Nasdaq
Annual Report 2010

Plain-text annual report

Table of Contents  From Our CEO   Key Accomplishments 2010  Officers & Directors  Locations & Shareholder Information  Form 10‐K     About This Form 10‐K    Forward‐Looking Statements  Part I  Item 1. Business.   Item 1A. Risk Factors   Item 1B. Unresolved Staff Comments   Item 2. Properties   Item 3. Legal Proceedings   Item 4. (Removed and Reserved)  Part II   Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   Item 6. Selected Financial Data   Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations   Item 7A. Quantitative and Qualitative Disclosures About Market Risk   Item 8. Financial Statements and Supplementary Data   Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   Item 9A. Controls and Procedures   Item 9B. Other Information   Part III   Item 10. Directors, Executive Officers and Corporate Governance   Item 11. Executive Compensation   Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   Item 13. Certain Relationships and Related Transactions, and Director Independence   Item 14. Principal Accounting Fees and Services   Part IV  Item 15. Exhibits, Financial Statement Schedules           NASDAQ OMX. Where InnovatIon Meets actIon. 2010 AnnuAl report nasdaq omx is where innovation meets action – fueling the world’s economic growth one investor, one company, one market at a time. from our CEo In 2010, The NASDAQ OMX Group, Inc., achieved record performance as many of the strategic initiatives of recent years came to fruition. Since 2007, and in the face of challenging macroeconomic headwinds, we achieved 67 percent* earnings per share growth, substantially outper- forming most of our competitors. We have reinforced our leadership position as a pioneering global exchange and made significant, game-changing advances in an increasingly competi- tive financial marketplace. In January, NASDAQ OMX CommoditiesSM and Nord Pool Spot launched N2EX, a new power futures market in the United Kingdom, offering investors transparent pricing in the UK power market. In February, we launched Genium INET®, a comprehensive multi-asset trading and clearing system, in all seven of our equities markets in the Nordics and Baltics. As a result, INET is now being utilized by all NASDAQ OMX® equities markets around the world — an accomplishment that is unrivaled in the exchange space. In March, NASDAQ OMX acquired Nord Pool ASA, the world’s largest power derivatives exchange and one of Europe’s largest carbon exchanges. We also continued to expand our presence in over-the-counter energy commodity markets with the purchase of the assets of North American Energy Credit and Clearing Corp. That same month we announced that the NASDAQ-100 Index® would be the benchmark for the first foreign index-linked financial product in China. Halfway around the world, we celebrated 20 years in Silicon Valley with San Jose Mayor Chuck Reed declaring March 16, 2010 “NASDAQ® Day” in honor of The NASDAQ Stock Market’s pivotal role in supporting economic growth in the region. As we continued to implement solutions to safeguard investors and further promote transparency in the markets, NASDAQ OMX announced the NASDAQ Volatility GuardSM, built to protect investors and increase transparency in times of high stress trading in a single NASDAQ-listed security. We also welcomed Tesla Motors, Inc., to The NASDAQ Stock Market® as the first U.S. automotive IPO in 54 years. NASDAQ OMX won Inside Market Data Awards for Best Data Provider and Best New Data Product for NASDAQ BasicSM as we continued to equip investors and traders with services and products of the highest quality. We maintained this momentum throughout the year as NASDAQ OMX continued to find new ways to bring powerful solutions to our clients. In August, we acquired SMARTS, a leading technology provider of surveillance solutions to exchanges, regulators and brokers. In December, we acquired FTEN, a leading provider of Real-Time Risk Management solutions for the financial securities markets. These acquisitions give us capabilities in pre- and post-trade risk management. We are proud to be one of the world’s largest providers of commercial exchange technology. The standout performance and flexibility of our technology has enabled us to enter new markets with a low-cost and highly regarded platform offering strong performance to both existing and new clients and creating additional sales opportunities for both our Transaction Services and Market Data businesses. Our leading trading system, Genium INET, is a great example of this forward-looking push. This year, the Australian Securities Exchange Group, or ASX, launched its next-generation trading platform ASX Trade, powered by Genium INET. ASX became our first Genium INET customer, and the new platform allows ASX to achieve significant performance enhancements — transaction speed is 100 times faster than it was only two years ago. From Our CEO For the third year in a row, more share value traded on The NASDAQ Stock Market than on any other single cash equities exchange in the world with an 18.8 percent matched market share in 2010. We also saw new market share highs in U.S. equity options with the average combined market share for NASDAQ OMX PHLX® and The NASDAQ Options MarketSM at 27.4 percent over the year — 23.4 percent on NASDAQ OMX PHLX and 4 percent on The NASDAQ Options Market — a 6.4 percent increase from 2009. In Europe, the total volume for equity and fixed income derivatives contracts traded per day was up by 34 percent. Contributing to the increase is the addition of 15 new European members in 2010, incremental to the 34 new members that joined in the fourth quarter of 2009. We continued to focus on new trading strategies, and in October, we launched NASDAQ OMX PSXSM, the only price-size priority trading venue for U.S. equities, which emphasizes liquidity by allocating shares based on the displayed size of the order. Throughout 2010, there were signs of a recovery in the IPO market and we expect the demand for public equity capital from companies experiencing the return of global economic growth to support further increases in the number of IPOs. In 2010, we listed a total of 89 IPOs on The NASDAQ Stock Market, in addition to 25 new listings on our Nordic and Baltic exchanges and NASDAQ OMX First NorthSM. Over the last few years, we have seen a surge of Chinese companies choosing to list their primary shares in the U.S. Today, 171 Chinese companies now reach U.S. investors everyday through The NASDAQ Stock Market. Over the course of the year, we focused on forging new relationships with key exchanges and businesses around the world and building on the successful alliances already in place. We partnered with the Singapore Exchange, or SGX, to begin trading the 19 major Asian companies with American Depository Receipts, or ADRs, in Asia. The partnership provides the opportunity to manage positions in U.S. ADRs during Asian market hours with effectively round-the-clock trading power. We furthered this alliance by announcing a dual listing cooperation with SGX. We partnered with the Osaka Securities Exchange Co., Ltd., the premier Japanese derivatives and securities exchange, to launch Next Funds NASDAQ-100 ETF, the first domestic NASDAQ-100 Index ETF to be available to Japanese investors. Most importantly, during the year, we achieved strong financial performance and operational excellence across the entire global organization. This translated into a 41 percent operating margin, which is a testament to the management team and the company overall. As we move into 2011 and celebrate our 40th anniversary, our pace has not slowed. We remain maniacally focused on ways to push the boundaries of technology, penetrate new markets, and continue to enhance and expand our diverse, transformative offerings across the globe. We are steadfast in our commitment to our stated strategic goal to leverage massive scale against extreme efficiency. We will continue to demonstrate to you, our shareholders, that we will remain focused on capitalizing on the opportunities we see as our industry goes through a transformation. Robert Greifeld Chief Executive Officer * Based on pro forma non-GAAP (see inside back cover) From Our CEO KEY ACComplishmEnts 2010 NASDAQ OMX is a leading global exchange group that delivers trading, clearing, exchange technology, securities listings, and public company services across six continents. MARKET SERVICES U.S. Transaction Services > In 2010, NASDAQ reached sub-100 microsecond speeds to accept, process, and acknowledge or fill an order on the 10G Network, decreasing latency for our markets. > The NASDAQ Options Market and NASDAQ OMX PHLX led U.S. equity options market share for 2010 with an average combined market share of 27.4 percent (23.4 percent on NASDAQ OMX PHLX and 4 percent on the NASDAQ Options Market) and reached a record 34.8 percent (30.1 percent on NASDAQ OMX PHLX and 4.7 percent on The NASDAQ Options Market) for the month of December. > NASDAQ OMX PHLX introduced a make/take pricing program to provide a system of rebates and fees for electronic executions in options by NASDAQ OMX PHLX participants. The program initially only applied to trading in C, IWM, QQQQ and SPY, but now includes 80 symbols trading on NASDAQ OMX PHLX. > We launched NASDAQ OMX Alpha Indexes to provide a more straight- forward way to track company outperformance or underperfor- mance without being subjected to overall market direction. These new indexes measure the relative total return of a single stock, the “Target Component”, against a leading exchange traded fund, the “Benchmark Component.” We plan to launch listed options on these innovative indexes on an exclusive basis in 2011. > NASDAQ OMX introduced the Investor Support Program, a rebate program designed to attract retail and institutional order flow while rewarding firms that exceed liquidity provision and execution requirements. > In cash equities trading, The NASDAQ Stock Market continued to be the largest single pool of liquidity for trading U.S.-listed cash equities, matching an average of 18.8 percent of all U.S. cash equities volume for 2010. > The NASDAQ Closing CrossSM was again used to configure the entire family of U.S. Russell Indexes during their annual reconstitution in June, and had another record day with 1.04 billion shares executed in 0.855 seconds. > In October 2010, NASDAQ OMX launched a third U.S. cash equities market called NASDAQ OMX PSX. This new market utilizes a price- size priority model and also runs on INET technology, leveraging the speed and efficiency benefits offered throughout NASDAQ OMX globally. This market structure rewards greater displayed size, which in turn will increase transparency, promote market stability and enable additional trading strategies. > In December 2010, NASDAQ OMX acquired FTEN, Inc., a leading provider of Real-Time Risk Manage- ment, or RTRM, solutions for the financial securities market. As a market leader in RTRM, FTEN is well positioned to grow as the industry is becoming more focused on solutions for effectively managing risk. Market participants are seeking tools that provide real-time, low latency, enterprise-wide risk management, market awareness and control. FTEN’s technology provides broker-dealers and their clients the ability to manage risk more effectively in real-time, which leads to better utilization of capital as well as improved regulatory compliance. We will offer FTEN solutions to our global base of broker-dealers and the international exchange community. > Throughout the year, NASDAQ OMX continued to focus on improved structure for market participants, leading the way in such efforts as enhancing market maker obliga- tions, and developing an improved sponsored access framework. Key Accomplishments 2010 Statistics are sourced from internal NASDAQ OMX information. Transaction Services: NASDAQ OMX offers superior technology and trading efficiency for equities, derivatives and commodities globally. It provides automatic execution venues with the tested capacity and speed to execute trades quickly and efficiently. European Transaction Services > In February 2010, NASDAQ OMX NordicSM successfully rolled out the Genium INET trading system in all seven of its equities markets in the Nordics and Baltics. Moving seven exchanges to one platform in a single roll-out is an accom- plishment that is unrivaled in the exchange space. > Primarily as a result of the intro- duction of Central Counterparty Clearing, or CCP, in 2009 and the roll-out of the Genium INET trading system in 2010, the average share of cash equity trading from members outside the Nordic countries increased from 35 percent in 2009 to 45 percent in 2010. The total number of share trades per day increased by 34 percent compared to 2009. > NASDAQ OMX Nordic introduced updated volatility guards on its Nordic and Baltic cash equity markets to protect investors and listed companies during times of volatile market conditions. > In September 2010, NASDAQ OMX a result of an agreement between the Swedish Money Market Council and NASDAQ OMX, the entire Swedish Interbank resale and repurchase agreement market will ultimately be cleared through NASDAQ OMX StockholmSM. > In October 2010, NASDAQ OMX launched Genium INET in its Nordic equity and fixed income derivatives markets. > The total volume for equity and fixed income derivatives contracts traded per day was up by 34 percent. Contributing to the increase is the addition of 15 new members in 2010, incremental to the 34 new members that joined in the fourth quarter of 2009. > In November 2010, NASDAQ OMX Nordic introduced Nordic@Mid, a non-displayed execution service for the cash equity markets in Stockholm, Copenhagen, Helsinki and Iceland. The orders are always matched at the midpoint of the prevailing reference price (best bid and offer) and have real-time, post-trade transparency via the public NASDAQ OMX Nordic data feed. expanded its multi-asset clearing house offering with the launch of a clearing service for the resale and repurchase agreement market. As > NASDAQ OMX Nordic announced that Deutsche Bank will start offering low latency Sponsored Access to its Nordic and Baltic exchanges using the newly enhanced Pre-Trade Risk Management Service. > NASDAQ OMX announced that it will expand the independent, real-time, latency measurement service, provided by Correlix Inc., to its Nordic marketplaces. > NASDAQ OMX Nordic President Hans-Ole Jochumsen has been elected President of the Federation of European Securities Exchanges for a statutory term of two years. > NASDAQ OMX launched a new fund market service in Sweden. The Nordic Fund MarketSM, or NFM, provides an electronic alternative to manage the transactions between fund distributors and fund management companies. The NFM platform aims to increase efficiency in the electronic validation process and decrease the marginal cost of each transaction. > Early in 2010, NASDAQ OMX Commodities and Nord Pool Spot announced the successful launch of physical power contracts on N2EX, a UK wholesale power market. > In March 2010, with the purchase of the assets of North American Energy Credit and Clearing Corp, NASDAQ OMX expanded its presence in the over-the-counter, or OTC, Statistics are sourced from internal NASDAQ OMX information. Key Accomplishments 2010 Market Data: NASDAQ OMX global data products offer strategic advantages to investors and traders all over the world, including superior transparency, depth, speed and flexibility of data management and delivery. energy commodity markets. The acquisition of these assets was affected through our newly established subsidiary NASDAQ OMX Commodities Clearing CompanySM. > In March 2010, NASDAQ OMX acquired Nord Pool ASA, a derivatives trading market. Through this acquisition, the NASDAQ OMX CommoditiesSM offering now includes the world’s largest power derivatives exchange and one of Europe’s leading carbon exchanges. > NASDAQ OMX and GFI Group an- nounced a strategic agreement to offer electronic trading and clearing of continental U.S. power and natural gas. The agreement broadens the clearing options for energy traders in the U.S. and expands NASDAQ OMX Commodities’ global presence. Market Data > In 2010, the Global Data Products team focused on adding valuable content for investors, while also focusing on cost savings for clients. > NASDAQ Basic, our premier, low- costalternative to Level 1 data, is providing customers with an average savings of 75 percent over their existing Level 1 subscriptions. NASDAQ Basic is now being offered by all of the top major data redistributors and many user firms are now realizing the costs- savings benefits. largest derivatives exchange in Europe, offering two new Level 2 products including Level 2 DirectSM and Level 2 EnhancedSM. > NASDAQ OMX won Inside Market Data Awards for Best Data Provider and Best New Data Product for NASDAQ Basic. > We introduced several enterprise license initiatives, all aimed at increasing distribution while lowering fees. We launched a Non- Professional Enterprise License for NASDAQ Level 2SM, OpenViewSM and TotalView® in an effort to further NASDAQ depth data distribution to retail investors, while limiting the distribution cost for retail brokers. We also introduced a Non-Display Enterprise License for NASDAQ exchange depth data, available to internal data distributors. > Global Data Products launched NASDAQ Data-On-DemandSM, providing customers with fast access to huge amounts of historical Level 1 tick data on demand, eliminating the need and expense for ever-growing, in-house databases to store the data. > We expanded our suite of data products for the NASDAQ OMX Derivatives MarketSM, the third > Based on customer demand, we introduced the Nordic Last SaleSM entitlement for business subscribers, reducing fees and expanding access to real-time order execution data. > To increase transparency into the NASDAQ OMX PHLX options market, we introduced the Historical PHLX OptionsTrade OutlineSM product and Historical PHLX OrdersSM, providing access to historical NASDAQ OMX PHLX trade information dating back to January 2009. > Through the Global Access Program, we have continued our focus on partnerships with global exchanges and third-party data content owners to get maximum exposure of data and enforce policies related to the dissemination of data. Most notably, we have provided audit services to the MICEX Group, a Russian financial exchange company, partnered with Russell Investments to develop and launch RussellTick, consolidating the Russell Family of indexes, and partnered with other index and ETF content owners to globally disseminate their data via existing NASDAQ OMX products. Key Accomplishments 2010 Statistics are sourced from internal NASDAQ OMX information. Global Listing Services: NASDAQ OMX continues to define the value of a global exchange. Our listed companies benefit from multiple worldwide listing platforms, exceptional customer service, and essential business offerings. ISSUER SERVICES Global Listing Services > We had a total of 195 new listings on The NASDAQ Stock Market in 2010, plus 25 new listings on our Nordic and Baltic exchanges, including NASDAQ OMX First NorthSM. New listings on The NASDAQ Stock Market included 89 initial public offerings, or IPOs, and new listings on our Nordic and Baltic exchanges, including NASDAQ OMX First North, included 11 IPOs. Over the last few years, we have seen a surge of Chinese companies choosing to list their primary shares in the U.S. Today, 171 Chinese companies now reach U.S. investors everyday through The NASDAQ Stock Market. > We welcomed Hasbro, Inc., Avis Budget Group, Inc., and Potlatch Corporation to The NASDAQ Stock Market this year. Over the past several years, companies representing $334 billion in global market capitalization have switched to NASDAQ affirming that companies looking for the greatest value and visibility from their listing continue to select The NASDAQ Stock Market. > We listed 94 new ETFs, structured products, OTC upgrades, and other listings. > To mark our 10-year anniversary in Times Square, New York City Mayor Michael Bloomberg proclaimed December 30th to be NASDAQ MarketSiteSM Day. > In March, we marked 20 years of our presence in Silicon Valley and highlighted our role in supporting economic growth over the last 20 years. > NASDAQ OMX’s GlobeNewswireSM press distribution engine launched DIY, or Do It Yourself, a robust alternative to the traditional editorial press release preparation and distribution method. > We entered into an exclusive partnership with FactSet Research Systems, Inc., a leading provider of integrated financial information and analytical applications to the global investment community, creating a complete macroeconomic research solution with in-depth data and flexible analytics for the corporate market. > We created a model to offer Corporate Solutions products to other global exchanges for resale to their listed companies. BM&FBOVESPA and the Osaka Securities Exchange Co., Ltd., became our first partners. > The NASDAQ OMX Investor Analytics team launched AI3SM, a ground- breaking stock surveillance solution that provides immediate intelligence on current trading conditions and institutional activity for a company’s stock. > In December 2010, NASDAQ OMX completed its acquisition of ZoomVision Mamato, or ZVM, a com- pany that provides live webcasting services primarily for investor relations professionals. ZVM is the leading provider of webcasting services in Northern Europe. Global Index Group > The number of products based on our indexes exceeded 2,900 in 2010, with an underlying notional value of over $400 billion. In addition, product sponsors launched 24 ETFs based on NASDAQ OMX indexes, bringing our total number of ETFs to 63. > We launched over 200 indexes bringing our total number of indexes to over 1,600. NASDAQ OMX introduced its benchmark offering, the Green Economy Index FamilySM. This offering marked the first time an indexer has applied a disciplined approach to the vast green space, covering 350 constituents divided Statistics are sourced from internal NASDAQ OMX information. Key Accomplishments 2010 Global Index Group: The Global Index Group is a leader in creating and licensing indexes across a range of asset classes and is home to some of the most widely watched indexes in the world. > Also, NASDAQ OMX announced the launch of eight new ETFs from XACT based on NASDAQ OMX Nordic Sector Indexes. > We also announced a new partnership with Sungard’s APT, a leading solution provider for risk-based investment management decisions, making selected index data available via risk analysis tools, enabling investors to more effectively monitor and manage financial risk. into 13 unique sectors. It will help investors develop highly relevant, investable products and receive very segmented and specific data for analysis. > In 2010, the Global Index Group both expanded the geographic reach of its flagship index, the NASDAQ-100, and increased licensed products on its well-known sector benchmarks. > During the second quarter of 2010, Guotai Asset Management Co., Ltd., launched The Guotai NASDAQ-100 Fund, the first foreign index-linked financial product in China. In the third quarter of 2010, NASDAQ OMX announced the launch of the Next Funds NASDAQ-100 ETF on the Osaka Securities Exchange Co., Ltd., the first domestic NASDAQ-100 Index ETF to be available to Japanese investors. Finally, in the fourth quarter of 2010, Mirae Asset Management launched the Mirae Asset MAPS Tiger NASDAQ-100 ETF on the Korean Stock Exchange. > In October 2010, iShares converted its existing semiconductor ETF to track the PHLX Semiconductor Index, or SOX. This ETF is the first unlevered ETF based on the SOX Index. Key Accomplishments 2010 Statistics are sourced from internal NASDAQ OMX information. Market Technology: NASDAQ OMX is one of the world’s largest providers of commercial exchange technology. Its solutions support trading, surveillance, clearing and Central Securities Depository operations and currently powers over 70 marketplaces in more than 50 countries. MARKET TEChNOlOGy the fastest trading technology in the world. The new Genium INET powered platform, SGX Reach, will enable significant latency and transaction capacity advantages. Benchmark tests for SGX have shown an average latency below 90 microseconds. > During 2010, we have made add-on sales to more than 30 of our existing customers including Canadian National Stock Exchange, Dubai Financial Market, the Financial Industry Regulatory Authority, Indian Energy Exchange, Indonesia Stock Exchange, Moscow Interbank Currency Exchange, Osaka Securities Exchange Co., Ltd., SIX Swiss Exchange and Tokyo Commodity Exchange, Inc. > Through our acquistion of FTEN, we will be able to increase FTEN’s penetration globally, greatly broadening its distribution network through our international network of exchange customers. > In 2010, we saw the first NASDAQ OMX market and the first market exchange customer go live with NASDAQ OMX Genium INET, a comprehensive multi-asset trading and clearing system, capable of delivering record-breaking performance with sub-100 microsecond average latency. > In August 2010, we acquired SMARTS Group Holdings Pty Ltd, or SMARTS, a leading technology provider of surveillance solutions to exchanges, regulators and brokers. SMARTS products are used by over 30 national exchange and regulatory customers as well as 50 brokerage firm clients in more than 30 countries. This acquisition is part of NASDAQ OMX’s strategy to diversify its Market Technology business and enter the surveillance and compliance market. It will strengthen our position as the leading technology partner to marketplaces worldwide. > The NASDAQ OMX Nordic Derivatives Markets successfully went live with Genium INET in October 2010. > In November 2010, the Australian Securities Exchange Group, or ASX, launched its next-generation trading platform, ASX Trade, powered by Genium INET. The new platform combines rich functionality with high reliability and has delivered significant latency and transaction capacity improvements — transaction speed today is 100 times faster than it was only two years ago. The improved latency has also been coupled with increased capacity, rising five times to 100,000 orders per second. > We signed an agreement with the Stock Exchange of Thailand for NASDAQ OMX to continue to support the integrated trading and clearing platform of the Thailand Futures Exchange for an additional five years. > NASDAQ OMX partnered with the Singapore Exchange, or SGX, to bring trading of 19 major Asian companies with American Depository Receipts, or ADRs, to Asia. The partnership provides the opportunity to manage positions in U.S. ADRs during Asian market hours with effectively round- the-clock trading power. At the same time, we also announced a dual listing cooperation with SGX. > NASDAQ OMX announced that it will deliver an ultra-low latency trading platform to SGX, and it will be powered by Genium INET, Statistics are sourced from internal NASDAQ OMX information. Key Accomplishments 2010 offiCErs & DirECtors loCAtions & shArEholDEr informAtion NASDAQ OMX Executive Officers Robert Greifeld Chief Executive Officer and President Bruce E. Aust Executive Vice President Global Corporate Client Group Anna M. Ewing Executive Vice President Global Technology and Market Technology and Chief Information Officer NASDAQ OMX Board of Directors Ronald Hassen Acting Chief Financial Officer Senior Vice President Controller and Principal Accounting Officer John L. Jacobs Executive Vice President Global Index Group and Chief Marketing Officer Hans-Ole Jochumsen Executive Vice President Transaction Services Nordics and Global Data Products Edward S. Knight Executive Vice President General Counsel and Chief Regulatory Officer Eric W. Noll Executive Vice President Transaction Services U.S. and UK H. Furlong Baldwin Chairman The NASDAQ OMX Group, Inc. Retired Chairman and Chief Executive Officer Mercantile Bankshares Corporation Urban Bäckström Deputy Chairman The NASDAQ OMX Group, Inc. Director General Confederation of Swedish Enterprise Michael Casey Retired Chief Financial Officer and Chief Administrative Officer Starbucks Corporation Börje Ekholm President and Chief Executive Officer Investor AB Lon Gorman Retired, Vice Chairman The Charles Schwab Corporation Robert Greifeld Chief Executive Officer and President The NASDAQ OMX Group, Inc. Glenn H. Hutchins Co-Founder and Co-Chief Executive Silver Lake Birgitta Kantola Director Birka Consulting Ab Essa Kazim Chairman Borse Dubai and Managing Director and Chief Executive Officer Dubai Financial Market Dr. John D. Markese Vice Chairman American Association of Individual Investors Hans Munk Nielsen Retired Chief Financial Officer TDC A/S Thomas F. O’Neill Chairman Ranieri Financial Services Group James S. Riepe Senior Advisor and Retired Vice Chairman T. Rowe Price Group, Inc. Michael R. Splinter Chairman of the Board President and Chief Executive Officer Applied Materials, Inc. Lars Wedenborn Chief Executive Officer FAM-Foundation Asset Management Deborah L. Wince-Smith President and Chief Executive Officer Council on Competitiveness Officers & Directors NASDAQ OMX Locations Armenia Yerevan Australia Sydney Canada Calgary China Beijing Hong Kong Denmark Copenhagen Estonia Tallinn Finland Helsinki Iceland Reykjavík Italy Milan Japan Tokyo Latvia Riga Lithuania Vilnius Norway Oslo Singapore Sweden Stockholm United Kingdom London United Arab Emirates (UAE) Dubai United States/Major Locations Los Angeles, California Menlo Park, California San Francisco, California Lakewood, Colorado Shelton, Connecticut Washington, District of Columbia Chicago, Illinois Oak Brook, Illinois Rockville, Maryland Boston, Massachusetts Maynard, Massachusetts New York, New York Eugene, Oregon Philadelphia, Pennsylvania shArEholDEr informAtion Transfer Agent and Registrar Investor Inquiries Should be Directed to: BNY Mellon 480 Washington Boulevard Jersey City, NJ 07310-1900 Domestic: +1 888 305 3741 International: +1 201 680 6578 Domestic TDD: +1 800 231 5469 International TDD: +1 201 680 6610 www.bnymellon.com/shareowner/isd By email: investor.relations@NASDAQOMX.com By phone: +1 212 401 8742 By mail: NASDAQ OMX Investor Relations 9600 Blackwell Road Rockville, MD 20850 The annual meeting will be held on May 26, 2011, at 9:00 a.m. local time at NASDAQ MarketSite at Four Times Square, New York, New York 10036. The NASDAQ OMX home page on the World Wide Web is at www.NASDAQOMX.com. Stockholders are advised to review financial information and other disclosures about NASDAQ OMX contained in its 2010 Annual Report on Form 10-K (the “Form 10-K”). Investor information, including the Annual Report, Form 10-K, Forms 10-Q, Proxy Statement and other periodic SEC updates as well as press releases and earnings announcements, can be accessed directly from our website at http://ir.NASDAQOMX.com/. The NASDAQ OMX Group, NASDAQ OMX, NASDAQ and all other NASDAQ related marks contained herein are trade/service marks of The NASDAQ OMX Group, Inc. All other trade and service marks are the property of their respective owners. Locations & Shareholder Information UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2010 OR ‘ 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: 000-32651 The NASDAQ OMX Group, Inc. (Exact name of registrant as specified in its charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) One Liberty Plaza, New York, New York (Address of Principal Executive Offices) 52-1165937 (I.R.S. Employer Identification No.) 10006 (Zip Code) Registrant’s telephone number, including area code: +1 212 401 8700 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.01 par value per share The NASDAQ Stock Market Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ‘ No È 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 È No ‘ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes È No ‘ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘ 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. Large accelerated filer È Accelerated filer ‘ Smaller reporting company ‘ Non-accelerated filer ‘ (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 ‘ No È As of June 30, 2010, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $2.3 billion (this amount represents approximately 130.6 million shares of The NASDAQ OMX Group, Inc.’s common stock based on the last reported sales price of $17.78 of the common stock on The NASDAQ Stock Market on such date). Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Class Common Stock, $.01 par value per share Outstanding at February 10, 2011 176,186,830 shares DOCUMENTS INCORPORATED BY REFERENCE Document Parts Into Which Incorporated Certain portions of the definitive Proxy Statement for the 2011 Annual Meeting of Stockholders Part III 139443_020_Nasdaq_1-188.p1.pdf QC 15 Black 04-07 19:41 139443_020_Nasdaq_1-188.p2.pdf QC 16 -- 04-07 19:41 TABLE OF CONTENTS Part I. Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Removed and Reserved) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. Item 3. Item 4. Part II. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . Item 8. Item 9. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part III. Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part IV. Page 2 23 38 38 39 39 40 43 45 91 91 92 92 94 94 94 94 96 96 Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 i 139443_020_Nasdaq_1-188.p3.pdf QC 17 Black 04-07 19:41 About This Form 10-K The NASDAQ OMX Group, Inc. is a holding company created by the business combination of The Nasdaq Stock Market, Inc. and OMX AB (publ) which was completed on February 27, 2008. Under the purchase method of accounting, Nasdaq was treated as the accounting and legal acquirer in this business combination. As such, Nasdaq is the predecessor reporting entity of NASDAQ OMX and the results of operations of OMX are only included in NASDAQ OMX’s consolidated results of operations beginning February 27, 2008. Throughout this Form 10-K, unless otherwise specified: • • • • • • • • • • • “NASDAQ OMX,” “we,” “us” and “our” refer to The NASDAQ OMX Group, Inc. “The NASDAQ Stock Market” and “NASDAQ” refer to the registered national securities exchange operated by The NASDAQ Stock Market LLC. “OMX AB” refers to OMX AB (publ), as that entity operated prior to the business combination with Nasdaq. “Nasdaq” refers to The Nasdaq Stock Market, Inc., as that entity operated prior to the business combination with OMX AB. “OMX” refers to OMX AB (publ) subsequent to the business combination with Nasdaq. “NASDAQ OMX Nordic” refers to collectively, NASDAQ OMX Stockholm, NASDAQ OMX Copenhagen, NASDAQ OMX Helsinki and NASDAQ OMX Iceland. “NASDAQ OMX Baltic” refers to collectively, NASDAQ OMX Tallinn, NASDAQ OMX Riga and NASDAQ OMX Vilnius. “PHLX” refers to the Philadelphia Stock Exchange, Inc. and its subsidiaries, as that entity operated prior to its acquisition by NASDAQ OMX. “NASDAQ OMX PHLX” refers to NASDAQ OMX PHLX LLC (formerly NASDAQ OMX PHLX, Inc.) subsequent to its acquisition by NASDAQ OMX. “SEK” or “Swedish Krona” refers to the lawful currency of Sweden. “NOK” or “Norwegian Krone” refers to the lawful currency of Norway. This Form 10-K includes market share and industry data that we obtained from industry publications and surveys, reports of governmental agencies and internal company surveys. Industry publications and surveys generally state that the information they contain has been obtained from sources believed to be reliable, but we cannot assure you that this information is accurate or complete. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position are based on the most currently available market data. For market comparison purposes, The NASDAQ Stock Market data in this Form 10-K for initial public offerings, or IPOs, is based on data generated internally by us, which includes best efforts underwritings and closed-end funds; therefore, the data may not be comparable to other publicly-available IPO data. Data in this Form 10-K for secondary offerings for The NASDAQ Stock Market is based on data provided by Thomson Financial. Data in this Form 10-K for new listings of equity securities on The NASDAQ Stock Market is based on data generated internally by us, which includes best efforts underwritings and issuers that switched from other listing venues, closed-end funds and exchange traded funds, or ETFs. Data in this Form 10-K for IPOs and new listings of equities securities on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic also is based on data generated internally by us. IPOs, secondary offerings and new listings data is presented as of period end. While we are not aware of any misstatements regarding industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed in “Item 1A. Risk Factors” in this Form 10-K. ii 139443_020_Nasdaq_1-188.p4.pdf QC 18 Black 04-07 19:41 Forward-Looking Statements The U.S. Securities and Exchange Commission, or SEC, encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Annual Report on Form 10-K contains these types of statements. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words or terms of similar substance used in connection with any discussion of future expectations as to industry and regulatory developments or business initiatives and strategies, future operating results or financial performance identify forward-looking statements. These include, among others, statements relating to: • • • • • • • • our 2011 outlook; the scope, nature or impact of acquisitions, dispositions, investments or other transactional activities; the integration of acquired businesses, including accounting decisions relating thereto; the effective dates for, and expected benefits of, ongoing initiatives; the impact of pricing changes; tax benefits; the cost and availability of liquidity; and the outcome of any litigation and/or government investigation to which we are a party and other contingencies. Forward-looking statements involve risks and uncertainties. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements include, among others, the following: • • • • • • • our operating results may be lower than expected; loss of significant trading volume or listed companies; economic, political and market conditions and fluctuations, including interest rate and foreign currency risk, inherent in U.S. and international operations; government and industry regulation; our ability to successfully integrate acquired businesses, including the fact that such integration may be more difficult, time consuming or costly than expected, and our ability to realize synergies from business combinations and acquisitions; covenants in our credit facilities, indentures and other agreements governing our indebtedness which may restrict the operation of our business; and adverse changes that may occur in the securities markets generally. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the uncertainty and any risk related to forward-looking statements that we make. These risk factors are more fully described under the caption “Item 1A. Risk Factors,” in this Form 10-K. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. You should carefully read this entire Form 10-K, including “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and the related notes. Except as required by the federal securities laws, we undertake no obligation to update any forward-looking statement, release publicly any revisions to any forward-looking statements or report the occurrence of unanticipated events. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. 1 139443_020_Nasdaq_1-188.p5.pdf QC 19 Black 04-07 19:41 Item 1. Business Overview Part I We are a leading global exchange group that delivers trading, clearing, exchange technology, securities listing, and public company services across six continents. Our global offerings are diverse and include trading and clearing across multiple asset classes, market data products, financial indexes, capital formation solutions, financial services and market technology products and services. Our technology powers markets across the globe, supporting cash equity trading, derivatives trading, clearing and settlement and many other functions. In the U.S., we operate The NASDAQ Stock Market, a registered national securities exchange. The NASDAQ Stock Market is the largest single cash equities securities market in the U.S. in terms of listed companies and in the world in terms of share value traded. As of December 31, 2010, The NASDAQ Stock Market was home to 2,778 listed companies with a combined market capitalization of approximately $4.6 trillion. In addition, in the U.S. we operate two additional cash equities trading markets, two options markets, a futures market and a derivatives clearinghouse. We also engage in riskless principal trading of over-the-counter, or OTC, power and gas contracts. In Europe, we operate exchanges in Stockholm (Sweden), Copenhagen (Denmark), Helsinki (Finland), and Iceland as NASDAQ OMX Nordic, and exchanges in Tallinn (Estonia), Riga (Latvia) and Vilnius (Lithuania) as NASDAQ OMX Baltic. Collectively, the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic offer trading in cash equities, bonds, structured products and ETFs, as well as trading and clearing of derivatives and clearing of resale and repurchase agreements. Our Nordic and Baltic operations also offer alternative marketplaces for smaller companies called NASDAQ OMX First North. As of December 31, 2010, the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, together with NASDAQ OMX First North, were home to 780 listed companies with a combined market capitalization of approximately $1.1 trillion. We also operate NASDAQ OMX Armenia. In addition, NASDAQ OMX Commodities operates the world’s largest power derivatives exchange, one of Europe’s largest carbon exchanges and N2EX, a marketplace for physical U.K. power contracts. In some of the countries where we operate exchanges, we also provide clearing, settlement and depository services. History and Structure Nasdaq was founded in 1971 as a wholly-owned subsidiary of the Financial Industry Regulatory Authority, or FINRA (then known as the National Association of Securities Dealers, Inc.). Beginning in 2000, FINRA restructured and broadened ownership in Nasdaq by selling shares to FINRA members, investment companies and issuers listed on The NASDAQ Stock Market. In connection with this restructuring, Nasdaq applied to the SEC to register The NASDAQ Stock Market as a national securities exchange. Prior to operating as an exchange, The NASDAQ Stock Market operated under an SEC-approved plan that provided a delegation of legal authority from FINRA to The NASDAQ Stock Market to operate as a stock market. FINRA fully divested its ownership of Nasdaq in 2006, and The NASDAQ Stock Market became fully operational as an independent registered national securities exchange in 2007. In 2006, Nasdaq also reorganized its operations into a holding company structure. As a result, our exchange licenses and exchange and broker-dealer operations are held by our subsidiaries. On February 27, 2008, Nasdaq and OMX AB combined their businesses pursuant to an agreement with Borse Dubai Limited, a Dubai company, or Borse Dubai, and Nasdaq was renamed The NASDAQ OMX Group, Inc. Concurrently with the business combination with OMX AB, we also acquired a 33 1⁄ 3% equity stake in 2 139443_020_Nasdaq_1-188.p6.pdf QC 20 Black 04-07 19:41 NASDAQ Dubai Limited, or NASDAQ Dubai. In December 2009, we agreed to participate in the realignment of the ownership structure of NASDAQ Dubai. In May 2010, as part of this realignment, NASDAQ Dubai became a wholly-owned subsidiary of Dubai Financial Market PJSC, or DFM, a publicly traded company controlled by Borse Dubai. NASDAQ OMX received a 1% equity interest in DFM in exchange for the equity interest in NASDAQ Dubai. In July 2008, we completed our acquisition of the Philadelphia Stock Exchange, Inc., or PHLX, expanding our presence in the derivatives market. PHLX, renamed NASDAQ OMX PHLX LLC, operates as a distinct market alongside The NASDAQ Options Market, our options platform that was launched in March 2008. In August 2008, we acquired the Boston Stock Exchange, Incorporated, or BSX. We used the BSX license to create a second U.S. cash equities market, called NASDAQ OMX BX, which was launched in January 2009. In October 2008, we acquired Nord Pool ASA’s, or Nord Pool’s, clearing, international derivatives and consulting subsidiaries. As a result of the acquisition, we launched NASDAQ OMX Commodities, which offers energy and carbon derivatives products. In December 2008, we acquired a majority interest in the International Derivatives Clearing Group, or IDCG, and IDCG became an independently operated subsidiary of NASDAQ OMX. IDCG provides central counterparty, or CCP, clearing for interest rate swap products through its clearinghouse subsidiary, International Derivatives Clearinghouse, LLC, or IDCH. In January 2009, we acquired a 22% stake in European Multilateral Clearing Facility N.V., or EMCF, a leading European clearinghouse. In addition, we signed an agreement with EMCF to use its CCP services for all Nordic cash equity transactions. In March 2010, with the purchase of the assets of North American Energy Credit and Clearing Corp., NASDAQ OMX expanded its presence in the OTC energy commodity markets. The acquisition of these assets was effected through our newly-established subsidiary NASDAQ OMX Commodities Clearing Company, or NOCC. In May 2010, we acquired Nord Pool ASA, a derivatives trading market. In August 2010, we completed our acquisition of SMARTS Group Holdings Pty Ltd, or SMARTS, a leading technology provider of surveillance solutions to exchanges, regulators and brokers. This acquisition is part of our strategy to diversify the Market Technology business and enter the surveillance and compliance market. We believe that this acquisition will strengthen our position as the leading technology partner to marketplaces worldwide. In December 2010, we completed our acquisitions of FTEN, Inc., or FTEN, a leading provider of Real-Time Risk Management, or RTRM, solutions for the financial securities market and Zoomvision Mamato, or ZVM, a company that provides live webcasting services primarily for investor relations professionals. ZVM is the leading provider of webcasting services in Northern Europe. Competitive Strengths Premier global exchange company. We are a premier global exchange company that is the largest cash equities market in terms of share value traded in the world. For the twelve months ended December 31, 2010, The NASDAQ Stock Market and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic had an average daily trading volume of 8.6 million trades in cash equities, representing a value of approximately $15.1 trillion. In addition, across our markets, we had 3,558 listings representing 42 countries as of December 31, 2010. We have many of the world’s largest companies listed on our marketplaces. Our wholly- owned subsidiary The NASDAQ Stock Market continues to be the single largest liquidity pool for trading cash equities in the U.S. Leader in global exchange technology. We believe we are the leader in global exchange technology. As the world’s first electronic stock exchange, we pioneered electronic trading and have continued to innovate over the last 30 years. Our INET platform processes trades at sub-millisecond transaction speeds with close to 100% system reliability. In addition, our platforms are highly scalable with current capacity at ten times the average daily volume allowing significantly higher transaction volume to be handled at low incremental cost. 3 139443_020_Nasdaq_1-188.p7.pdf QC 21 Black 04-07 19:41 Furthermore, we were the first exchange to offer electronic trading and integrated derivatives trading and clearing to other exchanges and today have a global technology customer base of more than 70 marketplaces in over 50 countries worldwide, including China (Hong Kong), Japan, Singapore, Australia and the U.S. Our Genium INET® offering, based on proven INET technology, provides technology customers with the speed, scale and reliability required to meet the specific needs of their markets. We believe that we will continue to provide leading technology for the world’s competitive and demanding capital markets, which increasingly require that exchanges be able to constantly secure the best price for investors and issuers, a natural strength of our technology and electronic trading platforms. Diversified operations and products. We have a diversified business, both in terms of geography and product offerings. In addition, our recent acquisitions, investments and strategic initiatives have significantly diversified our product offerings, particularly in the derivatives trading and clearing, clearing of resale and repurchase agreements, commodities and surveillance technology businesses. Proven and disciplined management team. We have a proven and disciplined management team that has substantial industry experience and expertise in making and integrating strategic acquisitions. Led by Robert Greifeld, our Chief Executive Officer, our executive management team has significant experience in the financial services industry. We believe the NASDAQ OMX management team has demonstrated an ability to innovate and respond effectively to market opportunities. Commitment to regulatory integrity. As a global exchange company, we are subject to regulation in many jurisdictions worldwide. We are charged by regulators with maintaining fair and orderly markets for the benefit of investors, and we work to fulfill this obligation in several ways. In some instances, we have entered into agreements with independent third parties to provide regulatory oversight that is separate from our markets. In addition, we operate real-time market surveillance programs relating to trading and compliance-monitoring and enforcement programs with respect to listings on our markets. We are committed to strong and effective regulation and believe that regulatory integrity benefits investors, strengthens the NASDAQ OMX brand and attracts companies seeking to do business with us or to list securities on our markets. Products and Services We operate in three segments: Market Services, Issuer Services and Market Technology. Of our 2010 revenues less transaction rebates, brokerage, clearance and exchange fees of $1,522 million, 67.3% was from our Market Services segment, 22.6% was from our Issuer Services segment, 10.0% was from our Market Technology segment and 0.1% related to other revenues. Of our 2009 revenues less transaction rebates, brokerage, clearance and exchange fees of $1,453 million, 67.2% was from our Market Services segment, 22.7% was from our Issuer Services segment, 10.0% was from our Market Technology segment and 0.1% related to other revenues. Of our 2008 revenues less transaction rebates, brokerage, clearance and exchange fees of $1,460 million, 67.5% was from our Market Services segment, 23.5% was from our Issuer Services segment, 8.2% was from our Market Technology segment and 0.8% related to other revenues. See Note 18, “Segments,” to the consolidated financial statements for additional financial information about our segments and geographic data. Market Services Our Market Services segment includes our U.S. and European Transaction Services businesses, as well as our Market Data and Broker Services businesses. We offer trading on multiple exchanges and facilities across several asset classes, including cash equities, derivatives, debt, commodities, structured products and ETFs. In addition, in some of the countries where we operate exchanges, we also provide clearing, settlement and depository services. 4 139443_020_Nasdaq_1-188.p8.pdf QC 22 Black 04-07 19:41 U.S. Transaction Services In the U.S., we offer trading in cash equity securities, derivatives and ETFs on The NASDAQ Stock Market, The NASDAQ Options Market, NASDAQ OMX PHLX, NASDAQ OMX BX, NASDAQ OMX PSX and NASDAQ OMX Futures Exchange, or NFX, and engage in riskless principal trading of OTC power and gas contracts through NOCC. Our transaction-based platforms in the U.S. provide market participants with the ability to access, process, display and integrate orders and quotes for cash equity securities, derivatives and ETFs. The platforms allow the routing and execution of buy and sell orders as well as the reporting of transactions for cash equity securities, derivatives and ETFs, providing fee-based revenues. Cash Equities Trading. The NASDAQ Stock Market is the largest single pool of liquidity for trading U.S.- listed cash equities, matching an average of approximately 18.8% of all U.S. cash equities volume for 2010. In January 2009, we launched a second U.S. cash equities market, called NASDAQ OMX BX. With NASDAQ OMX BX, we offer a second quote within the U.S. cash equities marketplace, providing our customers enhanced trading choices and price flexibility. We have been able to leverage our INET trading system, which runs The NASDAQ Stock Market, to operate NASDAQ OMX BX, providing customers an additional fast and efficient cash equity securities market. In 2010, NASDAQ OMX BX matched an average of approximately 3.3% of all U.S. cash equities volume. In October 2010, we launched a third U.S. cash equities market, called NASDAQ OMX PSX. This new market utilizes a price-size priority model and also runs on INET technology, leveraging the speed and efficiency benefits offered throughout NASDAQ OMX globally. Our fully electronic U.S. transaction-based platforms provide members with the ability to access, process, display and integrate orders and quotes in cash equity securities on The NASDAQ Stock Market, NASDAQ OMX BX and NASDAQ OMX PSX. Market participants include market makers, broker-dealers, alternative trading systems, or ATSs, and registered securities exchanges. These services are offered for NASDAQ-listed and non-NASDAQ-listed securities. Specifically, our platforms: • • • Provide a comprehensive display of the interest by market participants at the highest price a participant is willing to buy a security (best bid) and also the lowest price a participant is willing to sell that security (best offer). Provide subscribers quotes, orders and total anonymous interest at every price level for exchange-listed securities and critical data for the Opening Cross, Closing Cross, Halt Cross and IPO Cross. Provide anonymity to market participants. In other words, participants do not know the identity of the firm displaying the order unless that firm chooses to reveal its identity, which can contribute to improved pricing for securities by reducing the potential market impact that transactions by investors whose trading activity, if known, may influence others. Trade Reporting. All U.S. registered national securities exchanges and securities associations are required to establish a transaction reporting plan for the central collection of price and volume information concerning trades executed in those markets. Trades executed on The NASDAQ Stock Market, NASDAQ OMX BX and NASDAQ OMX PSX are automatically reported under the appropriate transaction reporting plan. Currently, market participants are not charged for the reporting of most of these trades. The NASDAQ Stock Market, NASDAQ OMX BX and NASDAQ OMX PSX, however, earn revenues for all of these trades in the form of shared market information revenues under the Unlisted Trading Privileges Plan, or the UTP Plan, for NASDAQ-listed securities and under the Consolidated Tape and Consolidated Quotation Plans for securities listed on the New York Stock Exchange, or NYSE, NYSE Amex and other exchanges. Through The FINRA/NASDAQ Trade Reporting Facility, or FINRA/NASDAQ TRF, we collect reports of trades executed by broker-dealers outside of our exchanges. The FINRA/NASDAQ TRF collects trade reports as a facility of FINRA. A large percentage of these trades results from orders that broker-dealers have matched 5 139443_020_Nasdaq_1-188.p9.pdf QC 23 Black 04-07 19:41 internally, or internalized, and is submitted to the FINRA/NASDAQ TRF for reporting purposes only. The FINRA/NASDAQ TRF charges market participants for locked in reporting of most trades, but it shares back most revenues earned from shared market information with respect to the trades. The FINRA/NASDAQ TRF also generates revenues by providing trade comparison to broker dealers by matching and locking-in the two parties to a trade that they have submitted to the FINRA/NASDAQ TRF for reporting and clearing. In addition to trade reporting and trade comparison services, we provide clearing firms with risk management services to assist them in monitoring their exposure to their correspondent brokers. U.S. Derivative Trading and Clearing. In the U.S., we operate The NASDAQ Options Market and NASDAQ OMX PHLX for the trading of equity options, ETF options, index options and currency options. As of December 31, 2010, NASDAQ OMX PHLX was the largest options market in the U.S. NASDAQ OMX PHLX operates a hybrid electronic and floor-based market as a distinct market alongside The NASDAQ Options Market. During the year ended December 31, 2010, NASDAQ OMX PHLX and The NASDAQ Options Market had an average combined market share of approximately 27.4% in the U.S. equity options market, consisting of approximately 23.4% at NASDAQ OMX PHLX and approximately 4.0% at The NASDAQ Options Market. Together, the 27.4% represented the largest share of the U.S. equity and ETF options market. Our options trading platforms provide trading opportunities to both retail investors and high frequency trading firms, who tend to prefer electronic trading, and institutional investors, who typically pursue more complex trading strategies and often prefer to trade on the floor. In the U.S., we also operate NFX which offers trading for currency futures and other financial futures. Most futures traded on NFX clear at The Options Clearing Corporation, or OCC. In addition, NFX serves as the designated contract market for interest rate swap futures that are cleared through IDCH. Through IDCH, our majority-owned subsidiary IDCG brings a centrally-cleared solution to the largest segment of the OTC derivatives marketplace, specifically interest rate derivatives. IDCH acts as the CCP for clearing interest rate swap futures contracts. IDCH utilizes NASDAQ OMX matching and clearing technology to clear and settle these interest rate derivative products. With the purchase of the assets of North American Energy Credit and Clearing Corp. in March 2010 by our newly-established subsidiary NOCC, NASDAQ OMX also expanded its presence in the OTC energy commodity markets. Acquisition of FTEN. In December 2010, we completed our acquisition of FTEN, a leading provider of RTRM solutions for the financial securities market. As a market leader in RTRM, FTEN is well positioned to grow as the industry is becoming more focused on solutions for effectively managing risk. Market participants are seeking tools that provide real-time, low latency enterprise-wide risk management, market awareness and control. FTEN’s technology provides broker-dealers and their clients the ability to manage risk more effectively in real-time, which leads to better utilization of capital as well as improved regulatory compliance. We will offer FTEN solutions to our global base of broker-dealers and the international exchange community. European Transaction Services Nordics. NASDAQ OMX Nordic’s operations comprise the exchanges in Stockholm (Sweden), Copenhagen (Denmark), Helsinki (Finland), and Iceland. The exchanges offer trading for cash equities and bonds, trading and clearing services for derivatives, and beginning September 2010, clearing services for resale and repurchase agreements. Our platform allows the exchanges to share the same trading system, which enables efficient cross-border trading and settlement, cross membership and a single source for Nordic market data. Trading is offered in Nordic securities such as cash equities and depository receipts, warrants, convertibles, rights, fund units, ETFs, bonds and other interest-related products. NASDAQ OMX Stockholm and NASDAQ 6 139443_020_Nasdaq_1-188.p10.pdf QC 24 Black 04-07 19:41 OMX Copenhagen also offer trading in derivatives, such as stock options and futures, index options and futures, fixed-income options and futures and stock loans. Settlement and registration of cash trading takes place in Sweden, Finland, Denmark and Iceland via the local central securities depositories. In 2009, NASDAQ OMX expanded its trading offering to include cash equities listed in Norway and launched a new portfolio of Norwegian derivatives products. The offering is designed to provide lower trading costs and other benefits for customers seeking to trade all Nordic cash equity products on one platform. NASDAQ OMX has been the second largest market for trading in Norwegian stocks since 2009. Through our clearing operations in the derivative markets with NASDAQ OMX Stockholm, we are the legal counterparty for each derivative position traded and thereby guarantee the fulfillment of each contract. We also act as the counterparty for certain trades on OTC derivative contracts. The derivatives are not used by NASDAQ OMX Stockholm for the purpose of trading on its own behalf. As the legal counterparty of each transaction, NASDAQ OMX Stockholm bears the counterparty risk between the purchaser and the seller in the contract. The counterparty risks are measured using models that are agreed to with the Financial Supervisory Authority of the applicable country, which requires us to provide minimum guarantees and maintain certain levels of regulatory capital. The structure and operations of NASDAQ OMX Stockholm differ from other clearinghouses. NASDAQ OMX Stockholm is not a member-owned organization, does not maintain a guarantee fund to which members contribute and does not enforce loss sharing assessments amongst members. In addition, unlike other clearinghouses, it does not record any margin deposits and guarantee funds, as all risks and rewards of collateral ownership, including interest, belongs to the counterparty. Market participants must provide collateral to cover the daily margin call as needed, which is in addition to the initial collateral placed when entering into the transaction. Acceptable collateral is cash and eligible securities in a pledged bank account and/or an on-demand guarantee. All collateral is maintained at a third-party custodian bank for the benefit of the clearing members and is accessible by NASDAQ OMX in the event of default. In addition, market participants must meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations. For NASDAQ OMX Stockholm, following the completion of a transaction, settlement primarily takes place between parties by net cash settlement or with the exchange of securities and funds. For those transactions where there is an exchange of securities and funds, the transfer of ownership is registered and the securities are stored on the owner’s behalf. Beginning in October 2009, most of our cash equity trades on the exchanges that comprise NASDAQ OMX Nordic are centrally cleared by EMCF, a leading European clearinghouse in which we own a 22% equity stake. In September 2010, NASDAQ OMX launched a clearing service for the resale and repurchase agreement market together with market participants. As a result of an agreement between the Swedish Money Market Council and NASDAQ OMX, the entire Swedish Interbank resale and repurchase agreement market will ultimately be cleared through NASDAQ OMX Stockholm. Similar to derivative clearing discussed above, through our clearing operations in the resale and repurchase markets with NASDSQ OMX Stockholm, we are the legal counterparty for each resale and repurchase contract traded and thereby guarantee the fulfillment of each contract. We only clear these transactions once a bilateral contract between members has been entered into whereby the two members have agreed on all terms in the transaction. The resale and repurchase agreements are not used for financing purposes by NASDAQ OMX. As the legal counterparty of each transaction, NASDAQ OMX Stockholm bears the counterparty risk between the purchaser and the seller in a resale and repurchase agreement. As discussed above, the structure and operations for the resale and repurchase market is similar to the derivative market. For resale and repurchase agreements, collateral is not held by NASDAQ OMX Stockholm. All resale and repurchase clearing activities are transacted under our clearing member agreements that give us the right, in the event of default, to liquidate collateral pledged between the clearing members and to offset receivables and payables with the same counterparty. 7 139443_020_Nasdaq_1-188.p11.pdf QC 25 Black 04-07 19:41 Pledged collateral, which is transferred through NASDAQ OMX Stockholm at initiation of the bilateral contract between the two clearing member counterparties, primarily consists of Swedish government debt securities. Market participants must meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations. In the event that one of the participants cannot fulfill its obligation to deliver or receive the underlying security at the agreed upon price, NASDAQ OMX Stockholm is required to buy or sell the security in the open market to fulfill its obligation. In order to protect itself against a price movement in the value of the underlying security, or price risk, NASDAQ OMX Stockholm requires all participants to provide additional margin, which is valued on a daily basis and is maintained at a third-party custodian bank for the benefit of the clearing members and is accessible by NASDAQ OMX Stockholm in the event of default. Baltics. NASDAQ OMX Baltic operations comprise the exchanges in Tallinn (Estonia), Riga (Latvia) and Vilnius (Lithuania). During the first quarter of 2010, we acquired the remaining 7% minority holding in NASDAQ OMX Tallinn and an additional ownership stake of 0.4% in NASDAQ OMX Vilnius, both for immaterial amounts. As of December 31, 2010, NASDAQ OMX owns 100% of NASDAQ OMX Tallinn, 95% of NASDAQ OMX Vilnius and 93% of NASDAQ OMX Riga. In addition, NASDAQ OMX Tallinn owns 100% of the central securities depository in Estonia, NASDAQ OMX Riga owns 100% of the central securities depository in Latvia, and NASDAQ OMX Vilnius owns 40% of the central securities depository in Lithuania. The exchanges that comprise NASDAQ OMX Baltic offer their members trading, clearing, payment and custody services. Issuers, primarily large local companies, are offered listing and a distribution network for their securities. The securities traded are mainly cash equities, bonds and treasury bills. Clearing, payment and custody services are offered through the central securities depositories in Estonia, Latvia and Lithuania. In addition, in Estonia and Latvia, NASDAQ OMX offers registry maintenance of fund units included in obligatory pension funds, and in Estonia, NASDAQ OMX offers the maintenance of shareholder registers for listed companies. The Baltic central securities depositories offer a complete range of cross-border settlement services. Pan-European. In the second quarter of 2010, we made a strategic decision to close the business of our pan-European multilateral trading facility NASDAQ OMX Europe, or NEURO. We retained our London office and data hub, where we support trading and market data clients, run the U.K. power exchange N2EX and manage our overseas listings operation. Our decision to close the business of NEURO will not have a significant impact on our future results of operations. Commodities Trading and Clearing. NASDAQ OMX Commodities offers derivatives and carbon products, operates a clearing business and offers consulting services to commodities markets globally. With our acquisition of Nord Pool, NASDAQ OMX Commodities’ offering now includes the world’s largest power derivatives exchange and one of Europe’s largest carbon exchanges. NASDAQ OMX Commodities has 361 members across a wide range of energy producers and consumers, as well as financial institutions. NASDAQ OMX Commodities’ offering is designed for banks, brokers, hedge funds and other financial institutions, as well as power utilities, industrial, manufacturing and oil companies. NASDAQ OMX Commodities offers clearing services for energy derivative and carbon product contracts by serving as the CCP. Similar to derivative clearing and resale and repurchase agreement clearing on NASDAQ OMX Stockholm discussed above, through our clearing operations in the derivative markets with NASDAQ OMX Commodities, we are also the legal counterparty for each derivative position traded and thereby guarantee the fulfillment of each contract. We also act as the counterparty for certain trades on OTC derivative contracts. The derivatives are not used by NASDAQ OMX Commodities for the purpose of trading on its own behalf. As the legal counterparty of each transaction, NASDAQ OMX Commodities bears the counterparty risk between the purchaser and seller in the contract. The counterparty risks are measured using models that are agreed to with the Financial Supervisory Authority of the applicable country, which require us to provide minimum guarantees and maintain certain levels of regulatory capital. NASDAQ OMX Commodities utilizes the same structure and operations as the derivative markets for NASDAQ OMX Stockholm, discussed above. Trading on the contracts can take place up until the delivery period which may occur over a period of several years. 