counterparties to these trades are external financial institutions that also hold customer account balances. The Company receives commission income for customers use of FXCM Pro without taking any market or credit risk. Institutional trading revenue is recorded on a trade date
basis. Other Income In January 2007, the Company entered into an agreement to provide trade execution services to a related party, GCI Capital Co. Ltd (GCI). As consideration for the services, the Company received an upfront non refundable payment of $30.0 million in addition to ongoing monthly fees that are recognized when earned. The Company did not receive any ongoing monthly fees for the three months ended March 31, 2011 and 2010. Ongoing monthly fees were historically based on a fixed monthly amount and were changed to a variable per trade fee in June 2009. Prior to the acquisition of FXCMJ (refer to Note 3) the upfront fee was deferred and being
recognized on a straight line basis over the estimated period of performance of 5 years. Upon the consummation of the acquisition, the agreement to provide trade execution services was terminated and the deferred revenue was recognized as income and is included in other income in the consolidated statements of operations and comprehensive income. Other income also includes amounts earned from the sale of market data, equity and equity option brokerage activities and ancillary fee income. Referring Broker Fees Referring broker fees represent commissions paid to brokers for introducing trading customers to the Company. Commissions are determined based on the number and size of transactions executed by the customers and are recorded on a trade date basis.
 11    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 2. Significant Accounting Policies and Estimates   (continued) Compensation and Benefits Compensation and benefits expense represents employee and member salaries, benefit expense and stock based compensation expense. Such amounts have been included in compensation and benefits in the consolidated statements of operations and comprehensive income. Stock Based Compensation The Company accounts for stock-based compensation in accordance with ASC Topic 718, Compensation  Stock Compensation ( ASC 718). The fair value of the Companys stock-based compensation is estimated using the Black-Scholes option pricing model. The Company recognizes compensation expense for equity awards on a straight-line basis over the requisite service period of the award. Compensation expense is adjusted for an estimate of equity awards that do not vest in the future because service or performance conditions are not satisfied (forfeitures) and have been included in compensation and benefits in the consolidated
statements of operations and comprehensive income. See Note 13 for further discussion. Advertising and Marketing Advertising and marketing costs are charged to operations when incurred. General and Administrative Expenses General and administrative expenses include bank processing and regulatory fees, professional and consulting fees, occupancy and equipment expense and other administrative costs. Bank processing fees are costs associated with the processing of credit card transactions and prime brokerage fees charged by clearing banks. Regulatory fees are volume-based costs charged by certain regulatory authorities. Income Taxes Income Taxes   Prior to the initial public offering (IPO) in December 2010, we have historically operated as partnerships for U.S. federal income tax purposes and mainly as a corporate entity in non-U.S. jurisdictions. As a result, our income was not subject to U.S. federal and state income taxes. Generally, the tax liability related to income earned by these entities represents obligations of the individual partners and members. Income taxes shown on our historical combined income statements are attributable to the New York City unincorporated business tax and other income taxes on certain entities located in
non-U.S. jurisdictions. Following the IPO, FXCM Holdings, LLC and certain of its subsidiaries continue to operate in the United States as partnerships for U.S. federal income tax purposes and generally as corporate entities in non-U.S. jurisdictions. Accordingly, these entities in some cases continue to be subject to New York City unincorporated business taxes or non-U.S. income taxes. In addition, FXCM Inc. is subject to U.S. corporate federal, state and local income taxes that are reflected in our consolidated and combined financial statements. Allocation and Distribution of Holdings Earnings The allocation of Holdings earnings to the members is determined in accordance with the sharing ratios as defined in the Limited Liability Company Agreement of Holdings (the LLC Agreement). Distributions to members are made according to the LLC Agreement. Recently Adopted Accounting Pronouncements During the three months ended March 31, 2011, there were no recently issued accounting pronouncements that were applicable and adopted by the Company.
 12    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 3. Business Acquisition On the Acquisition Date, the Company acquired a 100% interest in FXCMJ, a Japan-based foreign exchange provider that had previously contracted to use the FXCM Japan trademark. The Acquisition was designed to increase the Companys profile in the Japanese market and accelerate its growth in Asia, utilizing FXCMJs relationships and sales force. The Companys purchase price was $15.9 million provided in cash. The Acquisition was accounted for in accordance with FASB ASC 805, Business Combinations. The assets acquired and the liabilities assumed were recorded at their fair values in accordance with ASC 820, Fair Value
Measurements and Disclosures. The $15.9 million purchase price was allocated to FXCMJ assets acquired and liabilities assumed based on their estimated fair values at the acquisition date as summarized in the following table. Goodwill of $0.6 million was calculated as the purchase premium after adjusting for the fair value of net assets acquired. Goodwill was allocated to the Retail Trading segments based on an analysis of the fair value of assets acquired and expected future benefits of synergies created from combining FXCMJs foreign exchange with the Companys foreign exchange trading expertise, the economies of scale expected from combining the operations of the two
companies and the retail relationships brought by the FXCMJs management. No goodwill is expected to be deductible for federal income tax purposes. FXCM Japan Inc. Purchase Price Allocation  (Amounts in thousands)Purchase price

          

          

          

          

          

          $

          15,870Net assets acquired

          

          $

          14,250Adjustments to reflect acquired assets and liabilities at fair valueCustomer relationships(1)

          

          

          1,055Fair value of net assets acquired

          

          

          

          

          

          

          15,305Goodwill resulting from the FXCMJ acquisition

          

          

          

          

          

          $

          565
  (1)

          Consists of retail customers. The amortization life is six years. The amounts included in the FXCM Japan Inc. Purchase Price Allocation table represent the preliminary allocation of the purchase price and are subject to revision during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Adjustments, if any, to the provisional values during the measurement period will be pushed back to the date of acquisition. Comparative information for periods after acquisition but before the period in which the adjustments are identified will be adjusted to reflect the effects of the adjustments as if they were taken into account as of the acquisition date. Changes to the amounts
recorded as assets and liabilities may result in a corresponding adjustment to goodwill. Acquisition-related Costs For the three months ended March 31, 2011, acquisition-related transaction costs for the Acquisition were not material and are included in general and administrative expense in the condensed consolidated statements of operations and comprehensive income.
 13    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 3. Business Acquisition   (continued) Condensed Statement of Net Assets Acquired The following condensed statement of net assets acquired reflects the amounts of FXCMJ net assets recognized as of the Acquisition Date, with amounts in thousands:  As of March 31, 2011AssetsCash and cash equivalents

          

          $

          9,827Cash and cash equivalents, held for customers

          

          

          114,024Accounts receivable, net

          

          

          143Office, communication and computer equipment, net

          

          

          2,279Intangible assets

          

          

          1,064Other assets

          

          

          5,892Total assets

          

          $

          133,229LiabilitiesCustomer account liabilities

          

          $

          114,023Accounts payable and accrued expenses

          

          

          3,901Total liabilities

          

          

          117,924Fair value of net assets acquired

          

          $

          15,305
 Accounts Receivables The fair value of net assets acquired includes accounts receivables with book value that approximates fair value. The reserve that was netted against receivables as of the Acquisition Date was not material. For further information, see Note 2. Contingencies The fair value of net assets acquired includes certain contingent liabilities that were recorded as of the acquisition date. It is the opinion of management of the Company that the ultimate outcomes of these matters are unlikely to have a material adverse effect on the business, financial condition or operating results of the Company. The Companys consolidated financial statements do not include any accrual for litigation contingency; as such, amounts cannot be reasonably estimated and are not expected to have a material impact. Condensed Combined Financial Information Since the Acquisition date is the same as the reporting date of March 31, 2011, there is no condensed financial related information as of this date.
 14    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 3. Business Acquisition   (continued) Pro Forma Condensed Combined Financial Information The following pro forma condensed combined financial information presents the results of the operations of the Company as they may have appeared if the Acquisition and ODL had been completed on January 1, 2011 and 2010, with amounts in thousands:  For the Three Months EndedMarch 31, 2011

          

          March 31, 2010Total revenues

          

          $

          92,576

          

          

          $

          96,790Net Income

          

          $

          12,976

          

          

          $

          17,100
 These pro forma results for the three months ended March 31, 2011 and 2010 primarily include the related tax impact and the elimination of certain revenues and expenses resulting from transactions conducted with FXCMJ prior to the Acquisition. Note 4. Customer Account Liabilities Customer account liabilities represent balances held by the Company and margin balances arising in connection with foreign currency transactions, including unrealized gains and losses on open foreign exchange commitments. Customer account liabilities were $775.1 million and $641.2 million as of March 31, 2011 and December 31, 2010, respectively. Note 5. Equity Method Investment As of March 31, 2011 and December 31, 2010, the Company had $3.6 million of equity interest in equity method investments, which consisted primarily of a 26% equity interest in a developer of FX trading software. Equity method investments are included in other assets in the consolidated statements of financial condition as of March 31, 2011 and December 31, 2010. Equity method investments are included in corporate for purposes of segment reporting (see Note 20). Income recognized from equity method investments was not material for the three months ended March 31, 2011 and 2010 and is included in other income in the condensed consolidated statements of operations and comprehensive income. There were no dividend distributions received from the FX trading software developer during the three months ended March 31, 2011 and 2010.
 15    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 6. Office, Communication and Computer Equipment Office, communication and computer equipment, including leasehold improvements, licenses, capitalized software development costs and capital leases, consisted of the following as of March 31, 2011 and December 31, 2010, with amounts in thousands:  March 31, 2011

          

          December 31, 2010Computer equipment

          

          $

          22,416

          

          

          $

          20,412Software

          

          

          8,453

          

          

          

          5,435Leasehold improvements

          

          

          4,622

          

          

          

          4,419Furniture and fixtures and other equipment

          

          

          2,057

          

          

          

          1,722Licenses

          

          

          9,355

          

          

          

          8,083Communication equipment

          

          

          955

          

          

          

          92647,858

          

          

          

          40,997Less: Accumulated depreciation

          

          

          (24,715

          )

          

          

          (22,288

          )Office, communication and computer equipment, net

          

          $

          23,143

          

          

          $

          18,709
 Depreciation is computed on a straight-line basis (see Note 2). Depreciation expense was $2.4 million and $1.5 million for the three months ended March 31, 2011 and March 31, 2010, respectively. The Company did not dispose of any assets during the three months ended March 31, 2011. Note 7. Goodwill The following table presents the changes in goodwill by segment during the three months ended March 31, 2011, with amounts in thousands:  Retail Trading

          

          Institutional Trading

          

          TotalBalance at December 31, 2010

          

          $

          27,105

          

          

          $

          10,832

          

          

          $

          37,937Goodwill acquired

          

          

          565

          

          

          

          

          

          

          

          565Foreign currency translation adjustment

          

          

          740

          

          

          

          296

          

          

          

          1,036Balance at March 31, 2011

          

          $

          28,410

          

          

          $

          11,128

          

          

          $

          39,538
 16    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 8. Other Intangible Assets, net The Companys acquired intangible assets consisted of the following as of March 31, 2011 and December 31, 2010, with amounts in thousands:  March 31, 2011

          

          December 31, 2010Gross Carrying Amount

          

          Accumulated Amortization

          

          Net Carrying Amount

          

          Gross Carrying Amount

          

          Accumulated Amortization

          

          Net Carrying AmountFinite-lived intangible assetsCustomer relationships

          

          $

          22,602

          

          

          $

          (3,356

          )

          

          $

          19,246

          

          

          $

          21,547

          

          

          $

          (2,443

          )

          

          $

          19,104Non-compete agreements

          

          

          7,214

          

          

          

          (1,313

          )

          

          

          5,901

          

          

          

          7,214

          

          

          

          (644

          )

          

          

          6,570Trade name

          

          

          337

          

          

          

          (168

          )

          

          

          169

          

          

          

          330

          

          

          

          (83

          )

          

          

          247Foreign currency translation adjustment

          

          

          539

          

          

          

          

          

          

          

          539

          

          

          

          (199

          )

          

          

          

          

          

          

          (199

          )Total finite-lived intangible assets

          

          $

          30,692

          

          

          $

          (4,837

          )

          

          $

          25,855

          

          

          $

          28,892

          

          

          $

          (3,170

          )

          

          $

          25,722Indefinite-lived intangible assetsLicense

          

          

          601

          

          

          

          

          

          

          

          601

          

          

          

          600

          

          

          

          

          

          

          

          600Exchange membership seat

          

          

          150

          

          

          

          

          

          

          

          150

          

          

          

          150

          

          

          

          

          

          

          

          150Total indefinite-lived intangible assets

          

          $

          751

          

          

          $

          

          

          

          $

          751

          

          

          $

          750

          

          

          $

          

          

          

          $

          750
 Customer relationships, non-compete agreements and trade name are amortized on a straight-line basis over 6 to 9 years, 2 to 3 years and 1 year, respectively, and approximates the weighted average useful lives. Indefinite-lived assets are not amortized (see Note 2). Amortization expense was $1.7 million and $0.2 million for the three months ended March 31, 2011 and March 31, 2010, respectively. Estimated future amortization expense for acquired intangible assets outstanding as of March 31, 2011 is as follows, with amounts in thousands:  Year Ending December 31,

          

          Estimated Amortization ExpenseRemainder of 2011

          

          $

          4,6142012

          

          

          5,7612013

          

          

          4,8442014

          

          

          3,2662015

          

          

          3,265Thereafter

          

          

          4,105$

          25,855
 17    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 9. Other Assets Other assets were comprised of the following as of March 31, 2011 and December 31, 2010, with amounts in thousands:  March 31, 2011

          

          December 31, 2010Prepaid expenses

          

          $

          5,322

          

          

          $

          5,714Equity method investments

          

          

          3,553

          

          

          

          3,632Employee advances

          

          

          2,103

          

          

          

          2,144Deposits

          

          

          1,666

          

          

          

          504Other

          

          

          3

          

          

          

          375$

          12,647

          

          

          $

          12,369
 As of March 31, 2011 and December 31, 2010, the Company had loan advances in connection with an investment in a third party in the amount of $2.7 million. This amount was fully provided for, and the loss is included in general and administrative in the consolidated statements of operations and comprehensive income. Note 10. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses were comprised of the following as of March 31, 2011 and December 31, 2010, with amounts in thousands:  March 31, 2011

          

          December 31, 2010Operating expenses payable

          

          $

          15,317

          

          

          $

          14,863Compensation payable

          

          

          12,195

          

          

          

          9,187Commissions payable

          

          

          9,350

          

          

          

          8,918IPO related costs payable

          

          

          5

          

          

          

          1,556Regulatory fees payable

          

          

          

          

          

          

          1,514Business acquisition cash consideration

          

          

          3,606

          

          

          

          1,432$

          40,468

          

          

          $

          37,470
 Note 11. Earnings per Share Basic earnings per share (EPS) measures the performance of an entity over the reporting period. Diluted earnings per share measures the performance of an entity over the reporting period while giving effect to all potentially dilutive common shares that were outstanding during the period. The Company uses the treasury stock method in accordance with ASC 260, Earnings Per Share, to determine the dilutive potential of stock options and Class B common stock that are exchangeable into the Companys Class A common stock. In accordance with ASC 260, all outstanding unvested share-based payments that contain rights to non-forfeitable dividends participate in the undistributed earnings with the common stockholders and are therefore participating securities. The shares of Class B common stock do not share in the earnings of the Company and are therefore not participating securities. Accordingly, basic and diluted net earnings per share of Class B common stock have not been presented. Further, EPS for the periods prior to the IPO is not presented since the Company was not a public company and did not have any participating securities. The Company did not grant stock options during the three months ended March 31, 2011. In 2010, an aggregate of 8,127,890 stock options were granted to certain employees, non-employees and members of the board of directors but were not included in the computation of earnings per common share because they were anti-dilutive under the treasury method.
 18    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 11. Earnings per Share   (continued) Additionally, as discussed in Note 1, Holdings existing owners also entered into an exchange agreement under which they (or certain permitted transferees thereof) have the right, from and after the first anniversary of the date of the closing of the IPO, (subject to the terms of the exchange agreement as described therein) to exchange their Holding Units for shares of the Corporations Class A common stock on a one-for-one basis at fair value, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. These shares were also excluded from the computation of earnings per common shares because they
were anti-dilutive under the treasury method. The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations, with amounts in thousands except per share data:  Three Months ended March 312011

          

          2010Basic and diluted net income per share:NumeratorNet income available to holders of Class A common stock

          

          $

          2,796

          

          

          $

          Earnings allocated to participating securities

          

          

          

          

          

          

          Earnings available for common stockholders

          

          $

          2,796

          

          

          $

          Denominator for basic net income per share of Class A common stockWeighted average shares of Class A common stock

          

          

          17,319

          

          

          

          Add dilutive effect of the following:

          

          

          

          

          

          

          IPO stock options

          

          

          

          

          

          

          Assumed conversion of Holding Units for Class A common stock

          

          

          

          

          

          

          Dilutive weighted average shares of Class A common stock

          

          

          17,319

          

          

          

          Basic income per share of Class A common stock

          

          $

          0.16

          

          

          $

          Diluted income per share of Class A common stock

          

          $

          0.16

          

          