8 139443_020_Nasdaq_1-188.p12.pdf QC 26 Black 04-07 19:41 In January 2010, NASDAQ OMX Commodities and Nord Pool Spot launched N2EX, a marketplace for physical UK power contracts. Access Services We provide market participants with several alternatives for accessing our markets for a fee. Shifting connectivity from proprietary networks to third-party networks has significantly reduced technology and network costs and increased our systems’ scalability without affecting performance or reliability. Our U.S. marketplaces may be accessed via a number of different protocols. The Financial Information Exchange product that uses the FIX protocol, a standard method of financial communication between trading firms and vendors, enables firms to leverage their existing FIX technology with cost-effective connections to our markets. Market participants may also access our systems using QIX, a proprietary programming interface that provides a more streamlined and efficient protocol for our users with expanded functionality, including quotation updates, and computer-to-computer interface, a protocol that allows market participants to enter transactions directly from their computer systems to our computer systems. Finally, firms may use former INET protocols, such as OUCH and RASH, to access our single trading platform. As an alternative to firm-developed trading front-end, our system offers the NASDAQ Workstation, an internet browser based interface that allows market participants to view market data and enter orders, quotes and trade reports. We provide co-location services to market participants whereby firms may lease space for equipment within our data center. These participants are charged monthly fees for cabinet space, connectivity and support. We also earn revenues from annual and monthly exchange membership and registration fees. Market Data We earn Market Data revenues from U.S. tape plans and U.S. and European proprietary market data products. U.S. Tape Plans. The NASDAQ Stock Market operates as the exclusive Securities Information Processor of the UTP Plan for the collection and dissemination of best bid and offer information and last transaction information from markets that quote and trade in NASDAQ-listed securities. The NASDAQ Stock Market, NASDAQ OMX BX and NASDAQ OMX PSX are participants in the UTP Plan and share in the net distribution of revenue according to the plan on the same terms as the other plan participants. In the role as the Securities Information Processor, The NASDAQ Stock Market collects and disseminates quotation and last sale information for all transactions in NASDAQ-listed securities whether traded on The NASDAQ Stock Market or other exchanges. We sell this information to market participants and to data distributors, who then provide the information to subscribers. After deducting costs associated with our role as an exclusive Securities Information Processor, as permitted under the revenue sharing provision of the UTP Plan, we distribute the tape revenues to the respective UTP Plan participants, including The NASDAQ Stock Market, NASDAQ OMX BX and NASDAQ OMX PSX, based on a formula required by Regulation NMS that takes into account both trading and quoting activity. In addition, all quotes and trades in NYSE- and NYSE Amex-listed securities are reported and disseminated in real time, and as such, we share in the tape revenues for information on NYSE- and NYSE Amex-listed securities. U.S. Market Data Products. Our market data products enhance transparency and provide critical information to professional and non-professional investors. We collect, process and create information and earn revenues as a distributor of our own, as well as select third-party content. We provide varying levels of quote and trade information to market participants and to data distributors, who in turn provide subscriptions for this information. Our systems enable distributors to gain direct access to our market depth, index values, mutual fund valuation, order imbalances, market sentiment and other analytical data. We earn revenues primarily based on the number of data subscribers and distributors of our data. 9 139443_020_Nasdaq_1-188.p13.pdf QC 27 Black 04-07 19:41 We distribute this proprietary market information to both market participants and non-participants through a number of proprietary products. We use our broad distribution network of more than 1,800 market data distributors to deliver data regarding our market depth, index values, mutual fund valuation, order imbalances, market sentiment and other analytical data. We offer a range of proprietary data products, including NASDAQ TotalView, our flagship market depth quote product. TotalView shows subscribers quotes, orders and total anonymous interest at every price level in The NASDAQ Stock Market for NASDAQ-listed securities and critical data for the Opening, Closing, Halt and IPO Crosses. TotalView is offered through distributors to professional subscribers for a monthly fee per terminal and to non-professional subscribers for a lower monthly fee per terminal. We also offer TotalView enterprise licenses to facilitate broad based distribution of this data. In addition, we charge the distributor a monthly distributor fee. We operate several other proprietary services and data products to provide market information, which include: • NASDAQ Basic, launched in 2009, which offers a flexible and affordable way to provide customers with essential trading data of best bid and offer and last sale information; • NASDAQ Last Sale, which provides broad based and universal access to real-time last sale information via Internet portals; • NASDAQ Market Replay, a powerful replay and analysis tool that allows users to view order book and trade data for NASDAQ, NYSE- and NYSE Amex-listed securities at any point in time; • NASDAQ OMX DataStore, which is designed to transform the market data industry through use of plug-and-play technology to deliver new proprietary information content; • Mutual Fund Quotation Service, a service for over 26,000 mutual funds, money market funds and unit investment trusts that supports fund data, including net asset values, and capital gains and dividend income distribution and provides print and electronic media exposure for the funds; • Mutual Fund Dissemination Service, which is a service that facilitates the real-time and end-of-day recap dissemination of all mutual fund pricing information and is used by data vendors and media to receive complete net asset value data on funds; • Global Index Dissemination Service, released in 2009, which is a real-time data feed that carries the values for a number of broad-based and sector indexes and ETFs; • RussellTick, released in 2010, which is a data feed that consolidates the distribution of the Russell family of indexes; and • Top of PHLX Options Plus Orders, or TOPO Plus Orders, which is a data product for the NASDAQ OMX PHLX options market. European Market Data Products. The exchanges that comprise NASDAQ OMX Nordic, NASDAQ OMX Baltic and NASDAQ OMX Commodities offer European market data products and services. These data products and services provide critical market transparency to professional and non-professional investors who participate in European marketplaces and, at the same time, give investors greater insight into these markets. European market data products and services are based on the trading information from the exchanges that comprise NASDAQ OMX Nordic, NASDAQ OMX Baltic and NASDAQ OMX Commodities for four classes of assets: cash equities, bonds, derivatives and commodities. We provide varying levels of quote and trade information to market participants and to data distributors, who in turn provide subscriptions for this information. Revenues from European market data are subscription-based and are generated primarily based on the number of data subscribers and distributors of our data. 10 139443_020_Nasdaq_1-188.p14.pdf QC 28 Black 04-07 19:41 We provide a wide range of data products including products in real-time, some with a time delay or in batch delivery. These products and services are packaged for market professionals as well as for private individuals, and include real-time information on market depth, specific transactions and share-price trends, the compilation and calculation of reference information such as indexes and the presentation of statistics. Significant European market data products include: • Nordic Equity TotalView, which provides full market insight into the order book, news and analysis data for all Nordic cash equities. The product also includes index values and weights and liquidity measure indicators; • Nordic Derivative Level 2, which provides listing details, trade information, derived information and order book information with the five best levels of bid and ask prices with the respective total quantity; • Nordic Fixed Income Level 2, which provides listing details, order book information, bid and ask quotes for up to five levels, trade information, derived information, indicative bid and ask quotes, daily turnover statistics and company disclosures; and • European Last Sale, which provides broad based and universal access to real-time last sale information via Internet portals. Broker Services Our Broker Services operations offer technology and customized securities administration solutions to financial participants in the Nordic market. Broker Services provides services through a registered securities company that is regulated by the Swedish Financial Supervisory Authority, or SFSA. The primary services consist of flexible back-office systems, which allow customers to entirely or partly outsource their company’s back-office functions. We offer customer and account registration, business registration, clearing and settlement, corporate action handling for reconciliations and reporting to authorities. Available services also include direct settlement with the Nordic central securities depositories, real-time updating and communication via the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, to deposit banks. Issuer Services Our Issuer Services segment includes our Global Listing Services and Global Index Group businesses. We offer capital raising solutions to companies around the globe and have more worldwide listings than any other global exchange group—approximately 3,600 companies representing approximately $5.7 trillion in total market value as of December 31, 2010. We operate a variety of listing platforms around the world to provide multiple global capital raising solutions for private and public companies. Our main listing markets are The NASDAQ Stock Market and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic. We offer a consolidated global listing application to companies to enable them to apply for listing on The NASDAQ Stock Market and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, as well as NASDAQ Dubai. Global Listing Services Our Global Listing Services business includes our U.S. Listings, European Listings and Corporate Solutions businesses. U.S. Listings. Companies listed on The NASDAQ Stock Market represent a diverse array of industries including health care, consumer products, telecommunication services, information technology, financial services, industrials and energy. 11 139443_020_Nasdaq_1-188.p15.pdf QC 29 Black 04-07 19:41 Companies seeking to list securities on The NASDAQ Stock Market must meet minimum listing requirements, including specified financial and corporate governance criteria. Once listed, companies must meet continued listing standards. The NASDAQ Stock Market currently has three listing tiers: The NASDAQ Global Select Market, The NASDAQ Global Market and The NASDAQ Capital Market. All three market tiers maintain rigorous listing and corporate governance standards (both initial and ongoing). As of December 31, 2010, a total of 2,778 companies listed securities on The NASDAQ Stock Market, with 1,323 listings on The NASDAQ Global Select Market, 975 on The NASDAQ Global Market and 480 on The NASDAQ Capital Market. We aggressively pursue new listings from companies, including those undergoing IPOs as well as companies seeking to switch from alternative exchanges. In 2010, The NASDAQ Stock Market attracted 195 new listings. Included in these listings were 89 IPOs, almost 47% of the total U.S. IPOs in 2010. The new listings were comprised of the following: Total New Listings on The NASDAQ Stock Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switches from NYSE/NYSE Amex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IPOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Upgrades from OTC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ETFs, Structured Products and Other Listings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 12 89 54 40 In 2010, the following three NYSE-listed companies switched to The NASDAQ Stock Market, representing $9.6 billion in market capitalization: Hasbro, Inc., Avis Budget Group, Inc. and Potlatch Corporation. A total of eight companies switched from NYSE Amex and one company switched from NYSE Arca to The NASDAQ Stock Market in 2010. European Listings. We also offer listings on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic. For smaller companies and growth companies, we offer access to the financial markets through the NASDAQ OMX First North alternative marketplaces. As of December 31, 2010, a total of 780 companies listed securities on our Nordic and Baltic exchanges and NASDAQ OMX First North. Measured in terms of the market capitalization of listed companies, as of December 31, 2010, NASDAQ OMX Nordic was the second largest marketplace in Europe for IT companies, the largest marketplace in the world for the paper industry, the second largest marketplace in the world for apparel retail companies and third largest marketplace in the world for the industrial machinery industry. Our European listing customers are organizations such as companies, funds or governments. Customers issue securities in the forms of cash equities, depository receipts, warrants, ETFs, convertibles, rights, options, bonds and fixed-income related products. In 2010, a total of 25 new companies were listed on our Nordic and Baltic exchanges and NASDAQ OMX First North. Corporate Solutions. Our Corporate Solutions business provides customer support services, products and programs to companies, including companies listed on our exchanges. Through our Corporate Solutions offerings, companies gain access to innovative products and services that ease transparency, mitigate risk, maximize board efficiency and facilitate better corporate governance. We provide corporate solutions in the following key areas of focus: • Investor Relations. We provide industry-leading investor relations and news distribution products designed to make it easier for companies to interact and communicate with analysts and investors while meeting corporate governance and disclosure requirements. • Market Monitoring. We offer unique proprietary services that help companies monitor their stock and track peer performance. 12 139443_020_Nasdaq_1-188.p16.pdf QC 30 Black 04-07 19:41 • Board Practice. We offer management solutions to ensure board member effectiveness. • Global Visibility. We provide ways for companies to increase their visibility through our MarketSite offerings and access to discounts and special offers from other listed companies. • PORTAL. In addition to traditional public offerings, SEC Rule 144A provides public and private companies with another option for effectively raising capital at a lower cost and with fewer regulatory hurdles. We have managed the process to designate SEC Rule 144A unregistered securities as PORTAL securities since 1990. In December 2010, we completed our acquisition of ZVM, a provider of webcasting and investor relations communication services for companies in the Nordic region. ZVM, which is the leading provider of webcasting services in Northern Europe, will add to the growing range of capabilities and services NASDAQ OMX offers public and private companies in the U.S. and Europe. Global Index Group We are one of the world’s leading index providers. We develop and license NASDAQ OMX branded indexes, associated derivatives and financial products as part of our Global Index Group. We believe that these indexes and products leverage, extend and enhance the NASDAQ OMX brand. License fees for our trademark licenses vary by product based on a percentage of underlying assets, dollar value of a product issuance, number of products or number of contracts traded. In addition to generating licensing revenues, these products, particularly mutual funds and ETFs, lead to increased investments in companies listed on our global exchanges, which enhances our ability to attract new listings. We also license cash-settled options, futures and options on futures on our indexes. Our flagship index, the NASDAQ-100 Index, includes the top 100 non-financial securities listed on The NASDAQ Stock Market. With the launch of new index families such as the Green Economy and Sharia families, we now have over 1,600 diverse indexes, with 238 launched in 2010. NASDAQ OMX indexes are the basis for over 2,900 structured products in 27 countries. In 2010, product sponsors launched 24 ETFs based on NASDAQ OMX indexes. We also license cash-settled options, futures and options on futures on our indexes. Market Technology Powering more than 70 markets in over 50 countries, we are the world’s leading technology solutions provider and partner to exchanges, clearing organizations and central securities depositories. Our technology business is also the sales channel for our complete global offering to other marketplaces. Technology Solutions. The systems solutions we offer support trading, clearing, settlement, surveillance and information dissemination for markets with wide ranging requirements, from smaller African markets to the leading markets in the US, Europe and Asia. Furthermore, the solutions we offer can handle all classes of assets, including cash equities, currencies, various interest-bearing securities, commodities, energy products and derivatives on any of these assets. NASDAQ OMX’s technology solutions are utilized by, among others, the Australian Securities Exchange, Bolsa de Valores de Colombia, Egypt Stock Exchange, Hong Kong Exchanges and Clearing, SIX Swiss Exchange, Singapore Exchanges and Tokyo Commodity Exchange. Our trading and market data solutions are utilized by exchanges, alternative-trading venues and banks and securities brokers with marketplace offerings of their own. In the post trade stage, we offer integrated systems solutions for clearing (risk management) and settlement (settlement and delivery) of both cash equities and derivatives to clearing organizations around the world. 13 139443_020_Nasdaq_1-188.p17.pdf QC 31 Black 04-07 19:41 Systems Integration, Operation and Support. A central part of many projects is facility management and systems integration. Through our integration services, we can assume total responsibility for projects involving migration to a new system and the establishment of entirely new marketplaces. We also offer operation and support for the applications, systems platforms, networks and other components included in a turn-key information technology solution. By transferring the operation and support of systems to us, the customer can focus on its core operations and reduce its operational risk level. At the same time, economies of scale can be achieved, by allowing the customer access to existing, effective technology and infrastructure. Advisory Services. Our advisory services are designed to support our customers’ strategies and help them with critical decisions in a highly demanding business environment. Operating our own exchanges and partnering with global marketplaces, we continually gain insight on developments in the financial world. We understand first-hand how marketplaces operate, the challenges they face and the complex technology infrastructures that support them. Our consultants have deep experience in strategy, operations and change management, and are backed by the combined knowledge of NASDAQ OMX as well as a network of external experts in the exchange industry. Surveillance. In August 2010, we completed our acquisition of SMARTS, a leading technology provider of surveillance solutions to exchanges, regulators and brokers. This acquisition is part of our strategy to diversify our Market Technology business and enter the broker surveillance and compliance market. We believe that this acquisition will strengthen our position as the leading technology partner to marketplaces worldwide. Core Technology. Technology plays a key role in ensuring the growth and reliability of financial markets. At NASDAQ OMX, we are committed to innovation through technology to ensure our position as a driving force in the exchange industry and to provide the best possible trading experience for our customers and investors. Investment decisions are made based on customer needs and general market trends. We continuously improve our core technology with a focus on reducing latency and improving capacity and reliability. NASDAQ OMX’s next generation technology is capable of handling multi-million messages per second at an average speed of sub-100 microseconds, currently the fastest of any exchange or alternative trading system in the world. The foundation for NASDAQ OMX’s core technology is INET. The INET technology is used across NASDAQ OMX’s U.S. and European markets. INET is also the main building block of our Market Technology offering, Genium INET. Genium INET combines innovative functionality with a modular approach to manage change and create new advantages for existing and new customers, as well as our own marketplaces. Intellectual Property We own or have licensed rights to trade names, trademarks, domain names and service marks that we use in conjunction with our operations and services. We have registered many of our most important trademarks in the United States and in foreign countries. For example, our primary “NASDAQ” mark is a registered trademark in the United States and in over 50 other countries worldwide and the OMX trademark also has been registered worldwide. We also have trademark registrations for the most important trade names of NASDAQ OMX Nordic and our operations in Europe. Many of these trademarks are registered in a number of countries. An example of the registered trademarks used in our European operations include: OMX, GENIUM, Genium INET, SECUR, CLICK XT and EXIGO. We also maintain copyright protection in our NASDAQ-branded materials and pursue patent protection for NASDAQ OMX-developed inventions and processes. We focus on gaining patent protection for the software functionality that we develop in order for us to fully benefit from our research and development investments. We accomplish this through the evaluation of inventions, the preparation, filing and prosecution of patent applications for inventions deemed worthwhile to pursue, the maintenance of granted patents, the coordination of information within the organization about patents and the monitoring of competitors for possible use of patented information. 14 139443_020_Nasdaq_1-188.p18.pdf QC 32 Black 04-07 19:41 Competition Market Services. The cash equity securities markets are intensely competitive. We compete in the U.S. against NYSE Euronext, BATS Global Markets, Direct Edge, regional exchanges and alternative trading systems, or ATSs. In Europe, our major competitors include NYSE Euronext, Deutsche Börse, the London Stock Exchange Group plc, or LSE, the Spanish Exchanges, SIX Swiss Exchange, and multilateral trading facilities, or MTFs, such as Chi-X and BATS Europe, which are similar to U.S. ATSs. Competition also comes from broker- dealers and from off-board or OTC trading in the U.S. and elsewhere. In bond trading, we compete in Europe with alternative marketplaces such as EuroMTS Limited. For derivatives products, competition comes in the form of trading and clearing that takes place OTC, usually through banks and brokerage firms, or through trading and clearing competition with other exchanges. The competitive significance in Europe of these varied alternative trading venues is likely to increase in the future, with the regulatory environment in Europe becoming more favorable to alternative trading venues as a result of the reforms required by the Markets in Financial Instruments Directive, or MiFID, and a broader effort to increase competition in financial services. Competition is based on a number of factors, including the quality of our technological and regulatory infrastructure, total transaction costs, the depth and breadth of liquidity, the quality of value-added customer services, reputation and the direct cost of trade execution. Cash equity securities trading. The U.S. marketplace continues to evolve as the number of exchanges increases and less heavily regulated broker-owned trading systems and ATSs, known collectively as dark pools, expand in number and activity. While many of the new entrants may have limited liquidity, some may attract significant levels of cash equity order volume through aggressive pricing, through interconnections with other systems, and from volume originating with broker-dealer owners and investors. Broker-dealer owned systems continued the rapid growth that began in 2009 throughout 2010. In addition, there remains interest in electronic trading systems specializing primarily in large block trades, such as LiquidNet, Pipeline Trading and Investment Technology Group’s POSIT platform. During 2010, three new exchange competitors to NASDAQ OMX appeared. In July 2010, Direct Edge received SEC approval to operate its two markets (EDGA and EDGX) as exchanges and in October 2010, BATS launched a second exchange (BATS-Y). During 2010, NASDAQ OMX also launched its third cash equity exchange, NASDAQ OMX PSX, to provide a third alternative combination of pricing and features. Finally, 2010 saw two significant regulatory events that could result in significant changes in the competitive landscape: the SEC published a market structure concept release early in 2010 and the May 6th “flash crash” accelerated rulemaking intended to prevent repeat of that day’s extreme price changes. Rules concerning halting trading during volatile markets, market access, algorithmic (high frequency) trading, alternative trading systems such as dark pools, and other market structure issues could change the competitive landscape by helping or hurting NASDAQ OMX or its competitors’ business models. The European landscape is continuing to adapt to the competitive forces released by MiFID in November 2007. Throughout Europe, new MTFs have been created with the most prominent MTFs (Chi-X, Turquoise, and BATS) based in the United Kingdom and attracting a significant share of electronically matched volume. MTFs continue to grow their business in shares listed on our Nordic exchanges. Trade reporting alternatives to incumbent exchanges, such as Markit BOAT, or BOAT, also continue to be active. Electronic trading systems interested in pursuing block business have long been active in Europe and are looking to grow their businesses. In the Nordics, the Burgundy MTF grew modestly in 2010 and plans to expand its business in 2011. These entrants pursue many of the same strategies to attract order flow as do ATSs in the U.S., which include attractive pricing, participant investment, technological innovation and pursuit of exchange status. Because of the success of the new entrants, incumbent exchanges have lowered prices, adopted new technology, and prepared to compete aggressively for trading volumes and revenue. While the state of competition in Europe remains evolutionary, the level of competition faced by incumbent national exchanges will remain intense. As a result of the conditions in the U.S. and Europe, we experience competition in our core trading activities such as execution services, quoting and trading capabilities, and reporting services. Many of our competitors have engaged in aggressive price competition by reducing the trade execution transaction fees they charge their 15 139443_020_Nasdaq_1-188.p19.pdf QC 33 Black 04-07 19:41 customers. As a result of this competition, we significantly reduced the trade execution transaction fees we charge our customers in the past, particularly our large-volume customers. We periodically reexamine our pricing structure to ensure that our fees remain competitive. Derivatives. Our principal competitors for trading options in the U.S. include the Chicago Board Options Exchange, or CBOE, the International Securities Exchange, or ISE, NYSE ARCA, NYSE Amex and the Boston Options Exchange, or BOX. Competition is focused on providing market participants with greater functionality, trading system stability, customer service, efficient pricing, and speed of execution. NASDAQ OMX operates two options exchanges with different market structures. NASDAQ OMX PHLX operates a pro-rata hybrid electronic and floor based exchange and competes most directly with CBOE, ISE, NYSE Arca and NYSE Amex. The NASDAQ Options Market operates a price/time priority exchange and competes most directly with NYSE ARCA and BOX. Both BATS and the CBOE launched new options exchanges in 2010, with BATS being somewhat similar to The NASDAQ Options Market. The further intensifying of competition for exchange traded options means that we must continuously review our technology and pricing. MiFID does not address competition between derivatives markets to the extent that it addresses cash equities trading and consequently has been slower to affect competition in trading derivative securities. Exchange based competition for trading in European derivatives continues to occur mainly where there is competition in trading for the underlying equities and our competition for options on European equities is primarily with EUREX Group, NYSE Liffe, EDX London Limited, or EDX, and, to a limited extent, the U.S. options exchanges. Such competition is limited to options on a small number of equity securities although these securities tend to be among the most active. In addition to exchange based competition in derivatives, we continue to face competition from OTC derivative markets. As trading in Europe evolves under the current review of the original MiFID legislation, competition for trading volumes in derivatives will likely increase. Both current and potential competition require us to constantly reassess our pricing and product offerings in order to remain competitive. Clearing. In both the U.S. and Europe, cash equity clearing has been organized along national lines. Typically, a single clearinghouse would serve essentially all cash equity trading involving securities listed on exchanges within a nation’s borders. Some countries, such as Sweden, did not have a clearinghouse until 2009. In some countries, such as the U.S., the clearinghouse is part of the same organization as the Central Securities Depository, or CSD. In some, such as Germany, the clearinghouse and the stock exchange are part of the same corporate structure, and in others, such as the U.K., the clearinghouse, exchange, and CSD are separate. Furthermore, there is a much shorter history of using CCP services in European clearing than in the U.S. Regardless of past practice, competition is beginning to come to the clearing business in response to the European Code of Conduct in Clearing and Settlement in Europe and initiatives by NASDAQ OMX in the U.S. At this time, competition in clearing in Europe remains limited with a few new non-national clearinghouses such as EMCF, X-Clear and EuroCCP serving non-national multilateral trading facilities or offering alternative clearing facilities for trades executed on incumbent exchanges. In the U.S., competition in equity clearing has been legislatively called for since 1975 but only recently have technological advances made competitive clearing in the U.S. a viable possibility. Should clearing competition become a vibrant reality in the U.S., it may have an impact on equity trading and on our business as clearing is a non-trivial cost of trade execution. We believe that the clearing business in both the U.S. and Europe would benefit from competition. Even as a 22% equity owner of EMCF, one of the largest cash equities clearinghouses in Europe, we support interoperability of cash equities clearinghouses, which will foster a healthy competition among cash equities clearinghouses in Europe. Market data services. The market data business in the U.S. includes both consolidated and proprietary data products. Consolidated data products are distributed by SEC-mandated consolidators (one for NASDAQ-listed 16 139443_020_Nasdaq_1-188.p20.pdf QC 34 Black 04-07 19:41 stocks and another for NYSE and other-listed stocks) that share the revenue among the exchanges that contribute data. Proprietary data products are made up exclusively of data derived from each exchange’s systems. In Europe, all market data products are proprietary as there is no official data consolidator. Our revenues from the sale of consolidated market data products and services are under competitive threat from other securities exchanges that trade NASDAQ-listed securities. Current SEC regulations permit these regional exchanges and FINRA’s Alternative Display Facility to quote and trade NASDAQ-listed securities. Trade reporting facilities regulated by FINRA are also operated by The NASDAQ Stock Market and other exchanges. The UTP Plan entitles these exchanges, FINRA’s Alternative Display Facility, and the trade reporting facilities to a share of UTP Plan tape fees, based on the formula required by Regulation NMS that takes into account both trading and quoting activity. In addition, The NASDAQ Stock Market similarly competes for the tape fees from the sale of information on NYSE- and NYSE Amex-listed securities for those respective tape plans. Participants in the tape plans have used tape fee revenues to establish payment for order flow arrangements with their members and customers. In January 2004, we implemented a new tiered pricing structure and the Nasdaq General Revenue Sharing Program, which provided incentives for quoting market participants to send orders and report trades to The NASDAQ Stock Market. We continuously evaluate and refine both programs. To remain competitive, in July 2006 and in January 2008, we changed the terms of the program and established a new Nasdaq Data Revenue Sharing Program. In December 2010, we again changed the terms of the program effective January 2011. We may adjust either program in the future to respond to competitive pressures. The sale of our proprietary data products in both the U.S. and Europe is under competitive threat from alternative exchanges and trading venues that offer similar products, sometimes at a lower price or free of charge. Our market data business competes with other exchanges and third party vendors in providing information to market participants. Consequently, our data products must be competitive in speed, reliability, content and price to succeed in the marketplace. New exchanges and trading systems entering the market have recognized the strong connection between market data and transactions volume and new entrants typically price their market data very aggressively in order to grow transactions volume, thereby limiting our flexibility in pricing market data. Any action by a market participant to provide information to another exchange or market data vendor could have a negative impact on our data products. The market data business must also adapt to rapidly changing information delivery technologies and constantly invest in innovative product design and development. Other market data providers may not face the regulatory obligations we face and may consequently be more flexible in pricing and more agile in deploying new products and business methods to our detriment. The growth of the number of proprietary data feeds offered by NASDAQ OMX and other exchanges has also increased the reluctance of some data vendors to add new feeds to their product offerings which further complicates exchanges’ efforts to expand their market data offerings. Listings. Our primary competitor for larger company listings in the U.S. on The NASDAQ Stock Market is the NYSE. The NASDAQ Stock Market also competes with NYSE Amex for listing of smaller companies and the BATS and DirectEdge exchanges have announced their intention to compete for listings in the future. The NASDAQ Stock Market also competes with local and overseas markets for listings by companies that choose to list outside of their home country. The listings business in Europe is characterized by the large number of exchanges competing for new or secondary listings. Each country has one or more national exchanges that are often the first choice of companies in the respective countries. For those considering an alternative, the European exchanges that attract the most overseas listings are LSE, NYSE Euronext, Deutsche Börse and the exchanges that comprise NASDAQ OMX Nordic. In addition to the larger exchanges, companies are able to consider smaller markets and quoting facilities, such as LSE’s Alternative Investment Market, Euronext’s Alternext, Deutsche Börse’s Entry Standard, Borsa Italiana’s Expandi Market, PLUS Markets plc, the Pink Sheets LLC and the Over-the-Counter Bulletin Board, or OTCBB. Other exchanges in Sweden include the Nordic Growth Market and Aktietorget, which primarily serve companies with small market capitalizations. 