          $

          
 Note 12. Related Party Transactions The Company has advanced funds to several employees. As of March 31, 2011 and December 31, 2010, the outstanding balance was $2.1 million and $0.6 are included in other assets in the consolidated statements of financial condition. Customer account liabilities include balances for employees and shareholders with greater than a 5% ownership in the Company. As of March 31, 2011 and December 31, 2010, employees account liabilities totaled $0.3 million and $3.0 million, respectively and are included the consolidated statements of financial condition as customer account liabilities. Account liabilities of shareholders with a greater than 5% ownership in the Company was $7.9 million and $10.8 as of March 31, 2011 and December 31, 2010, respectively and are included in the consolidated statements of financial condition as customer account liabilities. UK is party to an arrangement with Global Finance Company (Cayman) Limited, (Global Finance), and Master Capital Group, S.A.L. (Master Capital). A shareholder with greater than a 5% ownership of the Company beneficially owns more than 90% of the equity of Global Finance and Master Capital. Pursuant to such arrangement, Global Finance and Master Capital are permitted to use the brand name FXCM and our technology platform to act as our local presence in certain countries in the Middle East and North Africa (MENA). UK collects and remits to Global Finance and Master Capital fees and commissions charged by
Global Finance and Master Capital to customers in MENA countries. For the three months ended March 31,
 19    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 12. Related Party Transactions   (continued) 2011 and 2010, these fees and commissions were approximately $1.0 million and $0.3 million, respectively. The Company expects to enter into a definitive agreement in the near future. Exchange Agreement Prior to the completion of the IPO, the LLC Agreement was restated among other things, to modify its capital structure by reclassifying the interests held by its existing owners (i.e. the owners of Holdings prior to the IPO) into a single new class of units (Holding Units), Holdings existing owners also entered into an exchange agreement under which they (or certain permitted transferees thereof) have the right, from and after the first anniversary of the date of the closing of the IPO (subject to the terms of the exchange agreement as described therein), to exchange their Holding Units for shares of the Corporations Class A Common
Stock on a one-for-one basis at fair value, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. Payments under Tax Receivable Agreement The Corporation has entered into a tax receivable agreement with the other members of Holdings that provides for payments, in the aggregate of $73.3 million as of March 31, 2011 and $74.2 million as of December 31, 2010, from time to time by the Corporation to such other members of 85% of the amount of the benefits, if any, that the Corporation is deemed to realize as a result of increases in tax basis and certain other tax benefits related to its entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. These payment obligations are obligations of the Corporation and not of
Holdings. For purposes of the tax receivable agreement, the benefit deemed realized by the Corporation will be computed by comparing the actual income tax liability of the Corporation (calculated with certain assumptions) to the amount of such taxes that the Corporation would have been required to pay had there been no increase to the tax basis of the assets of Holdings as a result of the purchase or exchanges and certain other assumptions. The term of the tax receivable agreement will continue until all such tax benefits have been utilized or expired, unless the Corporation exercises its right to terminate the tax receivable agreement for an amount based on the agreed payments remaining to be made under the agreement or the Corporation breaches any of its material obligations under the tax receivable agreement in which case all obligations will generally be accelerated and due as if the Corporation had exercised its right to terminate the agreement. Note 13. Stock-Based Compensation On December 1, 2010, (Grant Date) at the time of the IPO, the Company granted awards of stock options to purchase 8,042,000 and 85,890 shares of Class A common stock to its employees (Employee Stock Options) and the independent board of directors (Independent Directors Options), respectively, pursuant to its long term incentive plan (the LTIP) (collectively, the Stock Options). The Employee Stock Options have a contractual term of seven years and four-year graded vesting schedule. The Independent Directors Options also have a seven-year contractual term but cliff-vest on the first
anniversary after the grant date. The Stock Options have a strike price of $14.00. Under the terms of the LTIP, the Company may issue new shares or treasury shares upon share option exercise. During the three months ended March 31, 2011, 10,000 shares were forfeited and none were granted for the period. No shares were expired, vested or exercised for the period. The number of shares outstanding at March 31, 2011 was 8,117,890. The weighted average period over which compensation cost on non-vested Stock Options is expected to be recognized is 3.6 years and the unrecognized expense is $34.6 million. Stock-based compensation before income taxes included in the condensed consolidated statements of operations and comprehensive income in compensation and benefits for the three months ended March 31, 2011 was $2.3 million for the Employee Stock Options and immaterial for the Independent Directors Options. The Company did not record compensation expense for the three months ended March 31, 2010, since the
 20    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 13. Stock-Based Compensation   (continued) Stock Options were not awarded during the period. The total compensation cost capitalized was not material during the three months ended March 31, 2011. In arriving at stock-based compensation expense, the Company estimates the number of stock-based awards that will be forfeited due to employee turnover. The Companys forfeiture assumption is based primarily on its turn-over historical experience. If the actual forfeiture rate is higher than the estimated forfeiture rate, then an adjustment will be made to increase the estimated forfeiture rate, which will result in a decrease to the expense recognized in the Companys financial statements. If the actual forfeiture rate is lower than the estimated forfeiture rate, then an adjustment will be made to lower the estimated forfeiture rate, which
will result in an increase to expense recognized in the Companys financial statements. The expense the Company recognizes in future periods will be affected by changes in the estimated forfeiture rate and may differ significantly from amounts recognized in the current period. The Company did not have any cash proceeds or income tax benefits realized from the exercise of Stock Options for the three months ended March 31, 2011. Valuation Assumptions Calculating the fair value of employee stock options requires estimates and significant judgment. The Company uses the Black-Scholes option pricing model to estimate the fair value of its employee stock options. Note 14. Stockholders Equity Refer to the description of the Reorganization and IPO as described in Note 1 for further information regarding the current capital structure of the Company. The Companys authorized capital stock consists of 3,000,000,000 shares of Class A common stock, par value $.01 per share, 1,000,000 shares of Class B common stock, par value $.01 per share, and 300,000,000 shares of preferred stock, par value $.01 per share. As of March 31, 2011, there were no changes to the capital structure of Class A common stock issued and outstanding and Class B common stock issued and held from December 31, 2010. Therefore, there are 17,319,000 shares of the Companys Class A common stock issued and outstanding. Further, as of March 31, 2011, there are 100 shares of Class B common stock issued and held by the members of Holdings. Holders of shares of our Class A common stock and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law. Class A Common Stock Holders of shares of the Companys Class A common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of shares of Class A common stock are entitled to receive dividends when and if declared by the Companys board of directors out of funds legally available therefore, subject to any statutory or contractual restrictions on the payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock. Upon dissolution or liquidation or the sale of all or substantially all of the Companys assets, after payment in
full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of shares of Class A common stock will be entitled to receive pro rata the Companys remaining assets available for distribution. Holders of shares of Class A common stock do not have preemptive, subscription, redemption or conversion rights.
 21    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 14. Stockholders Equity   (continued) Class B Common Stock Each holder of the Companys Class B common stock shall be entitled, without regard to the number of shares of Class B common stock held by such holder, to one vote for each Holdings Unit in Holdings held by such holder. The unit holders of Holdings collectively have a number of votes in FXCM Inc. that is equal to the aggregate number of Holdings Units that they hold. Holders of our Class B common stock do not have any right to receive dividends or to receive a distribution upon a liquidation or dissolution of FXCM Inc. Note 15. Employee Benefit Plan The Company maintains a defined contribution employee profit-sharing and savings 401(k) plan for all eligible full time employees. The Company was not required to and made no contributions to the plan for the three months ended March 31, 2011 and March 31, 2010. Note 16. Net Capital Requirements US is registered as a futures commission merchant and a retail foreign exchange dealer with the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). US is subject to the National Futures Associations net capital requirements for forex dealing members. Since the agency model (see Note 1) is not used for all customer transactions, US is required to maintain adjusted net capital equal to or in excess of $20 million plus 5% of all liabilities owed to customers exceeding $10 million. Adjusted net capital and the level of notional values under these transactions change from day to
day. HK is organized in Hong Kong and is a licensed leveraged foreign exchange trading company with the Securities and Futures Commission (SFC). HK is subject to required minimum liquid capital financial requirements. UK is organized in the United Kingdom and is regulated by the Financial Services Authority (FSA). UK is a registered securities and futures firm with the FSA. UK is subject to minimum capital requirements. Also, in the U.K., ODL and ODL SL are registered with the U.K. FSA as registered broker dealers. ODL JL is registered with the FSA in Japan as a registered broker dealer. As ODL was acquired by the Company during 2010, the Company did not have capital requirements for these entities prior to the acquisition. FXCMJ, a Japan-based foreign exchange provider, was acquired on March 31, 2011, the Company is regulated by the Financial Services Agency in Japan. The Company is required to maintain capital ratios of net assets divided by a combination of market, counter party and operational risk factors. Canada is a Nova Scotia limited liability company that was registered as an exchange contracts dealer with the British Columbia Securities Commission (BCSC). Canada ceased operations in October 2009 and deregistered with the BCSC with the ultimate objective of dissolution. Canada was subject to BCSC minimum financial requirements or risk adjusted capital as of December 31, 2010. Canada received final deregistration approval in January 2011 and therefore did not have net capital requirements as of March 31, 2011. Australia is organized in New Zealand and is a registered exchange contract dealer with the Australia Securities & Investments Commission (ASIC). Australia is subject to ASIC minimum financial requirements or adjusted surplus liquid funds. The minimum capital requirements of the above entities may effectively restrict the payment of cash distributions to members.
 22    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 16. Net Capital Requirements   (continued) The tables below present the capital, as defined by the respective regulatory authority, the minimum capital requirement and the excess capital for US, HK, UK Canada, Australia, ODL, ODL SL, ODL JL and FXCMJ as of March 31, 2011 and December 31, 2010, with amounts in millions:  March 31, 2011US

          

          HK

          

          UK

          

          Australia

          

          ODL

          

          ODL SL

          

          ODL JL

          

          FXCMJCapital

          

          $

          80.9

          

          

          $

          16.1

          

          

          $

          25.2

          

          

          $

          3.6

          

          

          $

          24.1

          

          

          $

          23.6

          

          

          $

          1.8

          

          

          $

          11.3Minimum capital requirement

          

          

          26.3

          

          

          

          5.9

          

          

          

          11.7

          

          

          

          0.2

          

          

          

          5.8

          

          

          

          5.8

          

          

          

          0.9

          

          

          

          4.7Excess capital

          

          $

          54.6

          

          

          $

          10.2

          

          

          $

          13.5

          

          

          $

          3.4

          

          

          $

          18.3

          

          

          $

          17.8

          

          

          $

          0.9

          

          

          $

          6.6
   December 31, 2010US

          

          HK

          

          UK

          

          Canada

          

          Australia

          

          ODL

          

          ODL SL

          

          ODL JLCapital

          

          $

          89.4

          

          

          $

          16.1

          

          

          $

          28.4

          

          

          $

          1.0

          

          

          $

          3.1

          

          

          $

          6.1

          

          

          $

          15.4

          

          

          $

          2.0Minimum capital requirement

          

          

          26.5

          

          

          

          5.1

          

          

          

          8.9

          

          

          

          0.1

          

          

          

          0.1

          

          

          

          5.5

          

          

          

          5.5

          

          

          

          1.0Excess capital

          

          $

          62.9

          

          

          $

          11.0

          

          

          $

          19.5

          

          

          $

          0.9

          

          

          $

          3.0

          

          

          $

          0.6

          

          

          $

          9.9

          

          

          $

          1.0
 Note 17. Commitments and Contingencies Operating Lease Commitments The Company leases office space and equipment under operating leases. Some of the lease agreements contain renewal options ranging from 3 to 5 years at prevailing market rates. The lease for the office facilities is subject to escalation factors primarily related to property taxes and building operating expenses. Future minimum lease payments under non-cancelable operating leases with terms in excess of one year are as follows as of March 31, 2011, with amounts in thousands:  Year Ending December 31,

          

          As of March 31, 2011Remainder of 2011

          

          $

          4,8002012

          

          

          4,0762013

          

          

          2,5922014

          

          

          1,5492015

          

          

          1,434Thereafter

          

          

          362$

          14,813
 The aggregate rental expense for operating leases charged to operations, included in general and administrative expense in the consolidated statements of operations and comprehensive income, for the three months ended March 31, 2011 and March 31, 2010, was $1.7 million and $1.0 million, respectively. These amounts are net of sublease income that was not material for both periods. The future minimum lease payments for the remainder of 2011 of $4.8 million is net of sublease income. Sublease income included in the future minimum lease payments for the year ended remainder of December 31, 2011 is not material. Capital Lease Commitments The Company leases office equipment under capital leases. Interest paid as part of our capital lease obligation was not material for the periods ended March 31, 2011 and December 31, 2010, respectively. The capital leases expire in 2013. Future minimum lease payments for capital leases are not material for the years 2011 to 2013.
 23    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 17. Commitments and Contingencies   (continued) Litigation The Corporation and its subsidiaries have been named in various arbitration and civil litigation cases brought by customers seeking damages for trading losses. Management has investigated these matters and feels that such cases are without merit and is defending them vigorously. However, the arbitrations and litigations are presently at various stages of the judicial process and no judgment can be made regarding the ultimate outcome of the arbitrators and/or courts decisions. In June 2010, US was contacted by the NFA requesting information regarding trade execution practices. In November 2010, US was additionally contacted by the CFTC for similar information. Although we have complied, and continue to comply, with the NFAs requests and are in the process of complying with the CFTCs requests, we have not been formally notified whether or not the NFA or the CFTC intends to take any action against us with respect to our trade execution practices. In September 2010, UK became aware of changes in U.S. law that might preclude it from continuing to serve as a counterparty in retail forex transactions with U.S. persons absent registration as a retail foreign exchange dealer, as set forth under Part 5 of the CFTC Regulations, effective as of October 18, 2010, and Section 742 of the Dodd-Frank Act, which becomes effective on July 16, 2011. Since October 2010, UK has been in ongoing discussions with the CFTC regarding its procedure to repatriate all accounts held by U.S. retail customers from UK to US which was ultimately completed on October 29, 2010. Although we continue to be engaged in
discussions with the CFTC concerning the resolution of any violation that may have occurred, it is possible that the foregoing may result in our being subject to a fine and other penalties. On February 8, 2011, a purported class action lawsuit was filed in the United States District Court for the Southern District of New York by a single former customer against Forex Capital Markets LLC. The complaint asserts claims under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C §1961 et seq., as well as the New York General Business Law. The complaint seeks an unspecified amount of damages, trebled, and alleges false and deceptive trade practices, fraudulent and unfair trade execution and account handling practices. A motion to compel arbitration was filed by us during April 2011 and a decision is
pending. On March 3, 2011, a purported class action lawsuit was filed in the United States District Court for the Southern District of New York against FXCM Inc., as well as certain of our officers and directors and three underwriters in our IPO. The complaint asserts claims under Sections 11 and 15 of the Securities Act, alleges false or misleading statements in the IPO prospectus regarding the Companys business model and trading platforms, and seeks an unspecified amount of damages on behalf of persons who purchased our Class A common stock in the IPO. It is the opinion of management of the Company that the ultimate outcomes of the matters referenced above are unlikely to have a material adverse effect on the business, financial condition or operating results of the Company. The Companys condensed consolidated financial statements do not include any accrual for litigation contingency, as such amounts cannot be reasonably estimated and are not expected to have a material impact. Guarantees At the inception of guarantees, if any, the Company will record the fair value of the guarantee as a liability, with the offsetting entry being recorded based on the circumstances in which the guarantee was issued. The Company did not have any such guarantees in place as of March 31, 2011 and December 31, 2010.
 24    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 18. Income Taxes FXCMs effective rate was 2.89% and 11.17% for the three months ended March 31, 2011 and 2010, respectively. FXCMs income tax provision was $0.5 million and $2.6 million for the three months ended March 31, 2011 and 2010, respectively. The Companys effective tax rate includes a rate benefit attributable to the fact that the Companys subsidiaries operate as a limited liability company which are not subject to federal or state income tax. Accordingly, a portion of the Companys earnings attributable to the non-controlling interest are not subject to corporate level taxes. During the three months ended March 31, 2011, there were no material changes to the uncertain tax positions. The Company believes that there will not be a significant increase or decrease to the uncertain tax positions within 12 months of the reporting date. The rate fluctuated due to changes in the mix of earnings among different tax jurisdictions including our foreign subsidiaries. The Companys tax rate may fluctuate due to the impacts that rate mix changes have on our net deferred tax assets. The Company is no longer subject to tax examinations by taxing authorities for tax years prior to 2007 and, presently, has no open examinations for tax years before 2010. Note 19. Foreign Currencies and Concentrations of Credit Risk As a riskless principal under the agency model, the Company accepts and clears foreign exchange spot contracts for the accounts of its customers (see Note 2). These activities may expose the Company to off- balance-sheet risk in the event that the customer or other broker is unable to fulfill its contracted obligations and the Company has to purchase or sell the financial instrument underlying the contract at a loss. In connection with these activities, the Company executes and clears customers transactions involving the sale of foreign currency not yet purchased, substantially all of which are transacted on a margin basis subject to internal policies. Such transactions may expose the Company to off-balance-sheet risk in the event margin deposits are not sufficient to fully cover losses that customers may incur. In the event that a customer fails to satisfy its obligations, the Company may be required to purchase or sell financial instruments at prevailing market prices to fulfill the customers obligation. The Company controls such risks associated with its customer activities by requiring customers to maintain margin collateral, in the form of cash, in compliance with various internal guidelines. The Companys trading software technology monitors margin levels on a real time basis and, pursuant to such guidelines, requires customers to deposit additional cash collateral, or to reduce positions, if necessary. The system is designed to ensure that any breach in a customers margin requirement as a result of losses on the trading account will automatically trigger a final liquidation, which will execute the closing of all positions. Exposure to
credit risk is therefore minimal. Institutional customers are permitted credit pursuant to limits set by the Companys prime brokers. The prime brokers incur the credit risk relating to the trading activities of these customers in accordance with the respective agreements between such brokers and the Company. The Company is engaged in various trading activities with counterparties which include brokers and dealers, futures commission merchants, banks, and other financial institutions. In the event counterparties do not fulfill their obligations, the Company may be exposed to risk. The risk of default depends on the creditworthiness of the counterparty or issuer of the financial instrument. It is the Companys policy to: (i) perform credit reviews and due diligence prior to conducting business with counterparties; (ii) set exposure limits and monitor exposure against such limits; and (iii) periodically review, as necessary, the credit standing of
counterparties using multiple sources of information. The Companys due from brokers balance included in the consolidated statements of financial condition was not material as of March 31, 2011 and December 31, 2010. Four banks held more than 10% each of the Companys total cash and cash equivalents and cash and
 25    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 19. Foreign Currencies and Concentrations of Credit Risk   (continued) cash equivalents, held for customers as of March 31, 2011. Three banks held more than 10% each of the Companys total cash and cash equivalents and cash and cash equivalents, held for customers as of December 31, 2010. Note 20. Segments ASC 280 Segments Reporting, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Companys operations relate to foreign exchange trading and related services and operate in two segments  retail and institutional, with different target markets and are covered by a separate sales force, customer support and trading platforms.
The Companys segments are organized around three geographic areas. These geographic areas are the United States, Asia and Europe and are based on the location of its customers accounts. Retail Trading The Company operates its retail business whereby it acts as an agent between retail customers and a collection of large global banks and financial institutions by making foreign currency markets for customers trading in foreign exchange spot markets through its Retail Trading business segment. In addition, the Retail Trading business segment includes the Companys white label relationships CFDs, payments for order flow and rollovers. Institutional Trading Institutional Trading facilitates spot foreign currency trades on behalf of institutional customers through the services provided by the FXCM Pro Division of US. This service allows customers to obtain the best execution price from external banks and financial institutions. Information concerning the Companys operations by reportable segment is as follows, with amounts in thousands:  As of and For the Three Months Ended March 31, 2011Retail Trading

          

          Institutional Trading

          

          Corporate

          

          TotalTotal revenues

          

          $

          87,273

          

          

          $

          7,379

          

          

          $

          

          

          

          $

          94,652Operating expenses

          

          

          49,942

          

          

          

          4,766

          

          

          

          20,938

          

          

          

          75,646Income (loss) before income taxes

          

          $

          37,331

          

          

          $

          2,613

          

          

          $

          (20,938

          )

          

          $

          19,006
  As of and For the Three Months Ended March 31, 2010Retail Trading

          

          Institutional Trading

          

          Corporate

          

          TotalTotal revenues

          

          $

          70,773

          

          

          $

          6,187

          

          

          $

          

          

          

          

          76,960Operating expenses

          

          

          34,465

          

          

          

          3,403

          

          

          

          15,754

          

          

          

          53,622Income (loss) before income taxes

          

          $

          36,308

          

          

          $

          2,784

          

          

          $

          (15,754

          )

          

          $

          23,338
 26    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries)   Notes to Unaudited Condensed Consolidated Financial Statements Note 21  Subsequent Events We have evaluated our subsequent events through the issuance date of this Quarterly Report on Form 10-Q. The Company declared a quarterly dividend of $0.06 per share on its outstanding Class A common stock. The dividend is payable on June 24, 2011 to Class A stockholders of record at the close of business on June 10, 2011.
 27    TABLE OF CONTENTS FXCM Inc. (Prior to December 7, 2010, FXCM Holdings, LLC and Subsidiaries) Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements of FXCM Inc., and the related notes included elsewhere in this report and our Annual Report on Form 10K for the fiscal year ended December 31, 2010, filed with the Securities and Exchange Commission on March 31, 2011, including the audited consolidated financial statements and related notes and Managements Discussion and Analysis of results of Financial Condition and Results of Operations contained therein. The historical consolidated financial data discussed below reflects the historical results and financial
position of FXCM Inc. In addition, this discussion and analysis contains forward looking statements and involves numerous risks and uncertainties, including those described under Cautionary Note Regarding Forward-Looking Statement and Risk Factors. Actual results may differ materially from those contained in any forward looking statements. OVERVIEW Business We are an online provider of foreign exchange, trading and related services to approximately 139,900 active retail and institutional customers globally. We offer our customers access to over-the-counter, FX markets through our proprietary technology platform. In a FX trade, a participant buys a currency pair. Our platform presents our FX customers with the best price quotations on up to 56 currency pairs from up to 25 global banks, financial institutions and FX market makers, which we believe provides our customers with an efficient and cost-effective way to trade FX. We utilize what is referred to as agency execution or an agency model. When our
customer executes a trade on the best price quotation offered by our FX market makers, we act as a credit intermediary, or riskless principal, simultaneously entering into offsetting trades with both the customer and the FX market maker. We earn fees by adding a markup to the price provided by the FX market makers and generate our trading revenues based on the volume of transactions, not trading profits or losses. Industry Trends Economic Environment  Customer FX trading volumes are impacted by the volatility levels in financial markets. January and February 2011 were periods of primarily low volatility in foreign currencies. However, March was a period of relatively high volatility as a result of global political unrest and the earthquake in Japan and we experienced increased trading activity. Elevated volatility in the foreign currency markets has continued in April 2011 with heightened concerns about the fiscal position of some of the Euro zone countries. It is difficult to predict volatility in the FX market. Competitive Environment  The retail FX trading market is fragmented and highly competitive. Our competitors in the retail market can be grouped into several broad categories based on size, business model, product offerings, target customers and geographic scope of operations. These include U.S. based retail FX brokers, international multi-product trading firms, other online trading firms, and international banks and other financial institutions with significant FX operations. We expect competition to continue to remain strong for the foreseeable future. Regulatory Environment  Our business and industry are highly regulated. Many of the regulations we are governed by are intended to protect the public, our customers and the integrity of the markets, and not necessarily our shareholders. Our operating subsidiaries are regulated in a number of jurisdictions, including the United States, the United Kingdom (where regulatory passport rights have been exercised to operate in a number of European Economic Area jurisdictions), Hong Kong, Australia and Japan. We are also regulated in all regions by applicable regulatory authorities and the various exchanges of which we are members. For example, we are regulated by the Financial Services Authority in the United Kingdom,
 28    TABLE OF CONTENTS or FSA, the Securities and Futures Commission in Hong Kong, or SFC, the Australian Securities and Investment Commission in Australia, or ASIC and the Kanto Local Finance Bureau in Japan, or KLFB, among others. In addition, certain of our branch offices in Europe, while subject to local regulators, are regulated by the FSA with respect to, among other things, FX, CFDs and net capital requirements. These regulators and self-regulatory organizations regulate the conduct of our business in many ways and conduct regular examinations of our business to monitor our compliance with these regulations. Notwithstanding the foregoing, we accept and seek to deal with customers resident in foreign jurisdictions in a manner which does not breach any local laws or regulations where they are resident or require local registration, licensing or authorization from local governmental or regulatory bodies or self-regulatory organizations. We determine the nature and extent of services we can provide and the manner in which we conduct our business with customers resident in foreign jurisdictions based on a variety of factors. We evaluate our activities in relation to jurisdictions in which we are not currently regulated by governmental bodies and/or self-regulatory organizations on an ongoing basis. This evaluation may involve speaking with regulators, local counsel and referring brokers or white labels (firms that offer our trading services to their clients under their own brand name in exchange for a revenue sharing arrangement with us) operating in any such jurisdiction and reviewing published regulatory guidance and examining the licenses that any competing firms may have. As a result of these evaluations, we may determine to alter our business practices in order to
comply with legal or regulatory developments in such jurisdictions. At any given time, the manner in which we conduct business in any one of these jurisdiction may be changed or in a state of transition. At present, we are in the process of changing how we transact with clients residing in Canada, Japan and Singapore. As a result, our growth may be limited by future restrictions in these jurisdictions and we remain at risk that we may be exposed to civil or criminal penalties or be required to cease operations if we are found to be operating in jurisdictions without the proper license or authorization or if we become subject to regulation by local government bodies. The legislative and regulatory environment in which we operate has undergone significant changes in the recent past and there may be future regulatory changes in our industry. The governmental bodies and self-regulatory organizations that regulate our business have proposed and may consider additional legislative and regulatory initiatives and may adopt new or revised laws and regulations. As a result, in the future, we may become subject to new regulations that may affect the way in which we conduct our business and may make our business less profitable. Business Strategy We intend to implement the following strategies: 