17 139443_020_Nasdaq_1-188.p21.pdf QC 35 Black 04-07 19:41 Indexes. The NASDAQ Stock Market is subject to intense competition for the listing of financial products from other exchanges. The indexes on which these products are based face competition from indexes created by a large number of index providers. For example, there are a number of indexes that aim to track the technology sector and thereby compete with the NASDAQ-100 Index and the NASDAQ Composite Index. We face competition from investment banks, dedicated index providers, markets and other product developers in designing products that meet investor needs. Market Technology. The traditional model, where each exchange or exchange-related business developed its own technology internally sometimes aided by consultants, is evolving as many operators recognize the enormous cost savings made possible by buying technology already developed. Two types of competitors are emerging: other exchanges providing solutions, including NYSE Euronext and LSE, and pure technology providers focused on the exchange industry. These organizations offer a range of off-the-shelf technology including trading, clearing, settlement, depository and information dissemination. They also offer customization and operation expertise. NASDAQ OMX provides technology to over 70 exchanges and exchange-related businesses worldwide and in 2010 expanded its offering in compliance services by acquiring SMARTS. Regulation We are subject to extensive regulation in the United States and Europe. U.S. Regulation U.S. federal securities laws establish a two-tiered system for the regulation of securities markets, market participants and listed companies. The SEC occupies the first tier and has primary responsibility for enforcing the federal securities laws. Self-Regulatory Organizations, or SROs, which are non-governmental organizations, occupy the second tier. SROs, such as national securities exchanges, are registered with the SEC and are subject to the SEC’s extensive regulation and oversight. This regulatory framework applies to our U.S. business in the following ways: • • regulation of our registered national securities exchanges; and regulation of our U.S. broker-dealer subsidiaries. The rules and regulations that apply to our business are focused primarily on safeguarding the integrity of the securities markets and of market participants and investors generally. These rules and regulations are not focused on the protection of our stockholders, although we believe that regulation improves the quality of exchanges and, therefore, our company. U.S. federal securities laws and the rules that govern our operations are subject to frequent change. Regulation of U.S. Exchanges. SROs in the securities industry are an essential component of the regulatory scheme of the Securities Exchange Act of 1934, or the Exchange Act, for providing fair and orderly markets and protecting investors. The Exchange Act and the rules thereunder impose on the SROs many regulatory and operational responsibilities, including the day-to-day responsibilities for market and broker-dealer oversight. In general, an SRO is responsible for regulating its members through the adoption and enforcement of rules and regulations governing the business conduct of its members. With the registration of The NASDAQ Stock Market as a national securities exchange in 2006, we received our own SRO status through our exchange subsidiary, separate from that of FINRA. With the acquisitions of the Philadelphia Stock Exchange and the Boston Stock Exchange, we acquired additional SRO licenses. As SROs, each entity has separate rules pertaining to its broker-dealer members and listed companies. Broker-dealers that choose to become members of The NASDAQ Stock Market, NASDAQ OMX PHLX, and/or NASDAQ OMX BX are subject to the rules of those exchanges. Broker-dealers may also choose other SRO memberships, including membership in FINRA. 18 139443_020_Nasdaq_1-188.p22.pdf QC 36 Black 04-07 19:41 All of our U.S. national securities exchanges are subject to SEC oversight, as prescribed by the Exchange Act, including periodic and special examinations by the SEC. Our exchanges also are potentially subject to regulatory or legal action by the SEC or other interested parties at any time in connection with alleged regulatory violations. We are also subject to Section 17 of the Exchange Act, which imposes record-keeping requirements, including the requirement to make records available to the SEC for examination. We have been subject to a number of routine reviews and inspections by the SEC or external auditors in the ordinary course and because of settlements with the SEC. To the extent such actions or reviews and inspections result in regulatory or other changes, we may be required to modify the manner in which we conduct our business, which may adversely affect our business. Section 19 of the Exchange Act provides that our exchanges must submit to the SEC proposed changes to any of the SROs’ rules, practices and procedures, including revisions to provisions of our certificate of incorporation and by-laws that constitute SRO rules. The SEC will typically publish the proposal for public comment, following which the SEC may approve or disapprove the proposal, as it deems appropriate. The SEC’s action is designed to ensure that applicable SRO rules and procedures are consistent with the aims of the Exchange Act and its rules and regulations. In addition, pursuant to the requirements of the Exchange Act, our exchanges must file all proposals to change their pricing structure with the SEC. NASDAQ OMX currently operates three cash equities and two options markets in the United States. We operate The NASDAQ Stock Market and The NASDAQ Options Market pursuant to The NASDAQ Stock Market’s SRO license; the NASDAQ OMX BX cash equities market pursuant to the NASDAQ OMX BX SRO license; and the NASDAQ OMX PSX cash equities market and the NASDAQ OMX PHLX options market pursuant to the NASDAQ OMX PHLX SRO license. In addition, NASDAQ OMX BX regulates the BOX Market, pursuant to a regulatory services agreement between a subsidiary of NASDAQ OMX BX and BOX. NASDAQ OMX does not have an ownership interest in BOX, and BOX compensates NASDAQ OMX BX based on the cost of the regulatory services provided to BOX. FINRA provides regulatory services to the markets operated or regulated by The NASDAQ Stock Market, NASDAQ OMX PHLX and NASDAQ OMX BX, including the regulation of trading activity and surveillance and investigative functions. We have a limited direct regulatory role in conducting real-time market monitoring, certain options surveillance, rulemaking and some membership functions through our MarketWatch department. We refer suspicious trading behavior discovered by our regulatory staff and all other employees of the markets operated or regulated by The NASDAQ Stock Market, NASDAQ OMX PHLX and NASDAQ OMX BX to FINRA for further investigation. Broker-dealer regulation. NASDAQ OMX’s broker-dealer subsidiaries are subject to regulation by the SEC, the SROs and the various state securities regulators. Nasdaq Execution Services, LLC currently operates as our routing broker for sending orders from The Nasdaq Stock Market to other venues for execution. NASDAQ Options Services, LLC performs a comparable function with respect to routing of orders from The NASDAQ Options Market and NASDAQ OMX PHLX. Nasdaq Execution Services is registered as a broker-dealer with the SEC and in all 50 states, the District of Columbia and Puerto Rico. It is also a member of The NASDAQ Stock Market, NASDAQ OMX BX, NASDAQ OMX PHLX, NYSE, NYSE Amex, NYSE Arca, FINRA, BATS Exchange, CBOE, Chicago Stock Exchange, ISE and the National Stock Exchange. NASDAQ Options Services is registered as a broker-dealer with the SEC and in all 50 states, the District of Columbia and Puerto Rico. It is also a member of The NASDAQ Stock Market, NASDAQ OMX PHLX, FINRA, NYSE Amex, BOX, ISE, NYSE Arca, CBOE and BATS Exchange. The SEC, NYSE and FINRA adopt rules and examine broker-dealers and require strict compliance with their rules and regulations. The SEC, SROs and state securities commissions may conduct administrative proceedings which can result in censures, fines, the issuance of cease-and-desist orders or the suspension or 19 139443_020_Nasdaq_1-188.p23.pdf QC 37 Black 04-07 19:41 expulsion of a broker-dealer, its officers or employees. The SEC and state regulators may also institute proceedings against broker-dealers seeking an injunction or other sanction. The SEC and SRO rules cover many aspects of a broker-dealer’s business, including capital structure and withdrawals, sales methods, trade practices among broker-dealers, use and safekeeping of customers’ funds and securities, record-keeping, the financing of customers’ purchases, broker-dealer and employee registration and the conduct of directors, officers and employees. All broker-dealers have an SRO that is assigned by the SEC as the broker-dealer’s designated examining authority, or DEA. The DEA is responsible for examining a broker-dealer for compliance with the SEC’s financial responsibility rules. FINRA is the current DEA for both Nasdaq Execution Services and NASDAQ Options Services. As registered broker-dealer subsidiaries, Nasdaq Execution Services and NASDAQ Options Services are subject to regulatory requirements intended to ensure their general financial soundness and liquidity, which requires that they comply with certain minimum capital requirements. The SEC and FINRA impose rules that require notification when net capital falls below certain predefined criteria, dictate the ratio of debt to equity in the regulatory capital composition of a broker-dealer and constrain the ability of a broker-dealer to expand its business under certain circumstances. Additionally, the Uniform Net Capital Rule and FINRA rules impose certain requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to the SEC and FINRA for certain withdrawals of capital. As of December 31, 2010, we were in compliance with all of such capital requirements. Regulatory contractual relationships with FINRA. The NASDAQ Stock Market, The NASDAQ Options Market, NASDAQ OMX PHLX, NASDAQ OMX PSX and NASDAQ OMX BX have signed a series of regulatory service agreements covering the services FINRA provides to the respective SROs, including some of the regulatory services we perform for BOX. Under these agreements, FINRA personnel act as our agents in performing the regulatory functions outlined above, and FINRA bills us a fee for these services. These agreements have enabled us to reduce our headcount while ensuring that the markets for which we are responsible are properly regulated. However, our SROs retain ultimate regulatory responsibility for all regulatory activities performed under these agreements by FINRA. In addition, our options markets have entered into a joint agreement with the other options exchanges for conducting insider trading surveillance. Our SROs continue to monitor the activities conducted under the agreement and continue to have regulatory responsibility in this area. Exchange Act Rule 17d-2 permits SROs to enter into agreements, commonly called Rule 17d-2 agreements, approved by the SEC with respect to enforcement of common rules relating to common members. Our SROs have entered into several such agreements under which we are relieved of regulatory responsibility: • • • • agreements with FINRA covering the enforcement of common rules, the majority of which relate to the regulation of The NASDAQ Stock Market, NASDAQ OMX BX and the members of these exchanges; joint industry agreements with FINRA and NYSE Regulation covering responsibility for enforcement of insider trading rules; joint industry agreement with FINRA covering enforcement of rules related to cash equity sales practices and certain other non-market related rules; and joint industry agreement covering enforcement of rules related to options sales practices. Regulation NMS and Options Intermarket Linkage Plan. We are subject to Regulation NMS for our cash equities markets, and our options markets have joined the Options Intermarket Linkage Plan. These are designed to facilitate the routing of orders among exchanges to create a national market system as mandated by the Exchange Act. One of the principal purposes of a national market system is to assure that brokers may execute investors’ orders at the best market price. Both Regulation NMS and the Options Intermarket Linkage Plan require that exchanges avoid trade-throughs, locking or crossing of markets and provide market participants with electronic access to the best prices among the markets for the applicable cash equity or options order. 20 139443_020_Nasdaq_1-188.p24.pdf QC 38 Black 04-07 19:41 CFTC Regulation. With the acquisition of PHLX, we also acquired its subsidiary, NASDAQ OMX Futures Exchange, Inc. (formerly the Philadelphia Board of Trade), a designated contract market under the Commodity Exchange Act. As a designated contract market, NFX is subject to regulatory oversight by the U.S. Commodity Futures Trading Commission, or CFTC, an independent agency with the mandate to regulate commodity futures and option markets in the U.S. NFX currently lists futures contracts on stock indexes, foreign currencies and interest rate swaps. The National Futures Association, or NFA, provides certain regulatory services to NFX pursuant to a Regulatory Services Agreement. The CFTC also regulates IDCH, a derivatives clearing organization under the Commodity Exchange Act that is wholly owned by IDCG. IDCH clears interest rate swap futures contracts listed by NFX as well as interest rate swaps traded in the OTC market. NFA also provides regulatory services to IDCH. European Regulation Recent directives from the European Union have focused on harmonizing regulation with respect to financial services, listing and trading of securities and market abuse. Currently, there are proposals on regulation in relation to CCP services and OTC derivatives transactions. These are providing opportunities for companies such as ours. As the regulatory environment continues to change and related opportunities arise, we intend to use our position in the industry to continue product development, and ensure that the exchanges and clearinghouses that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic maintain favorable liquidity and offer efficient trading. Confidence in capital markets is paramount for trading to function properly. NASDAQ OMX Nordic carries out market regulation through an independent unit that is separate from the business operations. The surveillance work is organized into two functions: one for the listing of instruments and surveillance of companies (issuer surveillance) and one for surveillance of trading (trading surveillance). The real-time trading surveillance for the Finnish, Icelandic, Danish and Swedish markets has been centralized to Stockholm. In Iceland, the surveillance activities are carried out by specially appointed persons. In addition, there are special personnel who carry out surveillance activities at each of the three Baltic exchanges. There are three surveillance committees at NASDAQ OMX Nordic, one at each NASDAQ OMX Nordic exchange in Sweden, Finland and Denmark. These committees have an advisory role in relation to surveillance matters. In Sweden and Finland, decisions to list new companies are made by the listing committees of the exchanges. In Denmark and Iceland, listing decisions are made by the President of the exchange, a duty delegated by the board of NASDAQ OMX Copenhagen and NASDAQ OMX Iceland, respectively. If there is suspicion that a listed company or member has acted in breach of exchange regulations, the matter is dealt with by the market regulation division. Serious breaches are considered by the respective disciplinary committee in Sweden and Finland. In Denmark, all matters are dealt with by the surveillance department. In Iceland, enforcement committees handle all breaches of exchange regulations, while disciplinary committees handle the determination of fines. Suspected insider trading is reported to the appropriate authorities in the respective country or countries. The entities that operate trading venues in the Nordic and Baltic countries are each subject to local regulation. In Sweden, general supervision of the exchange market operated by NASDAQ OMX Stockholm is carried out by the SFSA, while NASDAQ OMX Stockholm’s role as central counterparty in the clearing of derivatives is overseen by the SFSA and the Swedish central bank, Riksbanken. Additionally, as a function of the Swedish two-tier supervisory model, certain surveillance in relation to the exchange market is carried out by us, acting through our surveillance division. NASDAQ OMX Stockholm’s exchange and clearing activities are regulated primarily by the Swedish Securities Markets Act 2007:528, or SSMA, which sets up basic requirements regarding the board of the exchange or clearinghouse and its share capital, and which also outlines the conditions on which exchange and clearing licenses are issued. The SSMA also provides that any changes to the exchange’s articles of association following initial registration must be approved by the SFSA. 21 139443_020_Nasdaq_1-188.p25.pdf QC 39 Black 04-07 19:41 With respect to ongoing operations, the SSMA requires exchanges to conduct their activities in an “honest, fair and professional manner, and in such a way as to maintain public confidence in the securities markets.” When operating a regulated market, an exchange must apply the principles of free access (i.e., that each person which meets the requirements established by law and by the exchange may participate in trading), neutrality (i.e., that the exchange’s rules for the regulated market are applied in a consistent manner to all those who participate in trading) and transparency (i.e., that the participants must be given speedy, simultaneous and correct information concerning trading and that the general public must be given the opportunity to access this information). Additionally, the exchange operator must identify and manage the risks which may arise in its operations, use secure technical systems and identify and handle the conflicts of interest which may arise between the exchange or its owners’ interests and the interest in safeguarding effective risk management and secure technical systems. Similar requirements are set up by the SSMA in relation to clearing operations. The SSMA also contains the framework for both the SFSA’s supervisory work in relation to exchanges and clearinghouses and the surveillance to be carried out by the exchanges themselves. The latter includes the requirement that an exchange should have “an independent surveillance function with sufficient resources and powers to meet the exchange’s obligations.” That requires the exchange to, among other things, supervise trading and price information, compliance with laws, regulations and good market practice, participant compliance with trading participation rules, financial instrument compliance with relevant listing rules and the extent to which issuers meet their obligation to submit regular financial information to relevant authorities. The regulatory environment in the other Nordic and Baltic countries in which a NASDAQ OMX entity has a trading venue is broadly similar to the regulatory environment in Sweden. Since 2005, there has been a Memorandum of Understanding between the SFSA and the main supervisory authorities in Norway, Denmark and Finland, which looks to safeguard effective and comprehensive supervision of the exchanges comprising NASDAQ OMX Nordic and the systems operated by it, and to ensure a common supervisory approach. Employees As of December 31, 2010, NASDAQ OMX had 2,395 employees, including staff employed at consolidated entities where we have a controlling financial interest. Of the total employees, 1,313 were based in the U.S. and 1,082 were based outside of the U.S. None of our U.S. employees is subject to collective bargaining agreements or is represented by a union. Approximately 106 employees based in Denmark and Finland are covered by local union agreements. NASDAQ OMX Website and Availability of SEC Filings We file periodic reports, proxy statements and other information with the SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (such as us). The address of that site is http://www.sec.gov. Our website is www.nasdaqomx.com. Information on our website is not a part of this Form 10-K. We will make available free of charge on our website, or provide a link to, our Forms 10-K, Forms 10-Q and Forms 8-K and any amendments to these documents, that are filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. To access these filings, go to NASDAQ OMX’s website and click on “Investor Relations,” then click on “Financial Information,” and then click on “SEC Filings.” We use our website, www.nasdaqomx.com, as a means of disclosing material non-public information and for complying with disclosure obligations under Regulation FD. 22 139443_020_Nasdaq_1-188.p26.pdf QC 40 Black 04-07 19:41 Item 1A. Risk Factors. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business. If any of the following risks actually occur, our business, financial condition, or operating results could be adversely affected. Risks Relating to our Business Our industry is highly competitive. We face intense competition from other exchanges and markets for market share of trading activity and listings. In addition, our market data, global index and market technology businesses face significant competition from other market participants. This competition includes both product and price competition and has continued to increase as a result of the creation of new execution and listing venues in the United States and Europe. Increased competition may result in a decline in our share of trading activity, listings and the markets for the products we offer, thereby adversely affecting our operating results. The liberalization and globalization of world markets has resulted in greater mobility of capital, greater international participation in local markets and more competition. As a result, both in the U.S. and in other countries, the competition among exchanges and other execution venues has become more intense. In the last several years, many marketplaces in both Europe and the United States have demutualized to provide greater flexibility for future growth. The securities industry also has experienced consolidation, creating a more intense competitive environment. Regulatory changes, such as MiFID, also have facilitated the entry of new participants in the EU that compete with our European exchanges. The regulatory environment, both in the U.S. and in Europe, is structured to maintain this environment of intense competition. In addition, a high proportion of business in the securities markets is becoming concentrated in a smaller number of institutions and our revenue may therefore become concentrated in a smaller number of customers. We also compete globally with other regulated exchanges and markets, ATSs, MTFs and other traditional and non-traditional execution venues. Some of these competitors also are our customers. Our exchange competitors include NYSE Euronext, the London Stock Exchange, Deutsche Börse, the Tokyo Stock Exchange, and a number of other exchanges in the U.S. and around the world. These exchanges offer a range of services comparable to those offered by our exchanges and generally compete with us in providing trade executions, trade reporting, market data, listings, regulation, index, and technology services. Public ATSs in the U.S. and MTFs in Europe are broker-dealer operated systems that offer trade execution services, typically at very low cost. Our competitors include Burgundy MTF in the Nordics. In London, Chi-X, Turquoise and BATS MTFs offer pan-European execution services in competition with our Nordic exchanges. Other competing execution venues include broker-dealer owned systems such as dark-pools and internalization engines which may or may not be registered as ATSs or MTFs. Like ATSs and MTFs, these venues also compete with us by offering low cost executions and differ from public ATSs and MTFs in the degree of transparency they offer and in restrictions on who may access these systems. Competitors may develop market trading platforms that are more competitive than ours. Competitors may enter into strategic partnerships, mergers or acquisitions that could make their trading, listings or data businesses more competitive than ours. In early 2011, the London Stock Exchange Group and the TMX Group and NYSE Euronext and Deutsche Börse AG announced proposed mergers that may affect our competitive position. If we are unable to compete successfully in this environment, our business, financial condition and operating results will be adversely affected. Price competition has affected and could continue to affect our business. The securities trading industry is characterized by intense price competition. We have in the past lowered prices, and in the U.S., increased rebates for trade executions to attempt to gain or maintain market share. These strategies have not always been successful and have at times hurt operating performance. Additionally, we have 23 139443_020_Nasdaq_1-188.p27.pdf QC 41 Black 04-07 19:41 also been, and may once again be, required to adjust pricing to respond to actions by competitors, which could adversely impact operating results. We are also subject to potential price competition from new competitors and from new and existing regulated markets and MTFs. We also compete with respect to the pricing of market data and with respect to products for pre-trade book data and for post-trade last sale data. In the future, our competitors may offer rebates for quotes and trades on their systems. If we are unable to compete successfully in respect to the pricing of our services and products, our business, financial condition and operating results may be adversely affected. A decline in trading volume will decrease our trading revenues. Trading volume is directly affected by economic, political and market conditions, broad trends in business and finance, unforeseen market closures or other disruptions in trading, the level and volatility of interest rates, inflation, changes in price levels of securities and the overall level of investor confidence. In recent years, trading volumes across our markets have fluctuated significantly depending on market conditions and other factors beyond our control. Current initiatives being considered by regulators and governments, such as restrictions on high frequency trading, could have a material adverse effect on overall trading volumes. Because a significant percentage of our revenues is tied directly to the volume of securities traded on our markets, it is likely that a general decline in trading volumes would lower revenues and may adversely affect our operating results if we are unable to offset falling volumes through our pricing. Declines in trading volumes may also impact our market share or pricing structures and adversely affect our business and financial condition. Our market share of trading has declined and may continue to decline. Our matched market share in NASDAQ-listed securities executed on NASDAQ declined from 46.1% in 2007 to 28.6% in 2010 and our combined matched market share in all U.S.-listed securities executed on all of our platforms declined from 29.1% in 2007 to 22.2% in 2010. In addition, as a result of the adoption of MiFID, a number of MTFs have launched, thereby significantly increasing competition in Europe. As a result, our matched market share in securities listed on our exchanges comprising NASDAQ OMX Nordic and NASDAQ OMX Baltic has declined from 100% in 2007 to 75% in 2010. If our total market share in these securities continues to decrease relative to our competitors, our venues may be viewed as less attractive sources of liquidity. If growth in overall trading volume of these securities does not offset continued declines in our market share, or if our exchanges are perceived to be less liquid, then our business, financial condition and operating results could be adversely affected. Declines in market share could result in issuers viewing the value of a listing on our exchanges as less attractive, thereby adversely affecting our listing business. Also, declines in market share of NASDAQ-listed securities could lower NASDAQ’s share of tape pool revenues under the consolidated data plans, thereby reducing the revenues of our market data business. Economic conditions and market factors, which are beyond our control, may adversely affect our business and financial condition. Our business performance is impacted by a number of factors including general economic conditions, market volatility, and other factors that are generally beyond our control. Although access to credit markets has improved recently, a long-term continuation of challenging economic conditions is likely to negatively impact our business. Adverse market conditions could reduce customer demand for our services and the ability of our customers, lenders and other counterparties to meet their obligations to us. Poor economic conditions may result in a decline in trading volume, deterioration of the economic welfare of our listed companies and a reduction in the demand for our products, including our market data, indexes and market technology. Market volatility such as that seen with the “flash crash” on May 6, 2010 could drive investors away from cash equity markets. Trading volume is driven primarily by general market conditions and declines in trading volume may affect our market share and impact our pricing. 24 139443_020_Nasdaq_1-188.p28.pdf QC 42 Black 04-07 19:41 The number of listings on our markets is primarily influenced by factors such as investor demand, the global economy, available sources of financing, and tax and regulatory policies. Adverse conditions may jeopardize the ability of our listed companies to comply with the continued listing requirements of our exchanges. Market data revenues also may be significantly affected by global economic conditions. Professional subscriptions to our market data are at risk if staff reductions occur in financial services companies, which could result in significant reductions in our market data professional user revenue. In addition, adverse market conditions may cause reductions in the number of non-professional investors with investments in the market. A reduction in trading volumes, market share of trading, the number of our listed companies and a decline in market data revenue due to economic conditions or other market factors could adversely affect our business, financial condition and operating results. Declines in the initial public offering market could have an adverse effect on our revenues. The market for initial public offerings is dependent on the prosperity of companies and the availability of risk capital, both of which have been severely tested in recent years. Stagnation or decline in the initial public offering market will impact the number of new listings on The NASDAQ Stock Market and the exchanges comprising NASDAQ OMX Nordic and NASDAQ OMX Baltic, and thus our related revenues. We recognize revenue from new listings on The NASDAQ Stock Market on a straight-line basis over an estimated six-year service period. As a result, a stagnant market for initial public offerings could cause a decrease in deferred revenues for future years. Furthermore, as initial public offerings are typically actively traded following their offering date, a prolonged decrease in the number of initial public offerings could negatively impact the growth of our transactions revenues. System limitations, failures or security breaches could harm our business. Our businesses depend on the integrity and performance of the computer and communications systems supporting them. If our systems cannot expand to cope with increased demand or otherwise fail to perform, we could experience unanticipated disruptions in service, slower response times and delays in the introduction of new products and services. These consequences could result in trade outages, lower trading volumes, financial losses, decreased customer service and satisfaction and regulatory sanctions. Our markets have experienced occasional systems failures and delays in the past and could experience future systems failures and delays. Although we currently maintain and expect to maintain multiple computer facilities that are designed to provide redundancy and back-up to reduce the risk of system disruptions and have facilities in place that are expected to maintain service during a system disruption, such systems and facilities may prove inadequate. If trading volumes increase unexpectedly, we may need to expand and upgrade our technology, transaction processing systems and network infrastructure. We do not know whether we will be able to accurately project the rate, timing or cost of any increases, or expand and upgrade our systems and infrastructure to accommodate any increases in a timely manner. Our systems and operations also are vulnerable to damage or interruption from security breaches, data theft, human error, natural disasters, power loss, fire, sabotage, terrorism, computer viruses, intentional acts of vandalism and similar events. Given our position in the global securities industry, we may be more likely than other companies to be a direct target, or an indirect casualty, of such events. In February 2011, we announced that through our normal security monitoring systems, we detected suspicious files on our U.S. servers. The files were immediately removed and at this point there is no evidence that any customer information was accessed or acquired by third parties. 