          Continue to use our global brand and marketing to drive organic customer growth; 

          Make selected acquisitions to expand our customer base or add presence in markets where we currently have low penetration; 

          Expand our range of products to add new customers and increase revenues from existing customers; and 

          Capture market share from competitors who are unable to keep pace with the changing and demanding regulatory landscape while capitalizing on the long-term benefits associated with a more transparent financial marketplace. Primary Sources of Revenues Most of our revenues are derived from fees charged as a commission or markup when our retail or institutional customers execute trades on our platform with our FX market makers. This revenue is primarily a function of the number of active accounts, the volume those accounts trade and the fees we earn on that volume. Retail Trading Revenue  Retail trading revenue is our largest source of revenue and is primarily driven by: (i) the number of active accounts and the mix of those accounts, such as low versus high volume accounts; (ii) the volume these accounts trade, which is driven by the amount of funds customers have on
 29    TABLE OF CONTENTS deposit and the overall volatility of the FX market; (iii) the size of the markup we receive, which is a function of the mix of currency pairs traded, the spread we add to the prices supplied by our FX market makers and the interest differential between major currencies and the markup we receive on interest paid and received on customer positions held overnight; and (iv) the amount of additional retail revenues earned, including revenues from contracts-for difference (CFD) trading, fees earned through white label relationships and payments we receive for order flow from FX market makers. In addition, 8% and 4% of our retail trading revenues for the
three months ended March 31, 2011 and 2010, respectively, were derived from such additional retail revenues earned. Institutional Trading Revenue  We generate revenue by executing spot foreign currency trades on behalf of institutional customers through our institutional trading segment, FXCM Pro, enabling them to obtain optimal prices offered by our FX market makers. The counterparties to these trades are external financial institutions that hold customer account balances and settle these transactions. We receive commissions for these services without incurring credit or market risk. Other  We are engaged in various ancillary FX related services and joint ventures, including use of our platform and trading facilities, providing technical expertise, and earning fees from data licensing. We also earn commission revenue from equity and related brokerage activities. Primary Expenses Referring Broker Fees  Referring broker fees consist primarily of compensation paid to our referring brokers and white labels. We generally provide white labels access to our platform, systems and back-office services necessary for them to offer FX trading services to their customers. We also establish relationships with referring brokers that identify and direct potential FX trading customers to our platform. Referring brokers and white labels generally incur advertising, marketing and other expenses associated with attracting the customers they direct to our platform. Accordingly, we do not incur any incremental sales or
marketing expense in connection with trading revenue generated by customers provided through our referring brokers and/or white labels. We do, however, pay a portion of the FX trading revenue generated by the customers of our referring brokers and/or white labels and record this under referring broker fees. Compensation and Benefits  Compensation and benefits expense includes employee and member salaries, bonuses, stock compensation awards, benefits and employer taxes. Changes in this expense are driven by fluctuations in the number of employees, increases in wages as a result of inflation or labor market conditions, changes in rates for employer taxes and other cost increases affecting benefit plans. In addition, this expense is affected by the composition of our work force. The expense associated with our bonus plans can also have a significant impact on this expense category and may vary from year to year. Advertising and Marketing  Advertising and marketing expense consists primarily of electronic media, print and other advertising costs, as well as costs associated with our brand campaign and product promotion. Communications and Technology  Communications and technology expense consists primarily of costs for network connections to our electronic trading platforms; telecommunications costs; and fees paid for access to external market data. This expense is affected primarily by the growth of electronic trading, our network/ platform capacity requirements and by changes in the number of telecommunication hubs and connections which provide our customers with direct access to our electronic trading platforms. General and Administrative  We incur general and administrative costs to support our operations, including: 

          Professional fees and outside services expenses  consisting primarily of legal, accounting and outsourcing fees; 

          Bank processing fees  consisting of service fees charged by banks primarily related to our customer deposits and withdrawals; 

          Regulatory fees  consisting primarily of fees from regulators overseeing our businesses which are largely tied to our overall trading revenues; and
 30    TABLE OF CONTENTS 

          Occupancy and building operations expense  consisting primarily of costs related to leased property including rent, maintenance, real estate taxes, utilities and other related costs. Our company headquarters are located in New York, NY, with other U.S. offices in Plano, TX and San Francisco, CA. Outside the United States, we have offices in London, Paris, Berlin, Athens, Milan, Hong Kong, Sydney, Jerusalem and Tokyo. We expect that our general and administrative expenses will increase as a result of the additional legal, accounting, insurance and other expenses associated with being a public company. Among other things, we expect that compliance with the Sarbanes-Oxley Act and related rules and regulations will result in a significant increase in legal and accounting costs. Depreciation and Amortization  Depreciation and amortization expense results primarily from the depreciation of long-lived assets purchased and internally developed software that has been capitalized. Amortization of purchased intangibles primarily includes amortization of intangible assets obtained through our acquisition of ODL as described in our Annual Report. Income Taxes  Prior to the initial public offering in December 2010, we have historically operated as partnerships for U.S. federal income tax purposes and mainly as a corporate entity in non-U.S. jurisdictions. As a result, our income was not subject to U.S. federal and state income taxes. Generally, the tax liability related to income earned by these entities represents obligations of the individual partners and members. Income taxes shown on our historical combined income statements are attributable to the New York City unincorporated business tax and other income taxes on certain entities located in non-U.S. jurisdictions. Following the IPO, FXCM Holdings, LLC and certain of its subsidiaries continue to operate in the United States as partnerships for U.S. federal income tax purposes and generally as corporate entities in non-U.S. jurisdictions. Accordingly, these entities in some cases continue to be subject to New York City unincorporated business taxes or non-U.S. income taxes. In addition, FXCM Inc. is subject to U.S. corporate federal, state and local income taxes that are reflected in our consolidated financial statements. Other Non-Controlling Interest  As a result of the IPO, FXCM Inc. is a holding company, and its sole material asset is a controlling equity interest in FXCM Holdings, LLC. As the sole managing member of FXCM Holdings, LLC, FXCM Inc. operates and controls all of the business and affairs of FXCM Holdings, LLC and, through FXCM Holdings, LLC and its subsidiaries, conduct our business. Refer to the financial results of FXCM Holdings, LLC and its subsidiaries, and the ownership interest of the other members of FXCM Holdings, LLC is reflected as a non-controlling interest in the consolidated financial statements of FXCM Inc. Segment Information The FASB establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. FXCMs operations relate to foreign exchange trading and related services and operate in two segments  retail and institutional, with different target markets with separate sales forces, customer support and trading platforms. For financial information regarding our
segments, see Note 20 to our consolidated financial statements.
 31    TABLE OF CONTENTS RESULTS OF OPERATIONS Acquisition of FXCM Japan Inc. On March 31, 2011, we acquired a 100% interest in FXCM Japan Inc. (FXCMJ), a Japan-based foreign exchange provider, (the Acquisition). The Acquisition was designed to increase our profile in the Japanese market and accelerate our growth in continental Asia, utilizing FXCMJs relationships and sales force. As consideration, we provided $15.9 million in cash. The Acquisition was accounted for in accordance with FASB ASC 805, Business Combinations. The assets acquired and the liabilities assumed were recorded at their fair values in accordance with FASB ASC 820, Fair Value Measurements and Disclosures. The Acquisition resulted in an increase in goodwill and intangible assets in our condensed statement of financial condition. Intangible assets acquired includes retail customer relationships. The Acquisition will result in an increase in amortization of intangible assets in our statement of operations and comprehensive income as this intangible asset is amortized over its estimated useful life. The following table sets forth FXCMs consolidated statement of operations and comprehensive income for the three months ended March 31, 2011 and 2010:  March 31, 2011

          

          March 31, 2010(In thousands)RevenuesRetail trading revenue

          

          $

          77,735

          

          

          $

          67,748Institutional trading revenue

          

          

          7,379

          

          

          

          6,187Interest income

          

          

          941

          

          

          

          516Other income

          

          

          8,597

          

          

          

          2,509Total revenues

          

          $

          94,652

          

          

          $

          76,960ExpensesReferring broker fees

          

          

          21,601

          

          

          

          15,655Compensation and benefits

          

          

          22,586

          

          

          

          16,891Advertising and marketing

          

          

          7,018

          

          

          

          5,336Communications and technology

          

          

          7,359

          

          

          

          5,538General and administrative

          

          

          12,915

          

          

          

          8,433Depreciation and amortization

          

          

          4,094

          

          

          

          1,743Interest expense

          

          

          73

          

          

          

          26Total expenses

          

          

          75,646

          

          

          

          53,622Income before income taxes

          

          

          19,006

          

          

          

          23,338Income tax provision

          

          

          549

          

          

          

          2,608Net income

          

          

          18,457

          

          

          

          20,730Other comprehensive income:Foreign currency translation gain/(loss)

          

          

          2,048

          

          

          

          42Total comprehensive income

          

          $

          20,505

          

          

          $

          20,772
 Highlights 

          The period ended March 31, 2011 experienced strong growth in customer balances with a 100% increase in customer equity to $775.1 million and a 15% increase in active accounts to 139,900. 

          Total revenues increased 23% to $94.7 million for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. This increase was due primarily to increases in retail and other revenues and the inclusion of $3.7 million retail trading revenue from ODC as a result of the acquisition. Retail trading revenue increased 15% due primarily to retail trading volumes increasing by 11% in the first quarter 2011 versus first quarter 2010 and markup increasing 3% to $95 per million traded. Other income increased by 243% to $8.6 million due primarily to the recognition of
 32    TABLE OF CONTENTS $4.5 million of deferred revenue as income upon the termination of an agreement to provide trade execution services to FXCMJ as well as the inclusion of $2.1 million in revenues from ODLs equity broker-dealer business as a result of the ODL acquisition in October 2010. 

          Net income decreased 11% to $18.5 million for the period ended March 31, 2011 compared to the three months ended March 31, 2010 as a lower effective tax rate was offset by higher expenses, including higher amortization of intangibles of ODL, acquired in October 2010. 

          On March 31, 2011, we completed the acquisition of the retail foreign exchange (FX) business of FXCMJ of Japan. Our acquisition of the retail FX business of FXCMJ is intended to increase our profile and accelerate our growth in the Japanese market utilizing their relationships and sales force. Revenues  March 31, 2011

          

          March 31, 2010(In thousands, except as noted)Revenues:Retail trading revenue

          

          $

          77,735

          

          

          $

          67,748Institutional trading revenue.

          

          

          7,379

          

          

          

          6,187Interest income

          

          

          941

          

          

          

          516Other income.