25 139443_020_Nasdaq_1-188.p29.pdf QC 43 Black 04-07 19:41 While we have programs in place to identify and minimize our exposure to vulnerabilities and work in collaboration with the technology industry to share corrective measures with our business partners, we cannot guarantee that such events will not occur in the future. Any system issue that causes an interruption in services, decreases the responsiveness of our services our otherwise affects our services could impair our reputation, damage our brand name and negatively impact our business, financial condition and operating results. Regulatory changes and changes in market structure, especially in response to adverse financial conditions, could have a material adverse effect on our business. In recent years, the securities trading industry and, in particular, the securities markets have been subject to significant regulatory changes. Moreover, in the past two years, the securities markets have been the subject of increasing governmental and public scrutiny in response to the global economic crisis and market volatility, such as that seen with the regulation of short selling and the “flash crash” on May 6, 2010. During the coming year, it is likely that there will be significant changes in the regulatory environment in which we operate our businesses, although we cannot predict the nature of these changes or their impact on our business at this time. For example, in January 2010, the SEC published a concept release covering a wide range of market structure issues, and on May 6, 2010, cash equity markets experienced record volatility, which resulted in accelerated SEC rulemaking. Both events could result in regulation that could significantly change the competitive landscape. The European Parliament has begun a review of MiFID that could affect our operations in Europe. In addition, actions on any of the specific regulatory issues currently under review in the U.S. and Europe such as short selling, co-location, high-frequency trading, market halts, the market data business, derivatives clearing, market transparency, taxes on stock transactions, restrictions on proprietary trading by certain of our customers and other related proposals could have a material impact on our business. Our market participants also operate in a highly regulated industry. The SEC, the SFSA and other regulatory authorities could impose regulatory changes that could adversely impact the ability of our market participants to use our markets. Regulatory changes by the SEC, the SFSA or other regulatory authorities could result in the loss of a significant number of market participants or a reduction in trading activity on our markets. We will need to invest in our operations to maintain and grow our business and to integrate acquisitions, and we may need additional funds, which may not be readily available. We depend on the availability of adequate capital to maintain and develop our business. Although we believe that we can meet our current capital requirements from internally generated funds, cash on hand and available borrowings under our existing credit facilities, if the capital and credit markets experience volatility, access to capital or credit may not be available on terms acceptable to us or at all. Limited access to capital or credit in the future could have an impact on our ability to refinance debt, maintain our credit rating, meet our regulatory capital requirements, engage in strategic initiatives, make acquisitions or strategic investments in other companies or react to changing economic and business conditions. If we are unable to fund our capital or credit requirements, it could have an adverse effect on our business, financial condition and operating results. In addition to our debt obligations, we will need to continue to invest in our operations for the foreseeable future to integrate acquired businesses and to fund new initiatives. If we do not achieve the expected operating results, we will need to reallocate our cash resources. This may include borrowing additional funds to service debt payments, which may impair our ability to make investments in our business or to integrate acquired businesses. Should we need to raise funds through issuing additional equity, our equity holders will suffer dilution. Should we need to raise funds through incurring additional debt, we may become subject to covenants even more restrictive than those contained in our existing credit facilities, the indentures governing our notes and our other debt instruments. Furthermore, if adverse economic conditions occur, we could experience decreased revenues from our operations which could affect our ability to satisfy financial and other restrictive covenants to which we are subject under our existing indebtedness. 26 139443_020_Nasdaq_1-188.p30.pdf QC 44 Black 04-07 19:41 Any reduction in our credit rating could increase the cost of our funding from the capital markets. Our long-term debt is currently rated investment grade by two of the major rating agencies. These rating agencies regularly evaluate us and their ratings of our long-term debt are based on a number of factors, including our financial strength as well as factors not entirely within our control, including conditions affecting the financial services industry generally. There can be no assurance that we will maintain our current ratings. Our failure to maintain those ratings could adversely affect the cost and other terms upon which we are able to obtain funding and increase our cost of capital. A reduction in credit ratings would also result in increases in the cost of our outstanding debt as the interest rate on the outstanding amounts under our term loans and our 5.25% senior notes due 2018 fluctuates based on our credit ratings. We may not be able to keep up with rapid technological and other competitive changes affecting our industry. The markets in which we compete are characterized by rapidly changing technology, evolving industry standards, frequent enhancements to existing products and services, the adoption of new services and products and changing customer demands. If our platforms fail to function as expected, our business would be negatively affected. In addition, our business, financial condition and operating results may be adversely affected if we cannot successfully develop, introduce or market new services and products or if we need to adopt costly and customized technology for our services and products. Further, our failure to anticipate or respond adequately to changes in technology and customer preferences, especially in our market technology business, or any significant delays in product development efforts, could have a material adverse effect on our business, financial condition and operating results. We may not be able to successfully integrate acquired businesses, which may result in an inability to realize the anticipated benefits of our acquisitions. We must rationalize, coordinate and integrate the operations of acquired businesses. This process involves complex technological, operational and personnel-related challenges, which are time-consuming and expensive and may disrupt our business. The difficulties, costs and delays that could be encountered may include: • • • • • • • • • • unforeseen difficulties, costs or complications in combining the companies’ operations, which could lead to us not achieving the synergies we anticipate; unanticipated incompatibility of systems and operating methods; inability to use capital assets efficiently to develop the business of the combined company; the difficulty of complying with government-imposed regulations in the U.S. and abroad, which may be conflicting; resolving possible inconsistencies in standards, controls, procedures and policies, business cultures and compensation structures; the diversion of management’s attention from ongoing business concerns and other strategic opportunities; unforeseen difficulties in operating acquired businesses in parallel with similar businesses that we operated previously; unforeseen difficulties in operating businesses we have not operated before; unanticipated difficulty of integrating multiple acquired businesses simultaneously; the retention of key employees and management; 27 139443_020_Nasdaq_1-188.p31.pdf QC 45 Black 04-07 19:41 • • • • • • • the implementation of disclosure controls, internal controls and financial reporting systems at non-U.S. subsidiaries to enable us to comply with U.S. generally accepted accounting principles, or U.S. GAAP, and U.S. securities laws and regulations, including the Sarbanes Oxley Act of 2002, required as a result of our status as a reporting company under the Exchange Act; the coordination of geographically separate organizations; the coordination and consolidation of ongoing and future research and development efforts; possible tax costs or inefficiencies associated with integrating the operations of a combined company; pre-tax restructuring and revenue investment costs; the retention of strategic partners and attracting new strategic partners; and negative impacts on employee morale and performance as a result of job changes and reassignments. For these reasons, we may not achieve the anticipated financial and strategic benefits from our acquisitions. Any actual cost savings and synergies may be lower than we expect and may take a longer time to achieve than we anticipate, and we may fail to realize the anticipated benefits of acquisitions. We may experience fluctuations in our operating results, which may adversely affect the market price of our common stock. The financial services industry is risky and unpredictable and is directly affected by many national and international factors beyond our control, including: • • • • • • • • • economic, political and geopolitical market conditions; natural disasters, terrorism, war or other catastrophes; broad trends in industry and finance; changes in price levels and volatility in the stock markets; the level and volatility of interest rates; changes in government monetary or tax policy; other legislative and regulatory changes; the perceived attractiveness of the U.S. or European capital markets; and inflation. Any one of these factors could have a material adverse effect on our business, financial condition and operating results by causing a substantial decline in the financial services markets and reducing trading volumes. Additionally, since borrowings under our credit facilities bear interest at variable rates, any increase in interest rates on debt that we have not fixed using interest rate hedges will increase our interest expense and reduce our cash flow. Other than variable rate debt, we believe our business has relatively large fixed costs and low variable costs, which magnifies the impact of revenue fluctuations on our operating results. As a result, a decline in our revenue may lead to a relatively larger impact on operating results. A substantial portion of our operating expenses will be related to personnel costs, regulation and corporate overhead, none of which can be adjusted quickly and some of which cannot be adjusted at all. Our operating expense levels will be based on our expectations for future revenue. If actual revenue is below management’s expectations, or if our expenses increase before revenues do, both revenues less transaction rebates, brokerage, clearance and exchange fees and operating results would be materially and adversely affected. Because of these factors, it is possible that our operating results or other operating metrics may fail to meet the expectations of stock market analysts and investors. If this happens, the market price of our common stock may be adversely affected. 28 139443_020_Nasdaq_1-188.p32.pdf QC 46 Black 04-07 19:41 We are exposed to credit risk from third parties, including customers, counterparties and clearing agents. We are exposed to credit risk from third parties, including customers, counterparties and clearing agents. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. We clear or stand as riskless principal to a range of equity-related and fixed-income-related derivative products, energy-related commodity products and resale and repurchase agreements. We assume the counterparty risk for all transactions that are cleared through our markets and guarantee that our cleared contracts will be honored. We enforce minimum financial and operational criteria for membership eligibility, require members and investors to provide collateral, and maintain established risk policies and procedures to ensure that the counterparty risks are properly monitored and pro-actively managed; however, none of these measures provides absolute assurance against experiencing financial losses from defaults by our counterparties on their obligations. No guarantee can be given that the collateral provided will at all times be sufficient. Although we maintain clearing capital resources to serve as an additional layer of protection to help ensure that we are able to meet our obligations, these resources may not be sufficient. Our subsidiaries Nasdaq Execution Services and NASDAQ Options Services may be exposed to credit risk, due to the default of trading counterparties, in connection with the clearing and routing services they provide for our trading customers. System trades in cash equities routed to other market centers for members of The NASDAQ Stock Market are cleared by Nasdaq Execution Services, as a member of the National Securities Clearing Corporation, or NSCC. System trades in derivative contracts for the opening and closing cross and trades routed to other market centers are cleared by NASDAQ Options Services, as a member of the OCC. Pursuant to the rules of the NSCC and Nasdaq Execution Services’ clearing agreement, Nasdaq Execution Services is liable for any losses incurred due to counterparty or a clearing agent’s failure to satisfy its contractual obligations, either by making payment or delivering securities. Pursuant to the rules of the OCC and NASDAQ Options Services’ clearing agreement, NASDAQ Options Services is liable for any losses incurred due to counterparty or a clearing agent’s failure to satisfy its contractual obligations, either by making payment or delivering securities. Adverse movements in the prices of securities and derivative contracts that are subject to these transactions can increase our credit risk. Credit difficulties or insolvency, or the perceived possibility of credit difficulties or insolvency, of one or more larger or visible market participants could also result in market- wide credit difficulties or other market disruptions. We also have credit risk related to transaction fees that are billed to customers on a monthly basis, in arrears. Our customers are financial institutions whose ability to satisfy their contractual obligations may be impacted by volatile securities markets. Credit losses such as those described above could adversely affect our consolidated financial position and results of operations. Our leverage limits our financial flexibility, increases our exposure to weakening economic conditions and may adversely affect our ability to obtain additional financing. In connection with recent acquisitions and share repurchases, we incurred a significant amount of indebtedness. Our indebtedness as of December 31, 2010 was approximately $2.3 billion. We also may borrow up to an additional $250 million under a revolver that is part of our credit facilities. Our leverage could: • • reduce funds available to us for operations and general corporate purposes or for capital expenditures as a result of the dedication of a substantial portion of our consolidated cash flow from operations to the payment of principal and interest on our indebtedness; increase our exposure to a continued downturn in general economic conditions; 29 139443_020_Nasdaq_1-188.p33.pdf QC 47 Black 04-07 19:41 • • place us at a competitive disadvantage compared with our competitors with less debt; and affect our ability to obtain additional financing in the future for refinancing indebtedness, acquisitions, working capital, capital expenditures or other purposes. In addition, we must comply with the covenants in our credit facilities. Among other things, these covenants restrict our ability to grant liens, incur additional indebtedness, pay dividends and conduct transactions with affiliates. Failure to meet any of the covenant terms of our credit facilities could result in an event of default. If an event of default occurs, and we are unable to receive a waiver of default, our lenders may increase our borrowing costs, restrict our ability to obtain additional borrowings and accelerate all amounts outstanding. We may incur goodwill, intangible asset or other long-lived asset impairment charges in the future. Our business acquisitions typically result in the recording of goodwill and intangible assets, and the recorded values of those assets may become impaired in the future. As of December 31, 2010, goodwill totaled approximately $5.1 billion and intangible assets, net of accumulated amortization, totaled approximately $1.7 billion. The determination of the value of such goodwill and intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. Goodwill for our three reporting units are reviewed for impairment annually, or in interim periods if certain events occur indicating that the carrying value may be impaired. We test for impairment during the fourth quarter of our fiscal year using October 1st carrying values. We assess potential impairments to goodwill and intangible assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate cash flow. Our judgments regarding the existence of impairment indicators and future cash flows related to goodwill and intangible assets are based on operational performance of our acquired businesses, market conditions, relevant trading multiples of comparable companies, the trading price of our common stock and other factors. Although there are inherent uncertainties in this assessment process, the estimates and assumptions we use are consistent with our internal planning. However, disruptions to our business, 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 or intangible asset impairment charges in the future. For goodwill, 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. For indefinite-lived intangible assets, impairment exists if the carrying value of the intangible asset exceeds its fair value. We also assess potential impairments to our other long-lived assets, including finite-lived intangible assets, equity method investments, property and equipment and other assets, 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. If we incur goodwill, intangible asset or other long-lived asset impairment charges in the future our operating results could be adversely affected. The regulatory framework under which we operate and new regulatory requirements or new interpretations of existing regulatory requirements could require substantial time and resources for compliance, which could make it difficult and costly for us to operate our business. Our business is subject to extensive regulation. Under current U.S. federal securities laws, changes in the rules and operations of our markets, including our pricing structure, must be reviewed and in many cases 30 139443_020_Nasdaq_1-188.p34.pdf QC 48 Black 04-07 19:41 explicitly approved by the SEC. The SEC may approve, disapprove, or recommend changes to proposals that we submit. In addition, the SEC may delay either the approval process or the initiation of the public comment process. Any delay in approving changes, or the altering of any proposed change, could have an adverse effect on our business, financial condition and operating results. We must compete not only with ATSs that are not subject to the same SEC approval process but also with other exchanges that may have lower regulation and surveillance costs than us. There is a risk that trading will shift to exchanges that charge lower fees because, among other reasons, they spend significantly less on regulation. In addition, our registered broker-dealer subsidiaries are subject to regulation by the SEC, FINRA and other self-regulatory organizations. These subsidiaries are subject to regulatory requirements intended to ensure their general financial soundness and liquidity, which require that they comply with certain minimum capital requirements. The SEC and FINRA impose rules that require notification when a broker-dealer’s net capital falls below certain predefined criteria, dictate the ratio of debt to equity in the regulatory capital composition of a broker-dealer and constrain the ability of a broker-dealer to expand its business under certain circumstances. Additionally, the Uniform Net Capital Rule and NYSE and FINRA rules impose certain requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to the SEC, the NYSE and FINRA for certain withdrawals of capital. Any failure to comply with these broker- dealer regulations could have a material adverse effect on the operation of our business, financial condition and operating results. Our non-U.S. business is subject to regulatory oversight in all the countries in which we operate regulated businesses, such as exchanges or CSDs. The countries in which we currently operate or share ownership in regulated businesses include Sweden, Finland, Denmark, Iceland, Estonia, Lithuania, Latvia, Norway, Armenia, Switzerland, the Netherlands and the United Kingdom. In all the aforementioned countries, we have received authorization from the relevant authorities to conduct our regulated business activities. The authorities may revoke this authorization if we do not suitably carry out our regulated business activities. The authorities are also entitled to request that we adopt measures in order to ensure that we continue to fulfill the authorities’ requirements. Furthermore, we hold minority stakes in other regulated entities, and certain of our customers operate in a highly regulated industry. Regulatory authorities with jurisdiction over our non-U.S. entities could impose regulatory changes that could impact the ability of our customers to use our European exchanges. The loss of a significant number of customers or a reduction in trading activity on any of our European exchanges as a result of such changes could have a material adverse effect on our business, financial condition and operating results. Our business may be impacted by the adoption and implementation of the Dodd-Frank Act. On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Act, a comprehensive banking and financial services reform package. Full implementation of the Act will require extensive rulemaking by the SEC, the CFTC, SROs and other regulators. In light of the uncertainty of the final implementation of the Act, there is a risk that the final regulations could include provisions that could impact our business. The Act provides for central clearing of standardized over-the-counter swaps and requires cleared swaps to be traded on exchanges or swap execution facilities. While these new requirements may provide new opportunities for us, including the opportunity to expand the business of IDCG, our existing offering to clear over-the-counter interest rate swap products, other market participants have developed, and likely will develop in the future, competing clearing platforms and offerings. We cannot guarantee that we will be able to compete effectively or that our initiatives in this area will be successful. In addition, market participants may change their behavior in response to the Act and the expected regulations. For example, the Act’s prohibitions on proprietary trading and certain relationships with hedge funds and private equity funds may cause some of our major clients to curtail or eliminate their trading operations in 31 139443_020_Nasdaq_1-188.p35.pdf QC 49 Black 04-07 19:41 advance of the effective date. To the extent that our existing customers and other market participants reduce the levels or restrict the nature of activity on our exchanges, our business, financial condition and operating results may be adversely affected. Furthermore, if the Act or any of the pending regulations are perceived as creating new burdensome legal and regulatory requirements on public companies in the U.S., it may decrease our ability to compete for listings with competitor exchanges in non-U.S. jurisdictions. We have self-regulatory obligations and also operate for-profit businesses, and these two roles may create conflicts of interest. We have obligations to regulate and monitor activities on our markets and ensure compliance with applicable law and the rules of our markets by market participants and listed companies. In the U.S., the SEC staff has expressed concern about potential conflicts of interest of “for-profit” markets performing the regulatory functions of a self-regulatory organization. Although our U.S. cash equities and options exchanges outsource the majority of their market regulation functions to FINRA, we do perform regulatory functions related to our listed companies and our markets. Any failure by us to diligently and fairly regulate our markets or to otherwise fulfill our regulatory obligations could significantly harm our reputation, prompt SEC scrutiny and adversely affect our business and reputation. Our Nordic and Baltic exchanges also monitor trading and compliance with listing standards. They monitor the listing of cash equities and other financial instruments. The prime objective of such monitoring activities is to promote confidence in the exchanges among the general public and to ensure fair and orderly functioning markets. The monitoring functions within the exchanges comprising NASDAQ OMX Nordic and NASDAQ OMX Baltic are the responsibility of the surveillance departments or other surveillance personnel. The surveillance departments or personnel are intended to strengthen the integrity of and confidence in these exchanges and to avoid conflicts of interest. Any failure to diligently and fairly regulate the Nordic and Baltic exchanges could significantly harm our reputation, prompt scrutiny from regulators and adversely affect our business and reputation. We are subject to risks relating to litigation, potential securities law liability and other liability. Many aspects of our business potentially involve substantial liability risks. Although we are immune from private suits for self-regulatory organization activities, this immunity only covers certain of our activities in the U.S., and we could be exposed to liability under national and local laws, court decisions and rules and regulations promulgated by regulatory agencies. In the U.S., we are subject to oversight by the SEC, and our subsidiaries NFX and IDCH are subject to oversight by the CFTC. Our subsidiary NOCC has applied to register with the CFTC and is regulated as a power marketer by the Federal Energy Regulatory Commission (for transactions in every state but Texas) and the Public Utility Commission of Texas (for transactions in Texas). In the case of non-compliance with our obligations under the securities, commodities or other laws, we could be subject to investigation and judicial or administrative proceedings that may result in substantial penalties. Our non-U.S. business is regulated both at the national level in several countries and at the European Union level. Implementation and application of these regulations may be undertaken by one or more regulatory authorities, which may challenge compliance with one or more aspects of such regulations. If a regulatory authority makes a finding of non-compliance, conditional fines can be imposed and our licenses can be revoked. Some of our other liability risks arise under the laws and regulations relating to the insurance, tax, intellectual property, anti-money laundering, technology export, foreign asset controls and foreign corrupt practices areas. Liability could also result from disputes over the terms of a trade, claims that a system failure or delay cost a customer money, claims we entered into an unauthorized transaction or claims that we provided 32 139443_020_Nasdaq_1-188.p36.pdf QC 50 Black 04-07 19:41 materially false or misleading statements in connection with a securities transaction. As we intend to defend any such litigation actively, significant legal expenses could be incurred. Although we carry insurance that may limit our risk of damages in some cases, we still may sustain losses that would affect our financial condition and results of operations. Failure to attract and retain key personnel may adversely affect our ability to conduct our business. Our future success depends, in large part, upon our ability to attract and retain highly qualified professional personnel. Competition for key personnel in the various localities and business segments in which we operate is intense. Our ability to attract and retain key personnel, in particular senior officers, will be dependent on a number of factors, including prevailing market conditions and compensation packages offered by companies competing for the same talent. There is no guarantee that we will have the continued service of key employees who we rely upon to execute our business strategy and identify and pursue strategic opportunities and initiatives. In particular, we may have to incur costs to replace senior officers or other key employees who leave, and our ability to execute our business strategy could be impaired if we are unable to replace such persons in a timely manner. We are highly dependent on the continued services of Robert Greifeld, our Chief Executive Officer, and other senior officers and key employees who possess extensive financial markets knowledge and technology skills. We do not have employment agreements with some of these key senior officers. We do not maintain “key person” life insurance policies on any of our senior officers, managers, key employees or technical personnel. The loss of the services of these persons for any reason, as well as any negative market or industry perception arising from those losses, could have a material adverse effect on our business, financial condition and operating results. Failure to protect our intellectual property rights, or allegations that we have infringed on the intellectual property rights of others, could harm our brand-building efforts and ability to compete effectively. To protect our intellectual property rights, we rely on a combination of trademark laws, copyright laws, patent laws, trade secret protection, confidentiality agreements and other contractual arrangements with our affiliates, clients, strategic partners and others. The protective steps that we take may be inadequate to deter misappropriation of our proprietary information. We may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our intellectual property rights. We have registered, or applied to register, our trademarks in the United States and in over 50 foreign jurisdictions and have pending U.S. and foreign applications for other trademarks. We also maintain copyright protection on our branded materials and pursue patent protection for software products, inventions and other processes developed by us. We also hold a number of patents, patent applications and licenses. Effective trademark, copyright, patent and trade secret protection may not be available in every country in which we offer our services. Failure to protect our intellectual property adequately could harm our brand and affect our ability to compete effectively. Further, defending our intellectual property rights could result in the expenditure of significant financial and managerial resources. Third parties may assert intellectual property rights claims against us, which may be costly to defend, could require the payment of damages and could limit our ability to use certain technologies, trademarks or other intellectual property. Any intellectual property claims, with or without merit, could be expensive to litigate or settle and could divert management resources and attention. Successful challenges against us could require us to modify or discontinue our use of technology or business processes where such use is found to infringe or violate the rights of others, or require us to purchase licenses from third parties, any of which could adversely affect our business, financial condition and operating results. 