          

          

          8,597

          

          

          

          2,509Total revenues

          

          

          94,652

          

          

          

          76,960Customer equity (dollars in millions)

          

          $

          775.1

          

          

          $

          388.1Active accounts

          

          

          139,900

          

          

          

          122,183Total retail trading volume(1) (billions)

          

          $

          822

          

          

          $

          744Retail trading revenue per million traded(1)

          

          $

          94

          

          

          $

          91
  (1)

          Volumes translated into equivalent U.S. dollars Retail trading revenue increased by $10 million or 15% to $77.7 million for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. The increase is attributable to 11% higher retail trading volumes and a 3% higher markup on retail trading volume in the three months ended March 31, 2011 compared to the three months ended March 31, 2010. The increase in markup was due primarily to the inclusion of payments for order flow and a greater contribution from CFD trading, two new products offering introduced in the second quarter of 2010 and 2009, respectively. Institutional trading revenue increased by $1.2 million or 19% to $7.4 million for the three months ended March 31, 2011 compared to the three months ended March 31, 2010. Our institutional business grew through a continuing expansion of its customer base and volumes executed by our institutional clients grew 27% to $219 billion for the three months ended March 31, 2011 compared to $172 billion for the three months ended March 31, 2010. Interest income increased by $0.4 million or 82% to $0.9 million for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 due primarily to higher cash balances which increased by 112% at March 31, 2011 versus March 31, 2010. Other income increased by 243% to $8.6 million due primarily to the recognition of $4.5 million of deferred revenue as income upon the termination of an agreement to provide trade execution services to FXCMJ. Other income also increased due to the inclusion of $2.1 million in revenues from ODLs equity broker-dealer business as a result of the ODL acquisition in October 2010.
 33    TABLE OF CONTENTS Expenses  March 31, 2011

          

          March 31, 2010(In thousands)Expenses:Referring broker fees

          

          $

          21,601

          

          

          $

          15,655Compensation and benefits

          

          

          22,586

          

          

          

          16,891Advertising and marketing

          

          

          7,018

          

          

          

          5,336Communications and technology

          

          

          7,359

          

          

          

          5,538General and administrative

          

          

          12,915

          

          

          

          8,433Depreciation and amortization

          

          

          4,094

          

          

          

          1,743Interest expense

          

          

          73

          

          

          

          26Total expenses

          

          $

          75,646

          

          

          $

          53,622
 Referring broker fees increased $5.9 million or 38% to $21.6 million for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 due primarily to a higher proportion of the Companys volume derived from indirect sources and the inclusion of ODL in the Companys results. Indirect volume increased 31% for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010 due primarily to a higher proportion of trading volume in the three months ended March 31, 2011 being derived from Asia, where the Company typically has more referring broker relationships than other regions. In
addition, ODL which was acquired in October 1, 2010 added $1.1 million in referring broker fees in the three months ended March 31, 2011 as compared to the three months ended March 31, 2010. Compensation and benefits expense increased $5.7 million or 34% to $22.6 million for the three months ended March 31, 2011 compared to the same period in 2010 due primarily to $2.4 million in stock compensation expense resulting from stock options awards granted at the time of the IPO in December 2010 and $2.4 million from ODL which was acquired in October 2010. Advertising and marketing expense increased $1.7 million or 32% to $7.0 million for the three months ended March 31, 2011 compared to the same period in 2010. The Company has been increasing spending of advertising and marketing to further growth, including initiating a sponsorship of a FX television show on the CNBC television network in the first quarter of 2011. Communications and technology expense increased $1.8 million or 33% to $7.4 million for the three months ended March 31, 2011, compared to the same period in 2010. $0.9 million of the increase is due to the acquisition of ODL, $0.3 million is due to increased fees from a third party provider of our institutional trading platform and remainder is due primarily to enhanced network capacity requirements. General and administrative expense increased $4.5 million or 53% to $12.9 million for the three months ended March 31, 2011 compared to the same period in 2010. $2.7 million of the increase was due to the inclusion of ODL in results in the three months ended March 31, 2011, $0.8 million in higher bank fees, primarily prime brokerage fees, and $0.4 million in higher rent expense. Depreciation and amortization expense rose $2.4 million or 135% to $4.1 million during the three months ended March 31 compared to the same period in 2010. Of this amount, $1.5 million was increased amortization due to the amortization of intangibles acquired in the ODL purchase, $0.3 million due to the inclusion of ODL in the Companys results in the three months ended March 31, 2011 following the acquisition of ODL in October 2010. The remainder is higher depreciation and amortization expense resulting from higher office, communication, computer equipment and software.
 34    TABLE OF CONTENTS Income Taxes  March 31, 2011

          

          March 31, 2010(In thousands, except percentages)Income before income taxes

          

          $

          19,006

          

          

          $

          23,338Income tax provision

          

          $

          549

          

          

          $

          2,608Effective tax rate

          

          

          2.89

          %

          

          

          11.17

          %
 Income tax provision decreased $2.1 million or 79% to $0.5 million for the three months ended March 31, 2011 compared to the same period in 2010 as FXCMs effective rate declined to 2.9% for the three months ended March 31, 2011 from 11.2% for the three months ended March 31, 2010. The Companys effective tax rate includes a rate benefit attributable to the fact that the Companys subsidiaries operate as a limited liability company which are not subject to federal or state income tax. Accordingly, a portion of the Companys earnings attributable to the non-controlling interest are not subject to corporate level taxes. The decrease in the effective tax rate for the three months ended March 31, 2010 to March 31, 2011 was due primarily to a shift of trading activity from the U.K. to the United States, decreasing the level of business activity in the U.K. and the provision for income taxes in the U.K. Changes in the
proportion of income derived in the United States, largely not subject to federal, state or local income taxes with the exception of certain unincorporated business taxes, to the U.K. with a 27% statutory rate, result in a decrease in our effective tax rate. Segment Results Period ended March 31, 2011 and 2010 Retail trading  Retail Trading is our largest segment and consists of providing FX trading and related services to approximately 139,900 active retail customers globally as of March 31, 2011. Revenues, operating expenses and income before income taxes of the Retail Trading segment for the periods ended March 31, 2011 and 2010 are as follows:  March 31, 2011

          

          March 31, 2010(In thousands)Revenues

          

          $

          87,273

          

          

          $

          70,773Operating expenses

          

          

          49,942

          

          

          

          34,465Income before income taxes

          

          $

          37,331

          

          

          $

          36,308
 Revenues for the Retail Trading segment increased $16.5 million or 23% for the period ended March 31, 2011 compared to the same period in 2010 as retail customer trading volume increased 10% to $822 billion, markup for retail trading revenue per million traded increased 3% from to $95 from $91, the recognition as a result of $4.5 million of deferred revenue as income upon the termination of an agreement to provide trade execution services to FXCMJ the inclusion of $2.1 million in revenues from ODLs equity broker-dealer business acquired in October 2010. Operating expenses increased $15.5 million or 45% to $49.9 million for the period ended March 31, 2011 compared to the same period in 2010 due primarily to $5.7 million or 37% higher referring broker fees, $3.7 million or 38% in higher compensation and benefits expense, $2.4 million or 135% in higher depreciation and amortization expense and $2.1 million or 95% in higher general and administrative expense. The increase in referring broker expense was due primarily to a higher proportion of the Companys volume derived from indirect sources and the inclusion of ODL in the Companys results. The increase in compensation and benefits expense
was due primarily to stock compensation expense resulting from stock options awards granted at the time of the IPO in December 2010 and the inclusion of ODL. The increase in depreciation and amortization expense was due primarily to the amortization of intangibles acquired in the ODL purchase and the inclusion of ODL depreciation and amortization expense in the Companys results in the three months ended March 31, 2011 following the acquisition of ODL in October 2010. The increase in general and administrative expense was due to the inclusion of ODL in results in the three months ended
 35    TABLE OF CONTENTS March 31, 2011 and higher depreciation and amortization expense resulting from higher office communication, computer equipment and software assets. Institutional Trading  Our institutional Trading segment operates under the name FXCM Pro and generates revenues by executing spot foreign currency trades on behalf of institutional customers, enabling them to obtain optimal prices offered by our FX market makers. The counterparties to these trades are external financial institutions that hold customers account balances and settle these transactions. We receive commissions for these services without incurring credit or market risk. Revenues, operating expenses and income before income taxes of the Institutional Trading segment for the periods ended March 31, 2011 and 2010 are as follows:  March 31, 2011

          

          March 31, 2010(In thousands)Revenues

          

          $

          7,379

          

          

          $

          6,187Operating expenses

          

          

          4,766

          

          

          

          3,403Income before income taxes

          

          $

          2,613

          

          

          $

          2,784
 Revenues for our Institutional Trading segment increased $1.2 million or 19% to $7.4 million for the period ended March 31, 2011 compared to the period ended March 31, 2010. The Institutional Trading segment grew through continued expansion of its customer base and volumes executed by our institutional clients grew 27% to $219 billion for the three months ended March 31, 2011 compared to $172 billion for the three months ended March 31, 2010. Operating expenses increased $1.4 million or 40% to $4.8 million for the period ended March 31, 2011 compared to the period ended March 31, 2010 due primarily to $0.5 million in higher communication and technology expense, due primarily to higher charges a third party provider of the platform used by the institutional segment to provide trading services, $0.4 million in higher compensation and benefits expense, due primarily to the increase in business profitability and that a significant portion of compensation and benefits of our Institutional Trading is linked to unit profitability, $0.3 million in higher referring broker fees due to higher
business activity and $0.2 million in higher prime brokerage and other bank fees. Corporate  Loss before income taxes of the Corporate segment for the periods ended March 31, 2011 and 2010 are as follows:  March 31, 2011

          

          March 31, 2010(In thousands)Revenues

          

          $

          

          

          

          $

          Operating expenses

          

          

          20,938

          

          

          

          15,754Loss before income taxes

          

          $

          (20,938

          )

          

          $

          (15,754

          )
 Loss before income taxes increased $5.2 million or 39% to $20.9 million for the three months ended March 31, 2011 compared to the same period in 2010 primarily due to higher compensation cost of $1.2 million resulting from the inclusion of ODL and $0.9 million in general and administrative costs, $0.4 million of expenses relating to the write-off of advances made to a software developer, $0.8 million due to increased rent and occupancy expenses resulting from additional branch office openings in Europe, the relocation of our Hong Kong office and increased office space in New York, and $0.3 million due to an increase in prime brokerage, legal,
accounting and regulatory fees.
 36    TABLE OF CONTENTS LIQUIDITY AND CAPITAL RESOURCES We have historically financed, and plan to continue to finance, our operating liquidity and capital needs with funds generated from operations. We primarily invest our cash in short-term demand deposits at various financial institutions. In general, we believe all our deposits are with institutions of high credit quality and we have sufficient liquidity to conduct the operations of our businesses. As a holding company, almost all of the funds generated from our operations are earned by our operating subsidiaries. We access these funds through receipt of dividends from these subsidiaries. Some of our subsidiaries are subject to requirements of various regulatory bodies relating to liquidity and capital standards, which may limit the funds available for the payment of dividends to us.  Regulatory Jurisdiction

          

          As of March 31, 2011Minimum Regulatory Capital Requirements

          

          Capital Levels Maintained

          

          Excess Net Capital(In millions)Forex Capital Markets, LLC

          

          

          USA

          

          

          $

          26.3

          

          

          $

          80.9

          

          

          $

          54.6Forex Capital Markets, Ltd.