33 139443_020_Nasdaq_1-188.p37.pdf QC 51 Black 04-07 19:41 Damage to our reputation or brand name could have a material adverse effect on our businesses. One of our competitive strengths is our strong reputation and brand name. Various issues may give rise to reputational risk, including issues relating to: • • • • • • • • • • the representation of our business in the media; the accuracy of our financial statements and other financial and statistical information; the accuracy of our financial guidance or other information provided to our investors; the quality of our corporate governance structure; the quality of our products, including the reliability of our transaction-based business, the accuracy of the quote and trade information provided by our market data business and the accuracy of calculations used by our Global Index Group for indexes and unit investment trusts; the ability to execute our business plan, key initiatives or new business ventures and the ability to keep up with changing customer demand; the quality of our disclosure controls or internal controls over financial reporting, including any failures in supervision; extreme price volatility on our markets, such as that seen with the “flash crash” on May 6, 2010; any negative publicity surrounding our listed companies; and any misconduct, fraudulent activity or theft by our employees or other persons formerly or currently associated with us. Damage to our reputation could cause some issuers not to list their securities on our exchanges, as well as reduce the trading volume on our exchanges or cause us to lose customers in our market data, index or market technology businesses. This, in turn, may have a material adverse effect on our business, financial condition and operating results. We rely on third parties to perform certain functions, and our business could be adversely affected if these third parties fail to perform as expected. We rely on third parties for regulatory, data center and other services. For example, we have a contractual arrangement with FINRA pursuant to which FINRA performs certain regulatory functions on our behalf. We also are highly reliant on third-party data centers provided by Verizon. To the extent that FINRA, Verizon or any other vendor or third-party service provider experiences difficulties, materially changes their business relationship with us or is unable for any reason to perform their obligations, our business or our reputation may be materially adversely affected. We also rely on members of our trading community to maintain markets and add liquidity. To the extent that any of our largest members experiences difficulties, materially changes their business relationship with us or is unable for any reason to perform market making activities, our business or our reputation may be materially adversely affected. We are a holding company that depends on cash flow from our subsidiaries to meet our obligations, and any restrictions on our subsidiaries’ ability to pay dividends or make other payments to us may have a material adverse effect on our results of operations and financial condition. We are a holding company with no direct operating businesses other than the equity interests of our subsidiaries. We require dividends and other payments from our subsidiaries to meet cash requirements or to pay dividends. Minimum capital requirements mandated by regulatory authorities having jurisdiction over some of 34 139443_020_Nasdaq_1-188.p38.pdf QC 52 Black 04-07 19:41 our regulated subsidiaries indirectly restrict the amount of dividends paid upstream. If our subsidiaries are unable to pay dividends and make other payments to us when needed, we may be unable to satisfy our obligations, which would have a material adverse effect on our business, financial condition and operating results. Future acquisitions, investments, partnerships and joint ventures may require significant resources and/or result in significant unanticipated losses, costs or liabilities. Over the past several years, acquisitions have been significant factors in our growth. Although we cannot predict our rate of growth as the result of acquisitions with complete accuracy, we believe that additional acquisitions and investments or entering into partnerships and joint ventures will be important to our growth strategy. Many of the other potential purchasers of assets in our industry have greater financial resources than we have. Therefore, we cannot be sure that we will be able to complete future acquisitions on terms favorable to us. We may finance future acquisitions by issuing additional equity and/or debt. The issuance of additional equity in connection with any such transaction could be substantially dilutive to existing shareholders. The issuance of additional debt could increase our leverage substantially. In addition, announcement or implementation of future transactions by us or others could have a material effect on the price of our common stock. We could face financial risks associated with incurring additional debt, particularly if the debt results in significant incremental leverage. Additional debt may reduce our liquidity, curtail our access to financing markets, impact our standing with credit agencies and increase the cash flow required for debt service. Any incremental debt incurred to finance an acquisition could also place significant constraints on the operation of our business. Furthermore, any future acquisitions of businesses or facilities could entail a number of additional risks, including: • • • • • • • • problems with effective integration of operations; the inability to maintain key pre-acquisition business relationships; increased operating costs; the diversion of our management team from its other operations; problems with regulatory bodies; exposure to unanticipated liabilities; difficulties in realizing projected efficiencies, synergies and cost savings; and changes in our credit rating and financing costs. Our non-U.S. business operates in various international markets, particularly emerging markets, that are subject to greater political, economic and social uncertainties than developed countries. The operations of our non-U.S. business are subject to the risk inherent in international operations, including but not limited to, risks with respect to operating in Iceland, the Baltics, Central and Eastern Europe, the Middle East and Asia. Some of these economies may be subject to greater political, economic and social uncertainties than countries with more developed institutional structures. Political, economic or social events or developments in one or more of these countries could adversely affect our operations and financial results. We have invested substantial capital in system platforms, and a failure to successfully implement such systems could adversely affect our business. In our technology operations, we have invested substantial amounts in the development of system platforms and in the rollout of our platforms. Although investments are carefully planned, there can be no assurance that the demand for such platforms will justify the related investments and that the future levels of transactions 35 139443_020_Nasdaq_1-188.p39.pdf QC 53 Black 04-07 19:41 executed on these platforms will be sufficient to generate an acceptable return on such investments. If we fail to generate adequate revenue from planned system platforms, or if we fail to do so within the envisioned timeframe, it could have an adverse effect on our results of operations and financial condition. Because we have operations in several countries, we are exposed to currency risk. We have operations in the U.S., the Nordic and Baltic countries, Australia and many other foreign countries. We therefore have significant exposure to exchange rate movements between the Euro, Swedish Krona, Danish Krone, Norwegian Krone, Australian dollar and other foreign currencies towards the U.S. dollar. Significant inflation or disproportionate changes in foreign exchange rates with respect to one or more of these currencies could occur as a result of general economic conditions, acts of war or terrorism, changes in governmental monetary or tax policy or changes in local interest rates. These exchange rate differences will affect the translation of our non-U.S. results of operations and financial condition into U.S. dollars as part of the preparation of our consolidated financial statements. Charges to earnings resulting from acquisition, restructuring and integration costs may materially adversely affect the market value of our common stock. In accordance with U.S. GAAP, we are accounting for the completion of our acquisitions using the purchase method of accounting. We are allocating the total estimated purchase prices to net tangible assets, amortizable intangible assets and indefinite-lived intangibles, and based on their fair values as of the date of completion of the acquisitions, recording the excess of the purchase price over those fair values as goodwill. Our financial results, including earnings per share, or EPS, could be adversely affected by a number of financial adjustments required by U.S. GAAP including the following: • we will incur additional amortization expense over the estimated useful lives of certain of the intangible assets acquired in connection with acquisitions during such estimated useful lives; • we may have additional depreciation expense as a result of recording purchased tangible assets at fair value, in accordance with U.S. GAAP, as compared to book value as recorded; • to the extent the value of goodwill or intangible assets becomes impaired, we may be required to incur material charges relating to the impairment of those assets; and • we will incur certain adjustments to reflect the financial condition and operating results under U.S. GAAP and U.S. dollars. Risks Relating to an Investment in Our Common Stock Volatility in our stock price could adversely affect our stockholders. The market price of our common stock is likely to be volatile. Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance. Factors that could cause fluctuations in our stock price may include, among other things: • • • • • • actual or anticipated variations in our quarterly operating results; changes in financial estimates by us or by any securities analysts who might cover our common stock; conditions or trends in our industry, including trading volumes, regulatory changes or changes in the securities marketplace; conditions or trends in the credit markets; announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures; announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us; 36 139443_020_Nasdaq_1-188.p40.pdf QC 54 Black 04-07 19:41 • • additions or departures of key personnel; and sales of our common stock, including sales of our common stock by our directors and officers, significant stockholders or our strategic investors. The market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets. Sales of a substantial number of shares of our common stock in the public markets, or the perception that these sales might occur, could cause the market price of our common stock to decline or could impair our ability to raise capital through a future sale of, or pay for acquisitions using, our equity securities. As of December 31, 2010, there were 175,782,683 shares of our common stock outstanding. All of our common stock is freely transferable, except shares held by our “affiliates,” as defined in Rule 144 under the Securities Act. The number of freely transferable shares of our common stock will increase upon any exercise of outstanding options pursuant to our stock compensation and stock award plan for our employees. There were 6.1 million options exercisable as of December 31, 2010 at a weighted average exercise price of $13.19. It is our intent and policy to settle the principal amounts of our 2.50% convertible notes in cash, which will not impact the number of shares of our common stock. However, we have the option to settle the conversion premium in shares of our common stock or cash. The conversion rate will initially be 18.1386 shares of common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of $55.13 per share of common stock. Provisions of our certificate of incorporation, by-laws, exchange rules (including provisions included to address SEC concerns) and Delaware law could delay or prevent a change in control of us and entrench current management. Our organizational documents place restrictions on the voting rights of certain stockholders. The holders of our common stock are entitled to one vote per share on all matters to be voted upon by the stockholders except that no person may exercise voting rights in respect of any shares in excess of 5% of the then outstanding shares of our common stock. Any change to the 5% voting limitation would require SEC approval. In response to the SEC’s concern about a concentration of our ownership, the rules of our U.S. exchanges include a rule prohibiting any member or any person associated with a member of the exchange from beneficially owning more than 20% of our outstanding voting interests. SEC consent would be required before any investor could obtain more than a 20% voting interest in us. The rules of our U.S. exchanges also require the SEC’s approval of any business ventures with one of our members, subject to exceptions. Our organizational documents contain provisions that may be deemed to have an anti-takeover effect and may delay, deter or prevent a change of control of us, such as a tender offer or takeover proposal that might result in a premium over the market price for our common stock. Additionally, certain of these provisions make it more difficult to bring about a change in the composition of our board of directors, which could result in entrenchment of current management. Our certificate of incorporation and by-laws: • • • require supermajority stockholder approval to remove directors; do not permit stockholders to act by written consent or to call special meetings; require certain advance notice for director nominations and actions to be taken at annual meetings; 37 139443_020_Nasdaq_1-188.p41.pdf QC 55 Black 04-07 19:41 • • require supermajority stockholder approval with respect to certain amendments to our certificate of incorporation and by-laws (including in respect of the provisions set forth above); and authorize the issuance of undesignated preferred stock, or “blank check” preferred stock, which could be issued by our board of directors without stockholder approval. Section 203 of the Delaware General Corporation Law imposes restrictions on mergers and other business combinations between us and any holder of 15% or more (or, in some cases, a holder who previously held 15% or more) of our common stock. In general, Delaware law prohibits a publicly held corporation from engaging in a “business combination” with an “interested stockholder” for three years after the stockholder becomes an interested stockholder, unless the corporation’s board of directors and stockholders approve the business combination in a prescribed manner. Item 1B. Unresolved Staff Comments. None. Item 2. Properties. The following is a description of our principal properties. Location Use New York, New York New York, New York Location of MarketSite U.S. headquarters New York, New York New York, New York Philadelphia, Pennsylvania Rockville, Maryland Shelton, Connecticut Stockholm, Sweden London, England Helsinki, Finland Copenhagen, Denmark General office space General office space Location of NASDAQ OMX PHLX General office space General office space European headquarters General office space General office space General office space Size (approximate, in square feet) Type of possession Subleased from FINRA with 17,931 square feet leased back to FINRA Subleased to third parties 38,000 Lease 115,000 53,000 48,000 Lease 147,000 Lease 78,000 Lease 29,000 Lease 366,000 Lease 71,000 Lease 20,000 Lease 29,000 Lease We also maintain local headquarters in each of the other European countries where we operate an exchange and office space in countries in which we conduct sales and operations, including Armenia, Australia, Canada, China, Estonia, Hong Kong, Iceland, Italy, Japan, Latvia, Lithuania, Norway, Singapore and United Arab Emirates. In addition to the above, we currently lease administrative, sales and disaster preparedness facilities in California, Illinois, Massachusetts, Oregon and Washington, DC. Generally, our properties are not earmarked for use by a particular segment; instead, most of our properties are used by two or more segments. We believe the facilities we occupy are adequate for the purposes for which they are currently used and are well-maintained. As of December 31, 2010, approximately 200,000 square feet of space was available for sublease. 38 139443_020_Nasdaq_1-188.p42.pdf QC 56 Black 04-07 19:41 Item 3. Legal Proceedings. We are not currently a party to any litigation that we believe could have a material adverse effect on our business, financial condition or operating results. However, from time to time, we have been threatened with, or named as a defendant in, lawsuits or involved in regulatory proceedings. Item 4. (Removed and Reserved). 39 139443_020_Nasdaq_1-188.p43.pdf QC 57 Black 04-07 19:41 Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock has been listed on The NASDAQ Stock Market (formerly The Nasdaq National Market) since February 10, 2005, under the ticker symbol “NDAQ.” From July 1, 2002 through February 9, 2005, our common stock traded on the OTCBB under the symbol “NDAQ.” The following chart lists the quarterly high and low sales prices for shares of our common stock for fiscal years 2010 and 2009. These prices are between dealers and do not include retail markups, markdowns or other fees and commissions and may not represent actual transactions. Fiscal 2010 Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2009 Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . High Low $24.34 20.54 23.11 21.33 $21.02 23.24 22.93 27.39 $19.07 17.18 17.54 17.87 $17.63 18.71 17.51 18.35 As of February 10, 2011, we had approximately 880 holders of record of our common stock. As of February 10, 2011, the closing price of our common stock was $27.82. Our credit facilities limit our ability to pay dividends. Before our credit facilities were in place, it was not our policy to declare or pay cash dividends on our common stock. Issuer Purchases of Equity Securities Share Repurchase Program During 2010, our board of directors approved a share repurchase program authorizing NASDAQ OMX to repurchase in the aggregate up to $797 million of our outstanding common stock which includes the authorization for the repurchase of our common stock from Borse Dubai, discussed below. Prior to our share repurchase from Borse Dubai, during the first nine months of 2010, we repurchased 15,050,647 shares of our common stock at an average price of $19.95 with an aggregate purchase price of $300 million. In December 2010, we purchased 22,781,000 shares of our common stock from Borse Dubai for $21.82 per share with an aggregate purchase price of approximately $497 million. This share purchase from Borse Dubai expanded, accelerated and completed the purchase of our shares pursuant to our previously announced share repurchase program. Employee Transactions In addition to our share repurchase program, during the fiscal quarter ended December 31, 2010 we also purchased shares from employees in connection with the settlement of income tax and related benefit withholding obligations arising from vesting in restricted stock grants. 40 139443_020_Nasdaq_1-188.p44.pdf QC 58 Black 04-07 19:41 The table below represents repurchases made by or on behalf of us or any “affiliated purchaser” of our common stock during the fiscal quarter ended December 31, 2010: (a) Total Number of Shares Purchased (b) Average Price Paid Per Share (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) $ 250 N/A $ 250 N/A $ — N/A $ — N/A Period October 2010 Share repurchase program . . . . . . . . . . . . . . Employee transactions . . . . . . . . . . . . . . . . . November 2010 Share repurchase program . . . . . . . . . . . . . . Employee transactions . . . . . . . . . . . . . . . . . December 2010 Share repurchase program . . . . . . . . . . . . . . Employee transactions . . . . . . . . . . . . . . . . . Total Fiscal Quarter Ended December 31, 2010 — 2,118 $ — $19.76 — 170 $ — $21.54 — N/A — N/A 22,781,000 126,212 $21.82 $22.71 22,781,000 N/A Share repurchase program . . . . . . . . . . . . . . 22,781,000 $21.82 22,781,000 Employee transactions . . . . . . . . . . . . . . . . . 128,500 $22.66 N/A 41 139443_020_Nasdaq_1-188.p45.pdf QC 59 Black 04-07 19:41 PERFORMANCE GRAPH The following graph compares the total return of our common stock with certain indices and a peer group. These include the NASDAQ Composite Stock Index and the Standard & Poor’s, or S&P, 500 Stock Index as well as the peer group. The peer group includes the CME Group Inc., Deutsche Börse AG, Intercontinental Exchange Inc., LSE, and NYSE Euronext. Information for the indices and the peer group is provided from December 31, 2005 through December 31, 2010. The figures represented below assume an initial investment of $100 in the common stock or index at the closing price on December 31, 2005 and the reinvestment of all dividends. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among The NASDAQ OMX Group, Inc., The NASDAQ Composite Index, The S&P 500 Index And A Peer Group $300 $250 $200 $150 $100 $50 $0 12/05 12/06 12/07 12/08 12/09 12/10 The NASDAQ OMX Group, Inc. NASDAQ Composite S&P 500 Peer Group * $100 invested on 12/31/05 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. Copyright © 2011 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved. The NASDAQ OMX Group, Inc. . . . . . . . . . . . . . . . . . . . . NASDAQ Composite . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Peer Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.00 100.00 100.00 100.00 87.52 111.74 115.80 174.16 140.68 124.67 122.16 270.69 70.24 73.77 76.96 89.99 56.34 107.12 97.33 121.79 67.45 125.93 111.99 121.67 12/05 12/06 12/07 12/08 12/09 12/10 42 139443_020_Nasdaq_1-188.p46.pdf QC 60 Black 04-07 19:41 Item 6. Selected Financial Data. On February 27, 2008, Nasdaq and OMX AB combined their businesses and Nasdaq was renamed The NASDAQ OMX Group, Inc. Under the purchase method of accounting, Nasdaq was treated as the accounting and legal acquirer in the business combination with OMX AB. We also completed our acquisitions of PHLX in July 2008, BSX in August 2008, certain businesses of Nord Pool in October 2008, the assets of North American Energy Credit and Clearing Corp. in March 2010, Nord Pool in May 2010, SMARTS in August 2010, as well as FTEN and ZVM in December 2010. These acquisitions also have been treated as purchases for accounting purposes, with NASDAQ OMX treated as the acquirer. Additionally, we purchased a majority stake in IDCG in December 2008 and a 22% equity interest in EMCF in January 2009. The financial results of these transactions are included in the consolidated financial results beginning on the date of each acquisition or strategic initiative. The following table sets forth selected financial data on a historical basis for NASDAQ OMX. The following information should be read in conjunction with the consolidated financial statements and notes thereto of NASDAQ OMX included elsewhere in this Form 10-K. Statements of Income Data: Total revenues(1) Cost of revenues(1) . . . . . . . . . . . . . . . . $ . . . . . . . . . . . . . . Revenues less transaction rebates, brokerage, clearance and exchange fees . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . Operating income . . . . . . . . . . . . . . . Net income attributable to NASDAQ OMX . . . . . . . . . . . . . . . . . . . . . . . Net income applicable to common stockholders . . . . . . . . . . . . . . . . . . Basic and diluted earnings per share: Selected Financial Data Year Ended December 31, 2010 2009 2008 2007 2006 (in millions, except share and per share amounts) 3,197 $ (1,675) 3,411 $ (1,958) 3,650 $ (2,190) 2,436 $ (1,624) 1,658 (971) 1,522 891 631 395 394 1,453 850 603 266 266 1,460 820 640 314 314 812 447 365 518 518 687 467 220 128 127 1.22 0.95 Basic earnings per share . . . . . . $ Diluted earnings per share . . . . . $ 1.94 $ 1.91 $ 1.30 $ 1.25 $ 1.65 $ 1.55 $ 4.47 $ 3.46 $ Weighted-average common shares outstanding for earnings per share: Basic . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . Balance Sheets Data: Cash and cash equivalents and financial investments(3) . . . . . . . . . $ . . . . . . . . . . . . . . . . . . Total assets(2) Total long-term liabilities(3) . . . . . . . Total equity . . . . . . . . . . . . . . . . . . . . 202,975,623 206,514,655 204,698,277 214,537,907 190,362,605 204,514,862 116,064,240 152,528,691 104,311,040 144,228,855 2010 2009 2008 2007 2006 December 31, (in millions) 568 $ 902 $ 601 $ 16,207 3,247 4,729 10,722 2,909 4,944 12,752 3,372 4,303 1,325 $ 2,979 360 2,208 1,950 3,716 1,798 1,457 43 139443_020_Nasdaq_1-188.p47.pdf QC 61 Black 04-07 19:41 (1) We record execution revenues from transactions on a gross basis in revenues and record related expenses as cost of revenues. (2) At December 31, 2010, total assets included resale agreements, at contract value of $3.4 billion. In September 2010, we launched a clearing service for the resale and repurchase agreement market. See “Resale and Repurchase Agreements, at Contract Value,” of Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements for further discussion. (3) At December 31, 2006, cash and cash equivalents and financial investments included our investment in shares of LSE. Unrealized gains and losses, including foreign currency gains, were included in accumulated other comprehensive income until the sale of the shares in September 2007. On September 25, 2007, we completed the sale of shares at that time representing 28.0% of the share capital of LSE to Borse Dubai for $1.6 billion in cash. We sold the remaining substantial balance of our holdings in LSE in open market transactions for approximately $194 million in cash on September 26, 2007 for total proceeds of $1.8 billion. As a result of the sale, we recognized a $431 million pre-tax gain which is net of $18 million of costs directly related to the sale, primarily broker fees. On September 28, 2007, we used approximately $1.1 billion of the proceeds from the above transactions to repay in full and terminate our former credit facilities. 44 139443_020_Nasdaq_1-188.p48.pdf QC 62 Black 04-07 19:41 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of the financial condition and results of operations of NASDAQ OMX in conjunction with our consolidated financial statements and related notes included in this Form 10-K, as well as the discussion under “Item 1A. Risk Factors.” Overview We are a leading global exchange group that delivers trading, clearing, exchange technology, securities listing, and public company services across six continents. Our global offerings are diverse and include trading and clearing across multiple asset classes, market data products, financial indexes, capital formation solutions, financial services and market technology products and services. Our technology powers markets across the globe, supporting cash equity trading, derivatives trading, clearing, settlement and many other functions. On February 27, 2008, Nasdaq and OMX AB combined their businesses and Nasdaq was renamed The NASDAQ OMX Group, Inc. Under the purchase method of accounting, Nasdaq was treated as the accounting and legal acquirer in the business combination with OMX AB. We also completed our acquisitions of PHLX in July 2008, BSX in August 2008, certain businesses of Nord Pool in October 2008, the assets of North American Energy Credit and Clearing Corp. in March 2010, Nord Pool in May 2010, SMARTS in August 2010, as well as FTEN and ZVM in December 2010. These acquisitions also have been treated as purchases for accounting purposes, with NASDAQ OMX treated as the acquirer. Additionally, we purchased a majority stake in IDCG in December 2008 and a 22% equity interest in EMCF in January 2009. The financial results of these transactions are included in the consolidated financial results beginning on the date of each acquisition or strategic initiative. Financial Highlights The comparability of our operating results for the year ended December 31, 2009 to the same period in 2008 is significantly impacted by our business combination with OMX AB as well as the acquisition of PHLX and the acquisition of Nord Pool’s derivatives, clearing and consulting subsidiaries. In our discussion and analysis of results of operations, we have quantified the contribution of additional revenues or expenses resulting from the operations of OMX, NASDAQ OMX PHLX and NASDAQ OMX Commodities wherever such amounts were material. While identified amounts may provide indications of general trends, the analysis cannot completely address the effects attributable to integration efforts. In addition, fluctuations in the value of foreign currencies relative to the U.S. dollar impacted our operating results. Impacts associated with fluctuations in foreign currency are discussed in more detail under “Item 7A. Quantitative and Qualitative Disclosures about Market Risk.” For the year ended December 31, 2010, approximately 33.9% of our revenues less transaction rebates, brokerage, clearance and exchange fees and 26.4% of our operating income were derived in currencies other than the U.S. dollar, primarily the Swedish Krona, Euro, Norwegian Krone and Danish Krone. In countries with currencies other than the U.S. dollar, revenues and expenses are translated using monthly average exchange rates. The following discussion of results of operations isolates the impact of year-over-year foreign currency fluctuations to better measure the comparability of operating results between periods. Operating results excluding the impact of foreign currency fluctuations are calculated by translating the current year’s results by the prior period’s exchange rates. The following summarizes significant changes in our financial performance for the year ended December 31, 2010 when compared with the same period in 2009: • Revenues less transaction rebates, brokerage, clearance and exchange fees increased $69 million, or 4.7%, to $1,522 million in 2010, compared with $1,453 million in 2009, reflecting an operational increase in revenues of $52 million and a favorable impact from foreign exchange of $17 million. The increase in operational revenues was primarily due to: 45 139443_020_Nasdaq_1-188.p49.pdf QC 63 Black 04-07 19:41 • • • • • • • • • an increase in total derivative trading and clearing revenues less transaction rebates, brokerage, clearance and exchange fees of $38 million; an increase in access services revenues of $29 million; an increase in total cash equity revenues less transaction rebates, brokerage, clearance and exchange fees of $9 million; an increase in global index group revenues of $8 million; and an increase in global listings services revenues of $6 million, partially offset by; a decrease in broker service revenues of $18 million; a decrease in market data revenues of $13 million; a decrease in other market services revenues of $5 million; and a decrease in market technology revenues of $1 million. • Operating expenses increased $41 million, or 4.8%, to $891 million in 2010, compared with $850 million in 2009, reflecting an increase in operating expenses of $27 million and an unfavorable impact from foreign exchange of $14 million. The operational increase in operating expenses was primarily due to an increase in general, administrative and other expense of $29 million primarily due to a pre-tax charge of $40 million incurred in January 2010 as a result of the repayment of our senior secured credit facilities in place as of December 31, 2009, partially offset by asset retirements of $10 million in 2009 related to obsolete technology assets. • Loss on divestiture of businesses was $11 million in 2010. This charge was due to our decision to close the businesses of both NEURO and Agora-X during the second quarter of 2010. • Net income from unconsolidated investees was $2 million in 2010, compared with a net loss of $107 million in 2009. The net loss for 2009 is primarily due to $87 million of impairment charges ($82 million on our NASDAQ Dubai investment and $5 million on our Agora-X investment), as well as a $19 million loss related to the sale of our share capital in Orc Software AB, or Orc. • Gain on sales of businesses was $12 million in 2009 and was related to the sale of substantially all of our Carpenter Moore insurance agency business for a gain of $7 million and the sale of our Broker Services operations in the United Kingdom for a gain of $5 million. • Debt conversion expense was $25 million in 2009 and was related to the conversion of most of our 3.75% convertible notes into common stock. The $25 million expense included a cash inducement of $9 million, the then present value of series A convertible preferred stock issued totaling $15 million, and debt issuance and other costs of $1 million. These current and prior year items are discussed in more detail below. Business Environment We serve listed companies, market participants and investors by providing high quality cash equity, derivative and commodities markets, thereby facilitating economic growth and corporate entrepreneurship. We also provide market technology to exchanges and markets around the world. In broad terms, our business performance is impacted by a number of drivers including macroeconomic events affecting the risk and return of financial assets, investor sentiment, government and private sector demands for capital, the regulatory environment for capital markets, and changing technology in the financial services industry. Our future revenues and net income will continue to be influenced by a number of domestic and international economic trends including: • Trading volumes, particularly in U.S. and Nordic cash equity and derivative securities, which are driven primarily by overall macroeconomic conditions; 46 139443_020_Nasdaq_1-188.p50.pdf QC 64 Black 04-07 19:41 • • • The number of companies seeking equity financing, which is affected by factors such as investor demand, the global economy, availability of diverse sources of financing as well as tax and regulatory policies; The emergence of new market participants seeking opportunities in the recovering global economy; The steady optimism of our technology customers about the outlook for capital markets and economic stability; • Continuing pressure in transaction fee pricing due to intense competition in the U.S. and Europe; • Competition for listings and trading related to pricing, product features and service offerings; • Regulatory changes imposed upon certain types of instruments, transactions, or capital market participants; and • Technological advancements and members’ demand for speed, efficiency, and reliability. Currently our business drivers are defined by investors’ cautious outlook about the pace of global economic recovery, and governments’ ability to fund their sovereign debt. The lack of confidence in the prospects for growth results in sporadic increases in the level of market volatility and lackluster trading volume. Additional impacts on our business drivers include the international enactment and implementation of new legislative and regulatory initiatives, and the continued rapid evolution and deployment of new technology in the financial services industry. The business environment that influenced our financial performance for the full year 2010 may be characterized as follows: • A considerable increase in the pace of new equity issuance relative to a historically slow 2009 in the U.S. with 89 IPOs on The NASDAQ Stock Market, up from 33 in 2009. IPO activity also increased in the Nordics with 11 IPOs on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic; • Matched share volume for all our U.S. markets decreased 16.2% relative to 2009 driven by a significant decline in overall U.S. volume and a modest decline in our market share; • A 34.1% increase relative to 2009 in the number of cash equity transactions on our Nordic and Baltic exchanges driven by increased levels of participant trading as participants increasingly adopt algorithmic trading; • A 1.6% increase relative to 2009 in the SEK value of cash equity transactions on our Nordic and Baltic exchanges resulting from increased volume levels and higher 12-month equity valuations; • Growth of 30.1% experienced by our Nordic and Baltic exchanges relative to 2009 in the number of traded and cleared equity and fixed-income contracts (excluding EDX and Eurex) driven by an increase in the number of derivative exchange members and increased market share in competitively listed products; • Intense competition among U.S. exchanges for both cash equity trading volume and listings, and strong competition between multilateral trading facilities and exchanges in Europe for equity trading volume; • Globalization of exchanges, customers and competitors extending the competitive horizon beyond national markets; and • Market trends requiring continued investment in technology to meet customers’ demands for speed, capacity, and reliability as markets adapt to a global financial industry, as increasing numbers of new companies are created, and as emerging countries show ongoing interest in developing their financial markets. 