          

          

          U.K.

          

          

          

          11.7

          

          

          

          25.2

          

          

          

          13.5FXCM Asia, Ltd.

          

          

          Hong Kong

          

          

          

          5.9

          

          

          

          16.1

          

          

          

          10.2FXCM Australia, Ltd.

          

          

          Australia

          

          

          

          0.2

          

          

          

          3.6

          

          

          

          3.4ODL Group, Ltd.

          

          

          U.K.

          

          

          

          5.8

          

          

          

          24.1

          

          

          

          18.3ODL Securities, Ltd.

          

          

          U.K.

          

          

          

          5.8

          

          

          

          23.6

          

          

          

          17.8ODL Japan, Ltd.

          

          

          Japan

          

          

          

          0.9

          

          

          

          1.8

          

          

          

          0.9FXCM Japan Inc.

          

          

          Japan

          

          

          

          4.7

          

          

          

          11.3

          

          

          

          6.6
 Cash Flow and Capital Expenditures Three months Ended March 31, 2011 and 2010 The following table sets forth a summary of our cash flow for the three months ended March 31, 2011 and 2010:  March 31, 2011

          

          March 31, 2010(In thousands)Cash provided by operating activities

          

          $

          19,002

          

          

          $

          25,505Cash used for investing activities

          

          

          (8,448

          )

          

          

          (1,623

          )Cash used for financing activities

          

          

          30

          

          

          

          (6,777

          )Effect of foreign currency exchange rate changes on cash and cash equivalents

          

          

          (454

          )

          

          

          (368

          )Net increase in cash and cash equivalents

          

          

          10,070

          

          

          

          16,737Cash and cash equivalents  end of period

          

          $

          203,400

          

          

          $

          156,595
 Cash provided by operating activities was $19.0 million for the three months ended March 31, 2011 compared to $25.5 million for the three months ended March 31, 2010, a decrease of $6.5 million. This decrease was due to $2.2 million lower net income and $4.2 million lower adjustments to reconcile net income to net cash provided by operating activities in the three months ended March 31, 2011 compared to the three months ended March 31, 2010. The lower adjustments to reconcile net income to net cash provided by operating activities was primarily a result of a decrease in accounts receivable of $6.3 million for the three months ended March 31, 2011
compared to $0.3 million for the three months ended March 31, 2010, an increase in due to brokers of $8.2 million for the three months ended March 31, 2011 compared to a decrease of $1.6 million for the three months ended March 31, 2010, an increase in deferred gains of $6.0 million for the three months ended March 31, 2011 versus $1.5 million for the three months ended March 31, 2010 as a result of $4.5 million of deferred revenue as income upon the termination of an agreement to provide trade execution services to FXCMJ, depreciation and amortization expense of $4.1 million versus $1.7 million for the three months ended March 31, 2011 and 2010, respectively, due to an increase of the expenses relating to
 37    TABLE OF CONTENTS the amortization of intangible assets resulting from the purchase of ODL and equity bond compensation expense of $2.4 million for the three months ended March 31, 2011 relating to stock compensation awards granted at the time of the Companys IPO. Cash used in investing activities was $8.4 million for the three months ended March 31, 2011 compared to $1.6 million for the three months ended March 31, 2010, an increase of $6.8 million. The reason for the increase in cash used was a $4.6 million for the purchase of fixed assets for the three months ended March 31, 2011 compared to $1.6 million for the purchase of fixed assets for the three months ended March 31, 2010 and cash paid for the acquisition of FXCM Japan, Inc. of $13.7 million offset by $9.8 million of cash acquired from such acquisition. Cash used in financing activities was not material for the three months ended March 31, 2011, compared to $6.8 million for the three months ended March 31, 2010, a decrease of $6.8 million. The decrease in cash used in financing activities was due to no distribution to members for the three months ended March 31, 2011 compared to a payout of $6.8 million in the three months ended March 31, 2010. Capital expenditure $4.6 million for the three months ended March 31, 2011 and $1.6 million for the three months ended March 31, 2010. Capital expenditure for the three months ended March 31, 2011 relate to software of $1.5 million and computer equipment of $1.7 million capitalized. NON-GAAP FINANCIAL MEASURES Management uses certain financial measures to evaluate our operating performance, as well as the performance of individual employees, that are calculated and presented on the basis of methodologies other than in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP). These measures should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with U.S. GAAP, and our calculations thereof may not be comparable to similarly entitled measures reported by other companies. More specifically, we utilize results presented on an Adjusted Pro Forma basis, including Adjusted EBITDA that excludes certain items relating to the initial public offering of FXCM Inc. and also reflects the exchange of all units of FXCM Holdings, LLC for shares of Class A common stock of FXCM Inc. We believe that these Adjusted Pro Forma measures, when presented in conjunction with comparable U.S. GAAP measures, are useful to investors to compare our results across different periods and facilitate an understanding of our operating results. The differences between Adjusted Pro Forma and U.S. GAAP results are as follows: 1.

          Assumed Exchange of Units of FXCM Holdings, LLC for FXCM Inc. Class A Shares.  As a result of the exchange of FXCM Holdings units, the noncontrolling interest related to these units is converted to controlling interest. Management believes that it is useful to provide the per-share effect associated with the assumed exchange of all FXCM Holdings units 2.

          Income Taxes.  Prior to the initial public offering we were organized as a series of limited liability companies and foreign corporations and, even following the initial public offering, not all of our income is subject to corporate-level taxes. Adjustments have been made to the Adjusted Pro Forma tax provisions and earnings to assume that we had adopted a conventional corporate tax structure and are taxed as a C corporation in the U.S. at the prevailing corporate rates, that all deferred tax assets relating to foreign operations are fully realizable within the structure on a consolidated basis and that adjustments for deferred tax assets related to the ultimate tax deductions for equity-based compensation awards are made directly to stockholders' equity. These assumptions are consistent with the assumption in clause 1 above that all FXCM Holdings units are exchanged for shares of FXCM Inc. Class A common stock, as the assumed
exchange would change our tax structure. 3.

          Elimination of Certain Initial Public Offering-Related Expenses.  In addition, adjusted Pro Forma results for 2010 exclude one-time charges relating to our initial public offering. Management believes that this adjustment results in a more meaningful comparison with prior and succeeding period results.
 38    TABLE OF CONTENTS The following table reconciles our Adjusted Pro Forma results with our results presented in accordance with U.S. GAAP for the three months ended March 31, 2011 and 2010:  Three Months Ended March 31,2011

          

          2010In millionsAs Reported

          

          Adjustments

          

          Adjusted Pro Forma

          

          As Reported

          

          Adjustments

          

          Adjusted Pro FormaRevenues

          

          

          94.7

          

          

          

          

          

          

          

          94.7

          

          

          

          77.0

          

          

          

          

          

          

          

          77.0ExpensesReferring broker fees

          

          

          21.6

          

          

          

          

          

          

          

          21.6

          

          

          

          15.7

          

          

          

          

          

          

          

          15.7Compensation and benefits

          

          

          22.6

          

          

          

          (2.4

          )(1)

          

          

          20.2

          

          

          

          16.9

          

          

          

          

          

          

          

          16.9Depreciation and amortization

          

          

          4.1

          

          

          

          

          

          

          

          4.1

          

          

          

          1.7

          

          

          

          

          

          

          

          1.7Other expense

          

          

          27.4

          

          

          

          

          

          

          

          27.4

          

          

          

          19.4

          

          

          

          

          

          

          

          19.4Total expenses

          

          

          75.7

          

          

          

          (2.4

          )

          

          

          73.3

          

          

          

          53.7

          

          

          

          

          

          

          

          53.7Income before income taxes

          

          

          19.0

          

          

          

          2.4

          

          

          

          21.4

          

          

          

          23.3

          

          

          

          

          

          

          

          23.3Income tax provision

          

          

          0.5

          

          

          

          7.2

          (2)

          

          

          7.7

          

          

          

          2.6

          

          

          

          6.0

          (2)

          

          

          8.6Net income

          

          

          18.5

          

          

          

          (4.8)

          

          

          

          13.7

          

          

          

          20.7

          

          

          

          (6.0)

          

          

          

          14.7Net income attributable to non-controlling interest

          

          

          15.7

          

          

          

          (15.7) (3)

          

          

          

          

          

          

          

          20.7

          

          

          

          (20.7) (3)

          

          

          

          Net income attributable to FXCM Inc.

          

          

          2.8

          

          

          

          10.9

          

          

          

          13.7

          

          

          

          

          

          

          

          14.7

          

          

          

          14.7Pro Forma fully exchanged, fully diluted shares outstanding

          

          

          

          

          

          

          

          

          

          

          75.3

          (4)

          

          

          

          

          

          

          

          

          

          

          75.3

          (4)Adjusted Pro Forma net income per fully exchanged, fully diluted shares outstanding

          

          

          

          

          

          

          

          

          

          $

          0.18

          

          

          

          

          

          

          

          

          

          

          $

          0.20
  (1)

          Represents the elimination of equity-based compensation associated with the IPO. (2)

          Represents an adjustment to reflect the assumed effective corporate tax rate of approximately 36.1% and 36.9% for the three months ended March 31, 2011 and 2010, respectively, which includes a provision for U.S. federal income taxes and assumes the highest statutory rates apportioned to each state, local and/or foreign jurisdiction. The adjustment assumes full exchange of existing unitholders membership units of Class B common stock of the Company into Class A common stock of the Company. (3)

          Represents the elimination of the non-controlling interest associated with the ownership by existing unitholders of FXCM Holdings, LLC (excluding FXCM, Inc.), as if the unitholders had fully exchanged their membership units and Class B common stock of the Company for shares of Class A common stock of the Company. (4)

          Fully diluted shares assuming all unitholders had fully exchanged their membership units and Class B common stock of the Company for shares of Class A common stock of the Company.
 39    TABLE OF CONTENTS The following table reconciles adjusted EBITDA to Adjusted Pro Forma Net Income, as presented and reconciled in the prior table for the three months ended March 31, 2011and 2010:  Three Months Ended March 31,2011

          

          2010In millionsNet income attributable to FXCM Inc.