47 139443_020_Nasdaq_1-188.p51.pdf QC 65 Black 04-07 19:41 2011 Outlook We launched several strategic initiatives during 2010 which should benefit us during the challenging economic environment anticipated for 2011. For the third year in a row, more share value traded on The NASDAQ Stock Market than on any other single cash equities exchange in the world. Our platform continues to stand out as a reliable, flexible, and high capacity system delivering high levels of execution quality and speed under even extremely demanding market conditions. We continued to expand the application of our U.S. INET trading system with the successful launch of a new cash equities trading platform, NASDAQ OMX PSX, in 2010. The NASDAQ OMX PSX model prioritizes trading according to price and order size, thereby offering an exchange alternative to institutional and block traders. The standout performance and flexibility of our technology has enabled us to enter new markets with a low cost and highly regarded platform offering strong performance to both existing and new clients and creating additional sales opportunities for both our Transactions Services and Market Data businesses. Our 2009 experiences with launching INET technology on our U.S. exchanges continued in 2010 with the NASDAQ OMX PSX cash equities market. Internationally, we developed and launched Genium INET for the NASDAQ OMX Nordic and NASDAQ OMX Baltic exchanges. By using NASDAQ OMX high performance systems in our major exchanges, the flexibility of INET and Genium INET technology has been demonstrated in both the U.S. and in Europe. The Australian Stock Exchange became our first Genium INET customer in late 2010 and we anticipate that the Singapore Stock Exchange will introduce their Genium INET based platform during 2011. We expect global markets to continue to be marked by significant change in 2011. These changes will be driven primarily by regulatory initiatives in the U.S. and Europe as legislation created in the aftermath of the financial crisis is implemented and as the industry reacts to those initiatives. We expect that cash equities markets will continue to fragment into additional venues and trading will continue to migrate from exchanges to OTC systems. Conversely, trading in OTC derivatives will begin to move onto exchanges and other public execution facilities. Our investment in IDCG creates an opportunity for entering the clearing business for interest rate swap products. Throughout 2010 there were signs of a recovery in the IPO market and we expect the demand for public equity capital from companies experiencing the return of global economic growth to support further increases in the number of IPOs. Furthermore, an improved outlook for equity investments and the number of private companies seeking capital is expected to add to the IPO pipeline in 2011. We continue to leverage the opportunities in market data brought about by the breadth of NASDAQ OMX’s data distribution capabilities by offering new data products to our customer base and by strengthening our direct relationships with those customers. We believe that the year ahead will be positive for our business drivers and our operations as the global economy slowly recovers. We believe that our aggressive steps in meeting our cost, revenue, and technology objectives over the last three years will enable us to benefit from improving economic conditions in 2011. We will continue to look for opportunities to further diversify our business with enhanced product offerings and/or acquisitions that are complementary to our existing businesses. Business Segments We manage, operate and provide our products and services in three business segments: Market Services, Issuer Services and Market Technology. • The Market Services segment includes our U.S. and European Transaction Services businesses and our Market Data business, which are interrelated because the Transaction Services businesses generate the quote and trade information that we sell to market participants and data distributors. Market Services also includes our Broker Services business. 48 139443_020_Nasdaq_1-188.p52.pdf QC 66 Black 04-07 19:41 • • The Issuer Services segment includes our Global Listing Services and the Global Index Group businesses. The companies listed on The NASDAQ Stock Market, our Nordic and Baltic exchanges and NASDAQ OMX First North represent a diverse array of industries. This diversity of companies listed on NASDAQ OMX markets allows us to develop industry-specific and other indexes that we use to develop and license NASDAQ OMX branded indexes, associated derivatives and index products as part of our Global Index Group. The Global Listing Services business also includes our Corporate Solutions business. The Market Technology segment delivers technology and services to marketplaces, brokers and regulators throughout the world. Market Technology provides technology solutions for trading, clearing, settlement, and information dissemination, and also offers facility management integration, surveillance solutions and advisory services. Our management allocates resources, assesses performance and manages these businesses as three separate segments. See Note 18, “Segments,” to the consolidated financial statements for further discussion. Sources of Revenues and Cost of Revenues Market Services Revenues Transaction Services U.S. Cash Equity Trading U.S. cash equity trading revenues are variable, based on individual customer share volumes, and recognized as transactions occur. We charge transaction fees for executing cash equity trades in NASDAQ-listed and other listed securities on The NASDAQ Stock Market, NASDAQ OMX BX and NASDAQ OMX PSX as well as on orders that are routed to other market venues for execution. For The NASDAQ Stock Market and NASDAQ OMX PSX we credit a portion of the per share execution charge to the market participant that provides the liquidity and for NASDAQ OMX BX we credit a portion of the per share execution charge to the market participant that takes the liquidity. We record these credits as transaction rebates which are included in cost of revenues in the Consolidated Statements of Income. These transaction rebates are paid on a monthly basis and the amounts due are included in accounts payable and accrued expenses in the Consolidated Balance Sheets. Also, we pay Section 31 fees to the SEC for supervision and regulation of securities markets. We pass these costs along to our customers through our cash equity trading fees. We collect the fees as a pass-through charge from organizations executing eligible trades on NASDAQ’s, NASDAQ OMX BX’s and NASDAQ OMX PSX’s platforms and we recognize these amounts in cost of revenues when invoiced. Section 31 fees received are included in cash and cash equivalents in the Consolidated Balance Sheets at the time of receipt and, as required by law, the amount due to the SEC is remitted semiannually and recorded as Section 31 fees payable to the SEC in the Consolidated Balance Sheets until paid. Since the amount recorded in revenues is equal to the amount recorded in cost of revenues, there is no impact on our revenues less transaction rebates, brokerage, clearance and exchange fees. As we hold the cash received until payment to the SEC, we earn interest income on the related cash balances. European Cash Equity Trading We charge transaction fees for executing trades on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic. The transaction fee for executing trades on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic is charged per executed order and as per value traded. U.S. Derivative Trading and Clearing U.S. derivative trading and clearing revenues are variable, based on traded and cleared volumes, and recognized when executed or when contacts are cleared. The principal types of derivative contracts traded on 49 139443_020_Nasdaq_1-188.p53.pdf QC 67 Black 04-07 19:41 NASDAQ OMX PHLX and The NASDAQ Options Market are equity options, ETF options, index options and currency options. In the U.S., we also operate NFX, which offers trading for currency futures and other financial futures. Similar to U.S. cash equity trading, we credit a portion of the per share execution charge to the market participant that provides the liquidity and record the transaction rebate as a cost of revenues in the Consolidated Statements of Income. Also, we pay Section 31 fees to the SEC for supervision and regulation of securities markets. See “U.S. Cash Equity Trading” above for further discussion. Through NOCC, we engage in riskless principal trading of OTC power and gas contracts. Revenues are based on notional amounts or volume of power and gas transacted and/or delivered and are recognized upon settlement of the contracts. European Derivative Trading and Clearing European derivative trading and clearing revenues are also variable, based on the volume of traded and cleared contracts, and recognized when executed or when contracts are cleared. Derivative trading and clearing is conducted on NASDAQ OMX Stockholm and NASDAQ OMX Copenhagen. The principal types of derivative contracts traded are stock options and futures, index options and futures, fixed-income options and futures and stock loans. On NASDAQ OMX Stockholm, we offer clearing services for fixed-income options and futures, stock options and futures and index options and futures, by serving as the CCP. In doing so, we guarantee the completion of the transaction and market participants can thereby limit their counterparty risk. We also act as the counterparty for certain OTC contracts. On NASDAQ OMX Stockholm, we also offer clearing services for resale and repurchase agreements. Clearing revenues for resale and repurchase agreements are based on the value and length of the contract and are recognized when cleared. European derivative trading and clearing revenues also include clearing revenues for commodities. NASDAQ OMX Commodities provides access to the world’s largest power derivatives markets and one of Europe’s largest carbon markets. NASDAQ OMX Commodities offers international power derivatives and carbon products, operates a clearing business and offers consulting services to commodities markets globally. Our clearing revenues from trading transactions on Nord Pool are variable, based on cleared volume, and recognized when contracts are cleared. We also generate clearing revenues for contracts traded on the OTC derivative market which are also recognized when contracts are cleared. In addition, European derivatives revenues include annual renewal fees. Each January, NASDAQ OMX Commodities members are billed an annual fee which is recognized ratably over the following 12-month period. Access Services We generate revenues by providing market participants with several alternatives for accessing our markets for a fee. The type of connectivity is determined by the level of functionality a customer needs. As a result, access services revenues vary depending on the type of connection provided to customers. We provide co-location services to market participants whereby firms may lease space for equipment within our data center. These participants are charged monthly fees for cabinet space, connectivity and support. We also earn revenues from annual and monthly exchange membership and registration fees. Revenues for providing access to our markets, co-location services and revenues for monthly exchange membership and registration fees are recognized on a monthly basis as the service is provided. Revenues from annual fees for exchange membership and registration fees are recognized ratably over the following 12-month period. Market Data Market Data revenues are earned from U.S. tape plans and U.S. and European proprietary market data products. 50 139443_020_Nasdaq_1-188.p54.pdf QC 68 Black 04-07 19:41 Net U.S. Tape Plans Revenues from U.S. tape plans include eligible UTP Plan revenues which are shared among UTP Plan participants. Under the revenue sharing provision of the UTP Plan, we are permitted to deduct costs associated with acting as the exclusive Securities Information Processor from the total amount of tape fees collected. After these costs are deducted from the tape fees, we distribute to the respective UTP Plan participants, including The NASDAQ Stock Market, NASDAQ OMX BX and NASDAQ OMX PSX, their share of tape revenues based on a formula, required by Regulation NMS that takes into account both trading and quoting activity. In addition, all quotes and trades in NYSE- and NYSE Amex-listed securities are reported and disseminated in real time, and as such, we share in the tape revenues for information on NYSE- and NYSE Amex-listed securities. Revenues from net U.S. tape plans are recognized on a monthly basis. U.S. Market Data Products We collect, process and create information and earn revenues as a distributor of our own data, as well as select third-party content. We provide varying levels of quote and trade information to market participants and to data distributors, who in turn sell subscriptions for this information. We earn revenues primarily based on the number of data subscribers and distributors of our data. U.S. Market Data revenues are recognized on a monthly basis. These revenues, which are subscription based, are recorded net of amounts due under revenue sharing arrangements with market participants. European Market Data Products European Market Data revenues are based on the trading information from the exchanges that comprise NASDAQ OMX Nordic, NASDAQ OMX Baltic and NASDAQ OMX Commodities for four classes of securities: cash equities, bonds, derivatives and commodities. We provide varying levels of quote and trade information to market participants and to data distributors, who in turn provide subscriptions for this information. Revenues from European market data are subscription-based, are generated primarily based on the number of data subscribers and distributors of our data and are recognized on a monthly basis. Broker Services Our Broker Services operations offer technology and customized securities administration solutions to financial participants in the Nordic market. The primary services offered are flexible back-office systems. Our services allow customers to entirely or partly outsource their company’s back-office functions. Revenues from broker services are based on a fixed basic fee for administration or licensing, maintenance and operations, and a variable portion that depends on the number of transactions completed. Broker Services revenues are recognized on a continuous basis as services are rendered. In November 2009, we sold our Broker Services operations in the United Kingdom to TD Waterhouse and recorded a gain of $5 million which is included in gain on sales of businesses in the Consolidated Statements of Income for the year ended December 31, 2009. The sale of our Broker Services operations in the United Kingdom will not have a material impact on our future consolidated results of operations. Issuer Services Revenues Global Listing Services Listing Services revenues in the U.S. include annual renewal fees, listing of additional shares fees and initial listing fees. Annual renewal fees are recognized ratably over the following 12-month period. Listing of additional shares fees and initial listing fees are recognized on a straight-line basis over estimated service periods, which are four and six years, respectively, based on our historical listing experience and projected future listing duration. European listing fees, which are comprised of revenues derived from annual fees received from companies listed 51 139443_020_Nasdaq_1-188.p55.pdf QC 69 Black 04-07 19:41 on our Nordic and Baltic exchanges and NASDAQ OMX First North, are directly related to the listed companies’ market capitalization on a trailing 12-month basis. These revenues are recognized ratably over the following 12-month period. Global Listing Services revenues also include fees from Corporate Solutions. Our Corporate Solutions business provides customer support services, products and programs to companies, including companies listed on our exchanges. Revenues primarily include subscription income from Shareholder.com and Directors Desk, fees from GlobeNewswire and revenues from Corporate Solutions Nordic. Prior to October 2009, Corporate Solutions revenues also included commission income from our Carpenter Moore insurance agency business. In October 2009, we sold substantially all of our Carpenter Moore insurance agency business and recorded a gain of $7 million, which is included in gain on sales of businesses in the Consolidated Statements of Income for the year ended December 31, 2009. The sale of our Carpenter Moore business will not have a material impact on our future consolidated results of operations. Fee income for services other than placement of insurance coverage is recognized as those services are provided. Shareholder.com revenues are based on subscription agreements with customers. Revenues from subscription agreements are recognized ratably over the contract period, generally one year in length. As part of subscription services, customers also are charged usage fees based upon actual usage of the services provided. Revenues from usage fees and other services are recognized when earned. Directors Desk revenues are based on subscriptions for online services for directors. Subscriptions are one year in length and revenues are recognized ratably over the year. GlobeNewswire generates fees primarily from wire distribution services, and revenues are recognized as services are provided. For our insurance agency business, commission income was recognized when coverage became effective, the premium due under the policy was known or could be reasonably estimated, and substantially all required services related to placing the insurance had been provided. Broker commission adjustments and commissions on premiums billed directly by underwriters were recognized when such amounts could be reasonably estimated. Global Index Group We develop and license NASDAQ OMX branded indexes, associated derivatives and financial products as part of our Global Index Group. Revenues primarily include license fees from these branded indexes, associated derivatives and financial products in the U.S. and abroad. We also generate revenues by licensing and listing third-party structured products and third-party sponsored ETFs. We primarily have two types of license agreements: transaction-based licenses and asset-based licenses. Transaction-based licenses are generally renewable long-term agreements. Customers are charged based on transaction volume or a minimum contract amount, or both. If a customer is charged based on transaction volume, we recognize revenue when the transaction occurs. If a customer is charged based on a minimum contract amount, we recognize revenue on a pro-rata basis over the licensing term. Asset-based licenses also are generally long-term agreements. Customers are charged based on a percentage of assets under management for licensed products, per the agreement, on a monthly or quarterly basis. These revenues are recorded on a monthly or quarterly basis over the term of the license agreement. Market Technology Revenues The Market Technology segment delivers technology and services to marketplaces, brokers and regulators throughout the world. Market Technology provides technology solutions for trading, clearing, settlement, and information dissemination, and also offers facility management integration, surveillance solutions and advisory services. Revenues are derived from the following primary sources: licensing, support and facility management revenues, delivery project revenues, as well as change request, advisory and broker surveillance revenues. 52 139443_020_Nasdaq_1-188.p56.pdf QC 70 Black 04-07 19:41 We enter into multiple-element sales arrangements to provide technology solutions and services to our customers. In order to recognize revenues associated with each individual element of a multiple-element sales arrangement separately, we are required to establish the existence of Vendor Specific Objective Evidence, or VSOE, of fair value for each element. When VSOE for individual elements of an arrangement cannot be established, revenue is generally deferred and recognized over either the final element of the arrangement or the entire term of the arrangement for which the services will be delivered. License and support revenues are derived from the system solutions developed and sold by NASDAQ OMX that are generally entered into in multiple-element sales arrangements. After we have developed and sold a system solution, the customer licenses the right to use the software and may require post contract support and other services. Facility management revenues are also generally entered into in multiple-element sales arrangements and are derived when NASDAQ OMX assumes responsibility for the continuous operation of a system platform for a customer and receives facility management revenues which can be both fixed and volume- based. Revenues for license, support and facility management services are generally deferred and recognized over either the final element of the arrangement or the entire term of the arrangement for which the services will be delivered. We record the deferral of revenue associated with multiple-element sales arrangements in deferred revenue and non-current deferred revenue and the deferral of costs in other current assets and other assets in the Consolidated Balance Sheets. Delivery project revenues are derived from the installation phase of the system solutions developed and sold by NASDAQ OMX. The majority of our delivery projects involve individual adaptations to the specific requirements of the customer, such as those relating to functionality and capacity. We may customize our software technology and make significant modifications to the software to meet the needs of our customers, and as such, we account for these arrangements under contract accounting. Under contract accounting, when VSOE for valuing certain elements of an arrangement cannot be established, total revenues, as well as costs incurred, are deferred until the customization and significant modifications are complete and are then recognized over the post contract support period. We record the deferral of this revenue in deferred revenue and non-current deferred revenue and the deferral of costs in other current assets and other assets in the Consolidated Balance Sheets. Change request revenues include customer specific adaptations and modifications of the system solution sold by NASDAQ OMX after delivery has occurred. Change request revenues are recognized in revenue when earned. Advisory services are designed to support our customers’ strategies and help them with critical decisions in a highly demanding business environment. Advisory services revenues are recognized in revenue when earned. Broker surveillance revenues are derived from surveillance solutions targeting brokers and regulators throughout the world. Broker surveillance revenues are subscription based and are recognized in revenue when earned. 53 139443_020_Nasdaq_1-188.p57.pdf QC 71 Black 04-07 19:41 NASDAQ OMX’s Operating Results Key Drivers The following table includes key drivers for our Market Services, Issuer Services, and Market Technology segments. In evaluating the performance of our business, our senior management closely watches these key drivers. Market Services Cash Equity Trading NASDAQ securities Average daily share volume (in billions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Matched market share executed on NASDAQ . . . . . . . . . . . . . . . . . . . . . . . . . Matched market share executed on NASDAQ OMX BX . . . . . . . . . . . . . . . . . Market share reported to the FINRA/NASDAQ Trade Reporting Facility(1) . . Total market share(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NYSE securities Average daily share volume (in billions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Matched market share executed on NASDAQ . . . . . . . . . . . . . . . . . . . . . . . . . Matched market share executed on NASDAQ OMX BX . . . . . . . . . . . . . . . . . Market share reported to the FINRA/NASDAQ Trade Reporting Facility(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total market share(2) NYSE Amex and regional securities Average daily share volume (in billions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Matched market share executed on NASDAQ . . . . . . . . . . . . . . . . . . . . . . . . . Matched market share executed on NASDAQ OMX BX . . . . . . . . . . . . . . . . . Market share reported to the FINRA/NASDAQ Trade Reporting Facility(1) . . Total market share(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total U.S.-listed equities Average daily share volume (in billions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Matched share volume (in billions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Matched market share executed on NASDAQ . . . . . . . . . . . . . . . . . . . . . . . . . Matched market share executed on NASDAQ OMX BX . . . . . . . . . . . . . . . . . NASDAQ OMX Nordic and NASDAQ OMX Baltic Average daily number of equity trades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average daily value of shares traded (in billions) . . . . . . . . . . . . . . . . . . . . . . . $ Derivative Trading and Clearing U.S. Equity Options Average daily volume (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NASDAQ OMX PHLX matched market share . . . . . . . . . . . . . . . . . . . . . . . . . The NASDAQ Options Market matched market share . . . . . . . . . . . . . . . . . . . NASDAQ OMX Nordic and NASDAQ OMX Baltic Average Daily Volume: Options, futures and fixed-income contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . Nordic equity option contracts traded on EDX(3) . . . . . . . . . . . . . . . . . . . . . . . . Finnish option contracts traded on Eurex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NASDAQ OMX Commodities Clearing Turnover: Year Ended December 31, 2010 2009 2008 2.19 28.6% 2.9% 35.5% 67.1% 4.83 13.7% 3.6% 31.3% 48.7% 1.45 20.7% 3.1% 28.7% 52.6% 2.24 33.0% 1.4% 36.6% 71.0% 5.64 15.7% 1.9% 32.1% 49.6% 1.89 24.4% 1.4% 32.1% 57.9% 2.28 43.2% — 22.6% 65.8% 5.06 22.2% — 19.3% 41.5% 1.49 35.1% — 16.2% 51.4% 8.47 475.0 18.8% 3.3% 9.77 566.6 21.3% 1.7% 8.83 665.9 29.8% — 284,840 212,465 3.3 $ 3.1 $ 213,481 5.0 14.3 23.4% 4.0% 13.4 17.9% 3.1% 13.0 16.4% 1.0% 428,523 — 117,450 329,350 95,374 77,312 418,773 153,686 73,870 Power contracts (TWh)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Carbon contracts (1000 tCO2)(4) 2,090 31,500 2,136 45,765 409 13,261 54 139443_020_Nasdaq_1-188.p58.pdf QC 72 Black 04-07 19:41 Year Ended December 31, 2010 2009 2008 Issuer Services Initial public offerings: NASDAQ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic . . 89 11 33 1 26 17 New listings: NASDAQ(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX 195 131 177 Baltic(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 12 28 Number of listed companies: NASDAQ(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX 2,778 2,852 3,023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Baltic(8) Market Technology Order intake (in millions)(9) Total order value (in millions)(10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 780 797 160 $ 495 $ 204 $ 417 $ 824 229 359 (1) (2) (3) (4) Transactions reported to the FINRA/NASDAQ Trade Reporting Facility. Includes transactions executed on NASDAQ’s, NASDAQ OMX BX’s and NASDAQ OMX PSX’s systems plus trades reported through the FINRA/NASDAQ Trade Reporting Facility. In December 2009, derivative volume was transferred to NASDAQ OMX from EDX. Transactions executed on Nord Pool and reported for clearing to NASDAQ OMX Commodities measured by Terawatt hours (TWh) and one thousand metric tons of carbon dioxide (1000 tCO2). (5) New listings include IPOs, including those completed on a best efforts basis, issuers that switched from other listing venues, closed-end funds and separately listed ETFs. (6) New listings include IPOs and represent companies listed on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic and companies on the alternative markets, NASDAQ OMX First North. (7) Number of listed companies for NASDAQ at period end, including separately listed ETFs. (8) Represents companies listed on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic and companies on the alternative markets, NASDAQ OMX First North, at period end. Total contract value of orders signed. (9) (10) Represents total contract value of orders signed that are yet to be recognized as revenue. Market Technology deferred revenue, as discussed in Note 7, “Deferred Revenue” to the consolidated financial statements, represents cash payments received that are yet to be recognized as revenue for these signed orders. Segment Operating Results Of our 2010 revenues less transaction rebates, brokerage, clearance and exchange fees of $1,522 million, 67.3% was from our Market Services segment, 22.6% was from our Issuer Services segment, 10.0% was from our Market Technology segment and 0.1% related to other revenues. Of our 2009 revenues less transaction rebates, brokerage, clearance and exchange fees of $1,453 million, 67.2% was from our Market Services segment, 22.7% was from our Issuer Services segment, 10.0% was from our Market Technology segment and 0.1% related to other revenues. Of our 2008 revenues less transaction rebates, brokerage, clearance and exchange fees of $1,460 million, 67.5% was from our Market Services segment, 23.5% was from our Issuer Services segment, 8.2% was from our Market Technology segment and 0.8% related to other revenues. 55 139443_020_Nasdaq_1-188.p59.pdf QC 73 Black 04-07 19:41 The following table shows our total revenues, cost of revenues and revenues less transaction rebates, brokerage, clearance and exchange fees by segment: Market Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,700 (1,675) 2010 2009 (in millions) $ 2,934 (1,958) 2008 2010 vs. 2009 2009 vs. 2008 $ 3,176 (2,190) (8.0)% (14.5)% (7.6)% (10.6)% Year Ended December 31, Percentage Change Market Services revenues less transaction rebates, brokerage, clearance and exchange fees . . . . . . . . . . Issuer Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenues less transaction rebates, brokerage, 1,025 344 152 1 976 330 145 2 986 343 119 12 5.0% 4.2% 4.8% (50.0)% (1.0)% (3.8)% 21.8% (83.3)% clearance and exchange fees . . . . . . . . . . . . . . . . . . . $ 1,522 $ 1,453 $ 1,460 4.7% (0.5)% 56 139443_020_Nasdaq_1-188.p60.pdf QC 74 Black 04-07 19:41 MARKET SERVICES The following table shows total revenues less transaction rebates, brokerage, clearance and exchange fees from our Market Services segment: Transaction Services Cash Equity Trading Revenues: U.S. cash equity trading(1) Cost of revenues: . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2008 2009 2010 Percentage Change 2010 vs. 2009 2009 vs. 2008 (in millions) $ 1,600 $ 2,010 $ 2,412 (20.4)% (16.7)% Transaction rebates . . . . . . . . . . . . . . . . . . . . . . . . . Brokerage, clearance and exchange fees(1) . . . . . . . (1,094) (341) (1,394) (467) (1,718) (444) Total U.S. cash equity cost of revenues . . . . . . . . . (1,435) (1,861) (2,162) (21.5)% (27.0)% (22.9)% (18.9)% 5.2% (13.9)% U.S. cash equity trading revenues less transaction rebates, brokerage, clearance and exchange fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . European cash equity trading . . . . . . . . . . . . . . . . . . . . . Total cash equity trading revenues less transaction rebates, brokerage, clearance and exchange fees . . . . . . . . . . . . . . . . . . . . . . . Derivative Trading and Clearing Revenues: U.S. derivative trading and clearing(2) Cost of revenues: . . . . . . . . . . . . . . 165 90 255 390 Transaction rebates . . . . . . . . . . . . . . . . . . . . . . . . . Brokerage, clearance and exchange fees(2) . . . . . . . (218) (22) Total U.S. derivative trading and clearing cost of 149 95 250 116 10.7% (5.3)% (40.4)% (18.1)% 366 4.5% (33.3)% 244 232 (81) (16) 93 68.1% (26) (2) # 37.5% revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (240) (97) (28) # U.S. derivative trading and clearing revenues less transaction rebates, brokerage, clearance and exchange fees . . . . . . . . . . . . . . . . . . . . . . . . . . . European derivative trading and clearing revenues . . . . Total derivative trading and clearing revenues less transaction rebates, brokerage, clearance and exchange fees . . . . . . . . . . . . . . Access Services Revenues . . . . . . . . . . . . . . . . . . . . . . Total Transaction Services revenues less transaction rebates, brokerage, clearance and exchange fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market Data Net U.S. tape plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. market data products . . . . . . . . . . . . . . . . . . . . . . . European market data products . . . . . . . . . . . . . . . . . . . Total Market Data revenues . . . . . . . . . . . . . . . . Broker Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Market Services . . . . . . . . . . . . . . . . . . . . . . . . . Total Market Services revenues less transaction rebates, brokerage, clearance and exchange fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 150 115 265 173 693 117 126 70 313 15 4 135 87 222 144 610 128 119 78 325 32 9 65 64 129 112 607 146 107 77 330 41 8 $ 1,025 $ 976 $ 986 5.0% (1.0)% # # # # # 35.9% 72.1% 28.6% 11.1% 32.2% 19.4% 20.1% 13.6% 0.5% (8.6)% 5.9% (10.3)% (3.7)% (53.1)% (55.6)% (12.3)% 11.2% 1.3% (1.5)% (22.0)% 12.5% 139443_020_Nasdaq_1-188.p61.pdf QC 75 Black 04-07 19:41 # Denotes a variance equal to or greater than 100.0%. (1) Includes Section 31 fees of $252 million in 2010, $314 million in 2009 and $207 million in 2008. Section 31 fees are recorded as U.S. cash equity trading revenues with a corresponding amount recorded in cost of revenues. Includes Section 31 fees of $19 million in 2010, $14 million in 2009 and $2 million in 2008. Section 31 fees are recorded as U.S. derivative trading and clearing revenues with a corresponding amount recorded in cost of revenues. (2) Transaction Services Transaction Services revenues less transaction rebates, brokerage, clearance and exchange fees increased in 2010 compared with 2009 and increased in 2009 compared with 2008. The increases were primarily due to increases in derivative trading and clearing revenues less transaction rebates, brokerage, clearance and exchange fees and access services revenues. Partially offsetting the increase in 2009 was a decrease in cash equity trading revenues less transaction rebates, brokerage, clearance and exchange fees. U.S. Cash Equity Trading Revenues U.S. cash equity trading revenues less transaction rebates, brokerage, clearance and exchange fees increased in 2010 compared with 2009 and decreased in 2009 compared with 2008. The increase in 2010 was primarily due to modified rates and lower tiered rebate payouts, partially offset by a significant decline in industry volumes and a decline in our matched market share. The decrease in 2009 was primarily due to declines in matched share volume on NASDAQ’s trading system and the average net fee per share matched on NASDAQ’s trading system. U.S. cash equity trading revenues decreased in 2010 compared with 2009 and decreased in 2009 compared with 2008. The decrease in 2010 was primarily due to declines in matched share volume on NASDAQ’s trading system due to a significant decline in industry volumes, a decrease in Section 31 pass-through fee revenues charged by us to our customers and a decline in our matched market share. The decrease in 2009 was primarily due to declines in matched share volume on NASDAQ’s trading system, partially offset by higher Section 31 revenues due to higher rates charged by us to customers beginning in the second quarter of 2009. As discussed above, we record Section 31 fees as U.S. cash equity trading revenues with a corresponding amount recorded as cost of revenues. We are assessed these fees from the SEC and pass them through to our customers in the form of incremental fees. Pass-through fees can increase or decrease due to rate changes by the SEC, our percentage of the overall industry volumes processed on our systems, and differences in actual dollar value of the shares traded. Since the amount recorded in revenues is equal to the amount recorded in cost of revenues, there is no impact on our revenues less transaction rebates, brokerage, clearance and exchange fees. Section 31 fees were $252 million in 2010, $314 million in 2009 and $207 million in 2008. The decrease in 2010 compared with 2009 was primarily due to lower Section 31 fee rates and lower dollar value traded on NASDAQ and NASDAQ OMX BX’s trading systems. The increase in 2009 compared to 2008 was primarily due to higher Section 31 fee rates in 2009. For The NASDAQ Stock Market and NASDAQ OMX PSX we credit a portion of the per share execution charge to the market participant that provides the liquidity and for NASDAQ OMX BX we credit a portion of the per share execution charge to the market participant that takes the liquidity. These transaction rebates decreased in 2010 compared to 2009 and decreased in 2009 compared with 2008. The decrease in 2010 was primarily due to declines in matched share volume on NASDAQ’s trading system due to a significant decline in industry volumes, lower tiered rebate payouts and a decline in our matched market share. The decrease in 2009 was primarily due to a lower number of shares matched on NASDAQ’s trading system, partially offset by an increase in the amount of the rebate offered to liquidity providers. 