          

          

          13.7

          

          

          

          14.7Net income attributable to non-controlling interest

          

          

          

          

          

          

          Provision for income taxes

          

          

          7.7

          

          

          

          8.6Depreciation and amortization

          

          

          4.1

          

          

          

          1.7EBITDA

          

          

          25.5

          

          

          

          25.0
 Contractual Obligations and Commercial Commitments The following tables reflect a summary of our contractual cash obligations and other commercial commitments at March 31, 2011:  As of March 31, 2011Total

          

          Less Than 1 Year

          

          1  3 Years

          

          3  5 Years

          

          More Than 5 Years(In thousands)Lease obligations

          

          $

          14,555

          

          

          $

          4,576

          

          

          $

          6,634

          

          

          $

          2,983

          

          

          $

          362Vendor obligations

          

          

          258

          

          

          

          224

          

          

          

          33

          

          

          

          

          

          

          

          Total

          

          $

          14,813

          

          

          $

          4,800

          

          

          $

          6,668

          

          

          $

          2,983

          

          

          $

          362
 Off-Balance Sheet Arrangements As of March 31, 2011, we did not have any significant off-balance sheet arrangements as defined by the regulations of the SEC. RECENT ACCOUNTING PRONOUNCEMENTS Recently Adopted Accounting Pronouncements During the three months ended March 31, 2011, there were no recently issued accounting pronouncements that were applicable and adopted by the Company.
 40    TABLE OF CONTENTS Item 3. Quantitative and Qualitative Disclosures About Market Risk Currency risk Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact the value of our assets denominated in foreign currencies as well as our earnings due to the translation of our statement of financial condition and statement of operations from local currencies to U.S. dollars. We currently have limited exposure to currency risk from customer open positions as we utilize an agency model, simultaneously entering offsetting trades with both our customers and FX market makers. However, we do incur currency mismatch risk arising from customer accounts denominated in one currency being secured by cash deposits in a different
currency. As exchange rates change, we could suffer a loss. As at March 31, 2011, 13% of our net assets (assets less liabilities) were in British pounds, 1% in Euros, 8% in Japanese yen, and 5% in all other currencies other than the US dollar. For illustrative purposes, if each of these currencies were to adversely change by 10% with no intervening hedging activity by ourselves, this would result in a pre-tax loss of $3.6 million in the case of British pounds, $0.2 million for Euros and $2.3 million for Japanese yen and $3.1 million for Hong Kong dollars. Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will impact our financial statements. Our cash and customer cash (on which we do not pay interest) is held primarily in short-term demand deposits at banks and at our FX market makers. Interest rates earned on these deposits and investments affects our interest revenue. We currently derive a minimal amount of interest income on our cash balances as interest rates are near-zero. Based on cash and customer cash held at March 31, 2011, we estimate that a 50 basis point change in interest rates would increase our annual pretax income by approximately $4.9 million. We also earn a spread on overnight position financing (rollovers) and the interest differential our customers earn or pay depends on whether they are long a higher or lower yielding currency relative to the currency they borrowed. Currently interest rate differentials globally are at low levels and we earn a minimal amount of income from our spread on rollover. Credit risk Credit risk is the risk that a borrower or counterparty will fail to meet their obligations. We are exposed to credit risk from our retail and institutional customers as well as institutional counterparties. All retail customers are required to deposit cash collateral in order to trade on our platforms. Our policy is that retail customers are not advanced credit in excess of the cash collateral in their account and our systems are designed so that each customers positions are revalued on a real-time basis to calculate the customers useable margin. Useable margin is the cash the customer holds in the account after adding or deducting real-time gains or losses, less the margin requirement. The retail customers positions are automatically closed once his or her useable margin falls to zero. Exposure to credit risk from customers is
therefore minimal. While it is possible for a retail customer account to go negative in rare circumstances, for example, due to system failure, a final stop loss on the account is automatically triggered which will execute the closing of all positions. For the three months ended March 31, 2011 and 2010, we incurred $0.6 million and $0.7 million, respectively, in losses from customer accounts that had gone negative. Institutional customers are permitted credit pursuant to limits set by the prime brokers that we use. As part of our arrangement with our prime brokers, they incur the credit risk regarding the trading of our institutional customers. In addition, we are exposed to the following institutional counterparties: clearing and prime brokers as well as banks with respect to our own deposits and deposits of customer funds. We are exposed to credit risk in the event that such counterparties fail to fulfill their obligations. We manage the credit risk arising from institutional counterparties by setting exposure limits and monitoring exposure against such limits, carrying out periodic credit reviews, and spreading credit risk across a number of different institutions to diversify risk. As of March 31, 2011, our exposure to our four largest institutional counterparties, all major global
banking institutions, was 58% of total assets and the single largest within the group was 19% of total assets.
 41    TABLE OF CONTENTS Market risk Market risk is the risk of losses in on- and off-balance sheet positions arising from movements in market prices. As we operate predominantly on an agency model with the exception of certain trades of our CFD customers and until recently our Micro customers, we are not exposed to the market risk of a position moving up or down in value. Beginning in July 2010, we automatically hedge the positions of our Micro customers and intend as soon as practicable to automatically hedge the positions of our CFD customers. As of March 31, 2011, our net unhedged exposure to CFD customer positions was 3% of total assets. A 1% change in the value of our unhedged CFD
positions as of March 31, 2011 would result in a $0.4 million [decrease] in pre-tax income. Liquidity risk In normal conditions, our business of providing online FX trading and related services is self financing as we generate sufficient cash flows to pay our expenses as they become due. As a result, we generally do not face the risk that we will be unable to raise cash quickly enough to meet our payment obligations as they arise. Our cash flows, however, are influenced by customer trading volume and the income we derive on that volume. These factors are directly impacted by domestic and international market and economic conditions that are beyond our control. In an effort to manage this risk, we maintain a substantial pool of liquidity. As of March 31,
2011, cash and cash equivalents, excluding cash and cash equivalents held for customers, were 17% of total assets. Operational risk Our operations are subject to various risks resulting from technological interruptions, failures, or capacity constraints in addition to risks involving human error or misconduct. Regarding technological risks, we are heavily dependent on the capacity and reliability of computer and communications systems supporting our operations. We have established a program to monitor our computer systems, platforms and related technologies and to address issues that arise promptly. We have also established disaster recovery facilities in strategic locations to ensure that we can continue to operate with limited interruptions in the event that our primary systems
are damaged. As with our technological systems, we have established policies and procedures designed to monitor and prevent both human errors, such as clerical mistakes and incorrectly placed trades, as well as human misconduct, such as unauthorized trading, fraud, and negligence. In addition, we seek to mitigate the impact of any operational issues by maintaining insurance coverage for various contingencies. Regulatory capital risk Various domestic and foreign government bodies and self-regulatory organizations responsible for overseeing our business activities require that we maintain specified minimum levels of regulatory capital in our operating subsidiaries. If not properly monitored or adjusted, our regulatory capital levels could fall below the required minimum amounts set by our regulators, which could expose us to various sanctions ranging from fines and censure to the imposition of partial or complete restrictions on our ability to conduct business. To mitigate this risk, we continuously evaluate the levels of regulatory capital at each of our operating subsidiaries
and adjust the amounts of regulatory capital in each operating subsidiary as necessary to ensure compliance with all regulatory capital requirements. These may increase or decrease as required by regulatory authorities from time to time. We also maintain excess regulatory capital to provide liquidity during periods of unusual or unforeseen market volatility, and we intend to continue to follow this policy. In addition, we monitor regulatory developments regarding capital requirements to be prepared for increases in the required minimum levels of regulatory capital that may occur from time to time in the future. As of March 31, 2011, we had $289.9 million in regulatory capital requirements at our regulated subsidiaries and $61.3 million of capital on a consolidated basis.
 42    TABLE OF CONTENTS Regulatory risk We operate in a highly regulated industry and are subject to the risk of sanctions from U.S., federal and state, and international authorities if we fail to comply adequately with regulatory requirements. Failure to comply with applicable regulations could result in financial and operational penalties. In addition, efforts to comply with applicable regulations may increase our costs and/or limit our ability to pursue certain business opportunities. Federal and state regulations significantly limit the types of activities in which we may engage. U.S. and international legislative and regulatory authorities change these regulations from time to time.
See Item 1A. Risk Factors. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2011. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2011, the design and operation of our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level. Changes in Internal Control over Financial Reporting Management has not identified any changes in the Companys internal control over financial reporting that occurred during the fiscal quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting. This Quarterly Report on Form 10-Q does not include a report of managements assessment regarding internal control over financial reporting or an attestation report of the Companys independent registered public accounting firm due to a transition period established by rules of the SEC for newly public companies. At the end of the fiscal year 2011, Section 404 of the Sarbanes-Oxley Act will require our management to provide an assessment of the effectiveness of our internal control over financial reporting, and our independent registered public accounting firm will be required to report on the effectiveness of internal control over
financial reporting. We are in the process of performing the system and process documentation, and evaluation and testing required for management to make this assessment and for the Companys independent registered public accounting firm to provide their attestation report. We have not completed this process or the assessment, and this process will require significant amounts of management time and resources. In the course of evaluation and testing, management may identify deficiencies that will need to be addressed and remediated.
 43    TABLE OF CONTENTS PART II  OTHER INFORMATION Item 1. Legal Proceedings There have been no material developments to any of our current legal proceedings described in our Annual Report on Form 10-K for the year ended December 31, 2010, nor have there have been any new legal proceedings in the quarter ended March 31, 2011. In the ordinary course of business, we may from time to time be involved in litigation and claims incidental to the conduct of our business, including intellectual property claims. In addition, our business is also subject to extensive regulation, which may result in regulatory proceedings against us. We have been named in various arbitrations and civil litigation cases brought by customers seeking damages for trading losses. Management has investigated these matters and believes that such cases are without merit and is defending them vigorously. However, the arbitrations and litigations are presently in various stages of the judicial process and no
judgment can be made regarding the ultimate outcome of the arbitrators and/or courts decisions. Please see the Litigation section in Note 17 to our Unaudited Condensed Consolidated Financial Statements, for a description of our current legal proceedings. Item 1A. Risk Factors See Part I. Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations  Regulatory Overview in this Quarterly Report for a discussion of the recent regulatory environment affecting our business. This discussion updates, and should be read together with, the discussion of our potential risks and uncertainties, set forth under the heading Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties, not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. (Removed and Reserved) Item 5. Other Information Not Applicable.
 44    TABLE OF CONTENTS Item 6. Exhibits The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.  Exhibit Number

          

          Description of Exhibit31.1*

          

          Certification required by Rule 13a-14(a).31.2*

          

          Certification required by Rule 13a-14(a).32.1**

          

          Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2**

          

          Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  *

          Filed herewith. **

          Furnished herewith.
 45    TABLE OF CONTENTS SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized.  FXCM INC.Date: May 16, 2011

          

          By/s/ Dror (Drew) NivDror (Drew) Niv Chief Executive Officer (Principal Executive Officer)Date: May 16, 2011

          

          By/s/ Robert LandeRobert Lande Chief Financial Officer(Principal Accounting Officer)
 46