58 139443_020_Nasdaq_1-188.p62.pdf QC 76 Black 04-07 19:41 Brokerage, clearance and exchange fees decreased in 2010 compared with 2009 and increased in 2009 compared with 2008. The decrease in 2010 was primarily due to a decrease in Section 31 pass-through fees, lower routing costs, and a decrease in the amount of volume routed by NASDAQ due to declines in industry volumes. The increase in 2009 was primarily due to higher Section 31 fee rates, partially offset by lower routing costs, a decrease in the amount of volume routed by NASDAQ and lower fees incurred from NSCC. European Cash Equity Trading Revenues European cash equity trading revenues include trading revenues from equity products traded on the NASDAQ OMX Nordic and NASDAQ OMX Baltic exchanges and NEURO (for periods prior to closing our NEURO business). European cash equity trading revenues decreased in 2010 compared with 2009 and decreased in 2009 compared with 2008. The decrease in 2010 was primarily due to revised trading fees introduced in the first quarter of 2010, partially offset by an increase in trading activity and a favorable impact from foreign exchange of $2 million. The decrease in 2009 was primarily due to a decrease in the value traded per day due to lower average market capitalization of stocks traded, partially offset by the inclusion of European cash equity trading revenues for the full twelve-month period in 2009 compared to ten months in 2008. In addition, foreign exchange negatively impacted European cash equity trading revenues by $11 million in 2009. U.S. Derivative Trading and Clearing Revenues U.S. derivative trading and clearing revenues and revenues less transaction rebates, brokerage, clearance and exchange fees increased in 2010 compared with 2009 and increased in 2009 compared with 2008. The increase in 2010 was primarily due to increases in volumes traded and market share, partially offset by lower average net fees for traded contracts. The increase in 2009 was primarily due to the inclusion of NASDAQ OMX PHLX’s derivative trading revenues of $196 million for the full twelve-month period in 2009 compared with the inclusion of five months of NASDAQ OMX PHLX’s derivative trading revenues totaling $78 million for 2008. In addition, an increase in market share contributed to these increases in 2009. Similar to U.S. cash equity trading, Section 31 fees are recorded as derivative trading and clearing revenues with a corresponding amount recorded as cost of revenues. We are assessed these fees from the SEC and pass them through to our customers in the form of incremental fees. Since the amount recorded in revenues is equal to the amount recorded in cost of revenues, there is no impact on our revenues less transaction rebates, brokerage, clearance and exchange fees. Section 31 fees were $19 million in 2010, $14 million in 2009 and $2 million 2008. Transaction rebates, in which we credit a portion of the per share execution charge to the market participant, increased in 2010 compared with 2009 and increased in 2009 compared with 2008. The increase in 2010 was primarily due to a revised fee structure implemented in the first quarter of 2010 along with higher volumes traded and an increase in market share. The increase in 2009 was primarily due to the inclusion of NASDAQ OMX PHLX’s transaction rebates of $61 million for the full twelve-month period in 2009 compared with the inclusion of five months of NASDAQ OMX PHLX’s transaction rebates totaling $17 million in 2008. The increase in transaction rebates in 2009 was also due to an increase in market share as discussed above. Brokerage, clearance and exchange fees increased in 2010 compared with 2009 and increased in 2009 compared with 2008. The increase in 2010 was primarily due to an increase in Section 31 pass-through fees. The increase in 2009 was primarily due to the inclusion of NASDAQ OMX PHLX’s brokerage, clearance and exchange fees of $11 million for the full twelve-month period in 2009 compared with the inclusion of five months of NASDAQ OMX PHLX’s brokerage, clearance and exchange fees totaling $2 million in 2008. European Derivative Trading and Clearing Revenues European derivative trading and clearing revenues include trading and clearing revenues from derivative products traded on NASDAQ OMX Stockholm, as well as clearing revenues from resale and repurchase agreements on NASDAQ OMX Stockholm, trading and clearing revenues from derivative products on NASDAQ 59 139443_020_Nasdaq_1-188.p63.pdf QC 77 Black 04-07 19:41 OMX Copenhagen and revenues from NASDAQ OMX Commodities. European derivative trading and clearing revenues increased in 2010 compared with 2009 and increased in 2009 compared with 2008. The increase in 2010 was primarily due to higher trading and clearing revenues for energy contracts, options and futures contracts and fixed income products due to the transfer of derivative volume from EDX to NASDAQ OMX in the fourth quarter of 2009. Also contributing to the increase in 2010 was transaction activity associated with clearing resale and repurchase agreements which was launched in the fourth quarter of 2010 and a favorable impact from foreign exchange of $5 million. The increase in 2009 was primarily due to the growth in cleared energy products and the transfer of derivative volume from EDX to NASDAQ OMX, partially offset by an unfavorable impact from foreign exchange of $4 million in 2009. European derivative trading and clearing revenues include: • • • • trading and clearing revenues for options and futures contracts of $49 million in 2010 compared with $33 million in 2009 and $41 million in 2008; trading and clearing revenues for energy and carbon products of $41 million in 2010 compared with $35 million in 2009 and $6 million for the two months included in 2008. Beginning in May 2010, trading and clearing revenues for energy and carbon products include revenues from Nord Pool; trading and clearing revenues from fixed income products of $18 million in 2010 compared with $14 million in both 2009 and 2008; and other revenues and fees of $7 million in 2010 compared with $5 million in 2009 and $3 million in 2008. During 2009, we began providing trading and clearing operations to a Dutch trading platform called The Order Machine, which primarily contributed to the increase in other revenues and fees in 2010 and 2009. Access Services Revenues Access services revenues increased in 2010 compared with 2009 and increased in 2009 compared with 2008. The increase in 2010 was primarily due to increased demand for co-location and network connectivity services and a revised fee structure for access services. The increase in 2009 was primarily due to: (i) revised fees for access services, (ii) increases in customer demand for network connectivity, (iii) continued expansion of our co-location services and (iv) the inclusion of NASDAQ OMX PHLX’s access services revenues of $15 million for the full twelve-month period in 2009 compared with the inclusion of five months of NASDAQ OMX PHLX’s access services revenues totaling $10 million in 2008. Market Data Market Data revenues decreased in 2010 compared with 2009 and decreased in 2009 compared with 2008. The decrease in 2010 was primarily due to decreases in net U.S. tape plans and European market data products revenues, partially offset by an increase in U.S. market data products revenues. The decline in net U.S. tape plans revenues in 2010 compared with 2009 was primarily due to declines in NASDAQ’s trading and quoting market share of U.S. cash equities, as calculated under the SEC-mandated market data revenue quoting and trading formula, and reductions in the size of the tape plan revenue pools mainly driven by declines in subscriber populations. The increase in U.S. market data products revenues in 2010 compared with 2009 was primarily due to growth of new products such as BX TotalView, options data feeds and mutual fund products, partially offset by discontinued products. The decrease in European market data products revenues in 2010 compared with 2009 was primarily due to declines in subscriber populations and discontinued products, partially offset by modified fees for market data products and a favorable impact from foreign exchange of $1 million. 60 139443_020_Nasdaq_1-188.p64.pdf QC 78 Black 04-07 19:41 The decrease in 2009 compared with 2008 was primarily due to a decrease in net U.S. tape plans revenues, partially offset by increases in U.S. market data products revenues and the inclusion of European market data products revenues for the full twelve-month period in 2009 compared with ten months in 2008, partially offset by an unfavorable impact from foreign exchange of $6 million. The decline in net U.S. tape plans revenues in 2009 was primarily due to a decline in NASDAQ’s trading and quoting market share of U.S. cash equities and a reduction in the size of the tape plans revenue pools. The increase in U.S. market data products revenues in 2009 was primarily due to growth of products such as the NASDAQ Global Index Data Service, which was launched in the first quarter of 2009, NASDAQ Last Sale, which was launched in the second quarter of 2008, and other proprietary data products. Broker Services Broker Services revenues decreased in 2010 compared with 2009 and decreased in 2009 compared with 2008. These decreases were primarily due to the sale of our Broker Services operations in the United Kingdom to TD Waterhouse in November 2009. The decrease in 2009 was also due to an unfavorable impact from foreign exchange of $6 million. ISSUER SERVICES The following table shows revenues from our Issuer Services segment: Year Ended December 31, Percentage Change 2010 2009 2008 2010 vs. 2009 2009 vs. 2008 (in millions) Global Listing Services: Annual renewal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . Listing of additional shares fees . . . . . . . . . . . . . . . . . Initial listing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 113 39 18 $ 117 37 20 $ 125 40 22 Total U.S. listing fees . . . . . . . . . . . . . . . . . . . . . . European listing fees . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Global Listing Services . . . . . . . . . . . . . . . Global Index Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 49 78 297 47 174 45 72 291 39 187 48 64 299 44 Total Issuer Services revenues . . . . . . . . . . . . . . . $ 344 $ 330 $ 343 (3.4)% 5.4% (10.0)% (2.3)% 8.9% 8.3% 2.1% 20.5% 4.2% (6.4)% (7.5)% (9.1)% (7.0)% (6.3)% 12.5% (2.7)% (11.4)% (3.8)% Global Listing Services U.S. Listing Services Revenues Annual renewal fees decreased in 2010 compared with 2009, primarily due to a decrease in the number of listed companies on The NASDAQ Stock Market. The number of companies listed on The NASDAQ Stock Market on January 1, 2010 was 2,852, compared to 3,023 on January 1, 2009, the date on which listed companies were billed their annual fees. The decrease in the number of listed companies was due to 302 delistings from The NASDAQ Stock Market in 2009, partially offset by 131 new listings in 2009. Annual renewal fees decreased in 2009 compared with 2008, primarily due to a decrease in the number of listed companies on The NASDAQ Stock Market. The number of companies listed on The NASDAQ Stock Market on January 1, 2009 was 3,023, compared to 3,135 on January 1, 2008, the date on which listed companies were billed their annual fees. The decrease in the number of listed companies was due to 289 delistings from The NASDAQ Stock Market in 2008, partially offset by 177 new listings in 2008. 61 139443_020_Nasdaq_1-188.p65.pdf QC 79 Black 04-07 19:41 The number of listed companies as of January 1, 2010, 2009 and 2008 includes separately listed ETFs. Annual renewal fees are recognized ratably over a 12-month period. Listing of additional shares fees increased in 2010 compared with 2009 and decreased in 2009 compared to 2008. Listing of additional shares fees are amortized on a straight-line basis over an estimated service period of four years. Therefore, revenues for each year will vary depending on the change in the total shares outstanding for companies listed on The NASDAQ Stock Market in each of the preceding four years. Initial listing fees decreased in 2010 compared with 2009 and in 2009 compared with 2008. Initial listing fees are amortized on a straight-line basis over an estimated service period of six years. Therefore, revenues for each year will vary depending on the number of new listings, which include IPOs, in each of the preceding six years. New listings were 195 during 2010 compared with 131 during 2009 and 177 during 2008. The increase in new listings during 2010 was primarily due to a stronger IPO market and will impact future revenues as these fees are amortized on a straight-line basis over the estimated service period of six years. European Listing Services Revenues European Listing Services revenues increased in 2010 compared with 2009 and decreased in 2009 compared with 2008. The increase in 2010 was primarily due to an increase in the market capitalization of Nordic issuers, partially offset by a decrease in the number of listed companies from 797 as of December 31, 2009 to 780 as of December 31, 2010. The decrease in 2009 was primarily due to a decline in the market capitalization of Nordic issuers as well as a decrease in the number of listed companies from 824 as of December 31, 2008 to 797 as of December 31, 2009. In addition, foreign exchange negatively impacted European Listing Services revenues by $4 million in 2009. Partially offsetting the decline in 2009 was an increase in revenues due to the inclusion of European Listing Services revenues for the full twelve-month period in 2009 compared to ten months in 2008. European Listing Services revenues are recognized ratably over a 12-month period. Corporate Solutions Revenues Corporate Solutions revenues increased in 2010 compared with 2009 and increased in 2009 compared with 2008, primarily due to expanding customer utilization of Shareholder.com, Directors Desk and GlobeNewswire, as well as revenues from Bloom Partners. In addition, the inclusion of Corporate Solutions Nordic for the full twelve-month period in 2009 compared with ten months in 2008 contributed to the increase in 2009. Partially offsetting these increases in 2010 and 2009 was a decrease in Carpenter Moore revenues primarily due to the sale of substantially all of our Carpenter Moore insurance agency business in October 2009. Global Index Group Revenues Global Index Group revenues increased in 2010 compared with 2009 and decreased in 2009 compared with 2008. The increase in 2010 was primarily due to an increase in underlying assets associated with NASDAQ OMX-licensed ETFs and other financial products. The Global Index Group has also seen growth in the number of products licensed and an increase in volume for licensed derivative products in 2010. The decrease in 2009 was primarily due to a decrease in underlying assets associated with NASDAQ OMX-licensed ETFs and a decrease in licensed derivatives and futures volumes, partially offset by futures price increases and the inclusion of a full twelve-month period of European global index revenues compared with ten months in 2008. 62 139443_020_Nasdaq_1-188.p66.pdf QC 80 Black 04-07 19:41 MARKET TECHNOLOGY The following table shows the revenues from our Market Technology segment: Market Technology: Year Ended December 31, Percentage Change 2010 2009 2008 2010 vs. 2009 2009 vs. 2008 (in millions) License, support and facility management revenues . . . . $ 104 $ 106 $ Delivery project revenues . . . . . . . . . . . . . . . . . . . . . . . . Change request, advisory and broker surveillance 20 17 77 13 (1.9)% (15.0)% 37.7% 53.8% revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Total Market Technology revenues . . . . . . . . . . . . . $ 152 $ 145 $ 119 19 31 63.2% 4.8% (34.5)% 21.8% Market Technology revenues increased in 2010 compared with 2009 primarily due to an increase in change request, advisory and broker surveillance revenues, partially offset by decreases in delivery project revenues and license, support and facility management revenues. License, support and facility management revenues decreased in 2010 compared with 2009 primarily due to a decrease in facility management revenues due to the loss of facility management customers. Partially offsetting this decrease was an increase in support revenues resulting from our acquisition of SMARTS in August 2010, clients entering the support stage of their contracts and a favorable impact from foreign exchange of $6 million in 2010. Delivery project revenues decreased in 2010 compared with 2009 primarily due to higher deliveries of market technology contracts during 2009, partially offset by a favorable impact from foreign exchange of $1 million in 2010. Change request, advisory and broker surveillance revenues increased in 2010 compared with 2009 primarily due to an increase in broker surveillance revenues resulting from our acquisition of SMARTS in August 2010, as well as higher change request activity during 2010. Market Technology revenues increased in 2009 compared with 2008 primarily due to the inclusion of Market Technology revenues for the full twelve-month period in 2009 compared to ten months in 2008, as well as increased deliveries of market technology contracts during 2009. Partially offsetting these increases was an unfavorable impact from foreign exchange of $14 million in 2009. As of December 31, 2010, total order value, which represents the total contract value of orders signed that are yet to be recognized as revenues, was $495 million. Market Technology deferred revenue of $146 million, which is included in this amount, represents cash payments received that are yet to be recognized as revenue for these signed orders. See Note 7, “Deferred Revenue,” to the consolidated financial statements for further discussion. The recognition and timing of these revenues depends on many factors, including those that are not within our control. As such, the following table of Market Technology revenues to be recognized in the future represents our best estimate: Fiscal year ended: 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total 63 Total Order Value (in millions) $ 146 117 80 59 44 49 $ 495 139443_020_Nasdaq_1-188.p67.pdf QC 81 Black 04-07 19:41 Expenses Operating Expenses The following table shows our operating expenses: Year Ended December 31, Percentage Change 2010 2009 2008 2010 vs. 2009 2009 vs. 2008 Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . Marketing and advertising . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . Professional and contract services . . . . . . . . . . . . . . . . . . . . Computer operations and data communications . . . . . . . . . Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Merger and strategic initiatives . . . . . . . . . . . . . . . . . . . . . . General, administrative and other . . . . . . . . . . . . . . . . . . . . (in millions) $ 412 15 104 76 58 81 32 17 55 $ 401 19 93 72 54 65 29 25 62 $ 416 20 103 78 58 88 35 4 89 Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . $ 891 $ 850 $ 820 1.0% 33.3% (1.0)% 2.6% — 8.6% 9.4% (76.5)% 61.8% 4.8% 2.7% (21.1)% 11.8% 5.6% 7.4% 24.6% 10.3% (32.0)% (11.3)% 3.7% Total operating expenses increased $41 million in 2010 compared with 2009 and $30 million in 2009 compared with 2008. The increase in 2010 reflects an increase in operating expenses of $27 million and an unfavorable impact from foreign exchange of $14 million. The increase in operating expenses of $27 million in 2010 was primarily due to an increase in general, administrative and other expense for charges incurred in connection with the January 2010 repayment of our senior secured credit facilities in place as of December 31, 2009, partially offset by asset retirements in the third quarter of 2009 related to obsolete technology assets. The increase in 2009 reflects an increase in operating expenses of $63 million, partially offset by a favorable impact from foreign exchange of $33 million. The increase in operating expenses of $63 million in 2009 was primarily due to the inclusion of OMX’s operating expenses for the full twelve-month period in 2009 compared with ten months in 2008 and the inclusion of NASDAQ OMX PHLX’s operating expenses for the full twelve-month period in 2009 compared with five months in 2008. Compensation and benefits expense increased in 2010 compared with 2009 and in 2009 compared with 2008. The increase in 2010 was primarily due to an unfavorable impact from foreign exchange of $7 million and higher compensation expenses reflecting stronger financial performance, partially offset by a decrease in salary expense primarily due to the sale of substantially all of our Carpenter Moore insurance agency business and our Broker Services operations in the United Kingdom in the fourth quarter of 2009. The increase in 2009 was primarily due to the inclusion of OMX’s compensation and benefits expense for the full twelve-month period in 2009 compared with ten months in 2008 as well as increased compensation and stock based compensation as a result of other recent acquisitions. Partially offsetting the increase in compensation and benefits expense in 2009 was a decrease in incentive compensation reflecting stronger financial performance in 2008, as well as a favorable impact from foreign exchange of $15 million. Headcount, including staff employed at consolidated entities where we have a controlling financial interest, increased to 2,395 employees at December 31, 2010 from 2,235 employees at December 31, 2009. Headcount at December 31, 2008 was 2,506 employees. The increase in headcount in 2010 compared with 2009 was primarily due to our recent acquisitions of SMARTS and FTEN. The decrease in headcount in 2009 compared with 2008 was primarily due to a reduction in staffing needs driven by successful integration efforts associated with our business combination with OMX AB and the acquisition of PHLX, as well as the sale of substantially all of our Carpenter Moore business and our Broker Services operations in the United Kingdom as noted above. Marketing and advertising expense increased in 2010 compared with 2009 and decreased in 2009 compared with 2008. The increase in 2010 was primarily due to production and media costs of a television advertisement campaign in 2010, as well as increased advertising on behalf of new issuers. The decrease in 2009 was primarily due to a reduction in media production and advertising. 64 139443_020_Nasdaq_1-188.p68.pdf QC 82 Black 04-07 19:41 Depreciation and amortization expense decreased slightly in 2010 compared with 2009 and increased in 2009 compared with 2008. The decrease in 2010 was primarily due to the full amortization of a technology intangible asset in January 2010, partially offset by an unfavorable impact from foreign currency of $2 million. The increase in 2009 was primarily due to the inclusion of NASDAQ OMX PHLX’s depreciation and amortization expense for the full twelve-month period in 2009 compared with five months in 2008 and the inclusion of OMX’s depreciation and amortization expense for the full twelve-month period in 2009 compared with ten months in 2008, partially offset by a favorable impact from foreign exchange of $5 million. Professional and contract services expense increased in 2010 compared with 2009 and in 2009 compared with 2008. The increase in 2010 was primarily due to an unfavorable impact from foreign currency. The increase in 2009 was primarily due to expenses for consulting work performed on system upgrades, as well as the inclusion of NASDAQ OMX PHLX’s professional and contract services expense for the full twelve-month period in 2009 compared with five months in 2008. Partially offsetting these increases were foreign exchange, which had a favorable impact of $3 million in 2009, and lower costs due to cost savings programs that were put in place during 2009. Computer operations and data communications expense remained flat in 2010 compared with 2009 and increased in 2009 compared with 2008. The increase in 2009 was primarily due to an increase in hardware maintenance, software leases and network costs to facilitate our recent acquisitions, as well as the inclusion of OMX’s computer operations and data communications expense for the full twelve-month period in 2009 compared with ten months in 2008, partially offset by a favorable impact from foreign exchange of $2 million. Occupancy expense increased in 2010 compared with 2009 and in 2009 compared with 2008. The increase in 2010 was primarily due to an increase in co-location rent related to the build-out of our data centers, a $5 million sublease loss reserve recorded in 2010 due to our decision to vacate space we currently lease in Philadelphia and San Francisco as well as London and an unfavorable impact from foreign exchange of $1 million. Partially offsetting these increases in 2010 was a $8 million sublease loss reserve recorded in 2009 on the space we occupy in Stockholm, Sweden, discussed below. The increase in 2009 was primarily due to a charge incurred as a result of our decision to exercise our option to terminate our lease contract for space we occupy in Stockholm before its term and our decision to vacate part of the space we occupy in Stockholm, which resulted in recording an estimated sublease loss reserve of $8 million. In addition, an increase in co-location rent and the inclusion of NASDAQ OMX PHLX’s occupancy expense for the full twelve-month period in 2009 compared with five months in 2008 contributed to the increase in 2009. Partially offsetting this increase was foreign exchange, which had a favorable impact of $2 million for 2009. Regulatory expense increased in 2010 compared with 2009 and in 2009 compared with 2008. The increase in 2010 was primarily due to outsourcing the regulation of NASDAQ OMX PHLX to FINRA in 2010. The increase in 2009 was primarily due to new regulatory fees from FINRA and an expansion of regulatory services to new markets. FINRA provides regulatory services to The NASDAQ Stock Market, The NASDAQ Options Market, NASDAQ OMX PHLX, NASDAQ OMX PSX and the markets operated and regulated by NASDAQ OMX BX, including the regulation of trading activity and surveillance and investigative functions. Merger and strategic initiatives expense was $4 million in 2010 compared with $17 million for 2009 and $25 million in 2008. Merger and strategic initiatives expense for 2010 included legal and consulting costs related to our recent acquisitions of SMARTS and FTEN and costs related to strategic initiatives. Merger expenses for 2009 and 2008 were directly attributable to the business combination with OMX AB and the acquisition of PHLX, but did not qualify as purchase accounting adjustments. The costs primarily included consulting and legal costs related to our integration of OMX AB and PHLX. Merger expenses in 2009 also included sales and use tax exposures which existed on previous acquisitions. General, administrative and other expense increased in 2010 compared with 2009 and decreased in 2009 compared with 2008. The increase in 2010 was primarily due to charges incurred related to the repayment of our senior secured credit facilities in place as of December 31, 2009. In January 2010, we recorded a pre-tax charge 65 139443_020_Nasdaq_1-188.p69.pdf QC 83 Black 04-07 19:41 of $40 million, which included the write-off of the remaining unamortized balance of debt issuance costs incurred in conjunction with our senior secured credit facilities in place as of December 31, 2009 of $28 million, costs to terminate our float-to-fixed interest rate swaps previously designated as a cash flow hedge of $9 million and other costs of $3 million. See “Senior Unsecured Notes, Credit Facility and Repayment of Our Senior Secured Credit Facilities in Place as of December 31, 2009,” of Note 8, “Debt Obligations,” to the consolidated financial statements for further discussion. In addition, the increase was due to the recognition of pre-tax gains of $4 million in 2009 on the early extinguishment of debt, net of debt issuance, discussed below. Partially offsetting these increases in 2010 were asset retirements of $10 million in the third quarter of 2009 related to obsolete technology assets. The decrease in general, administrative and other expense in 2009 compared with 2008 was primarily due to foreign exchange, which had a favorable impact of $6 million, the recognition of pre-tax gains of $4 million in 2009 on the early extinguishment of debt, net of debt issuance and other costs, and an improvement in collections of bad debts in 2009, partially offset by asset retirements of $10 million in 2009 related to obsolete technology assets. See “Early Extinguishment of Debt,” of Note 8, “Debt Obligations,” to the consolidated financial statements for further discussion of the early extinguishment of debt. Non-operating Income and Expenses The following table presents our non-operating income and expenses: 2010 Year Ended December 31, 2009 (in millions) $ $ 2008 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9 (102) 13 (102) Net interest expense . . . . . . . . . . . . . . . . . . . . . . Dividend and investment income . . . . . . . . . . . . . . . . Loss on divesture of businesses . . . . . . . . . . . . . . . . . Income (loss) from unconsolidated investees, net . . . Loss on sale of investment security . . . . . . . . . . . . . . Gain on sales of businesses . . . . . . . . . . . . . . . . . . . . . Debt conversion expense . . . . . . . . . . . . . . . . . . . . . . . Asset impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain (loss) on foreign currency contracts, net (93) (3) (11) 2 — — — — — (89) 2 — (107) (5) 12 (25) — — Percentage Change 2010 vs. 2009 2009 vs. 2008 35 (97) (62) 8 — 27 — — — (42) (58) (30.8)% — 4.5% # # # # # # # # (62.9)% 5.2% 43.5% (75.0)% # # # # # # # Total non-operating income and (expenses) . . . . $ (105) $ (212) $ (127) (50.5)% 66.9% # Denotes a variance equal to or greater than 100.0%. Interest Income Interest income decreased in 2010 compared with 2009 and in 2009 compared with 2008. The decrease in 2010 was primarily due to lower average interest rates earned on our short term investments included in cash and cash equivalents, as well as on financial investments, at fair value in our Consolidated Balance Sheets. The decrease in 2009 was primarily due to lower interest rates of approximately 2% on our investments in 2009 compared with 2008. Interest Expense Interest expense for 2010 was $102 million, and was comprised of $81 million in interest expense, $14 million of non-cash expense associated with accretion of the 2.50% convertible notes and $7 million in non-cash debt issuance amortization expense. Interest expense remained flat in 2010 compared with 2009 as decreases in 66 139443_020_Nasdaq_1-188.p70.pdf QC 84 Black 04-07 19:41 interest expense due to lower average outstanding debt obligations in 2010 resulting from principal amortization payments made in 2009 and 2010 and repurchases of our debt during 2009 were offset by increases in interest expense due to higher average interest rates on our debt obligations. Interest expense for 2009 was $102 million, and was comprised of $67 million in interest expense, $13 million of non-cash expense associated with accretion of the 2.50% convertible notes, $11 million in non-cash debt issuance amortization expense and $11 million in other related fees. Interest expense increased in 2009 compared with 2008 primarily due to a full twelve-month period of interest expense in 2009 on our outstanding debt obligations related to the OMX AB business combination compared with ten months of interest expense in 2008 and additional interest expense due to our increased outstanding debt obligations as a result of the acquisitions of PHLX and certain businesses of Nord Pool that were completed in the second half of 2008. Dividend and Investment Income Dividend and investment income decreased in 2010 compared with 2009 and in 2009 compared with 2008. The decrease in 2010 was primarily due to a decrease in the fair value of our government debt securities portfolio as a result of increased rates. The decrease in 2009 was primarily due to a decrease in the dividend per share received from our available-for-sale investment in the Oslo Børs Exchange, or Oslo, as well as a decrease in the fair value of our government debt securities portfolio classified as trading investment securities. Lower fair values were generally related to higher interest rates in 2009 on this portfolio. Loss on Divestiture of Businesses The loss on divestiture of businesses of $11 million in 2010 was due to our decision to close the businesses of both NEURO ($6 million) and Agora-X ($5 million) in the second quarter of 2010. Income (Loss) from Unconsolidated Investees, net Net income from unconsolidated investees of $2 million in 2010 was related to our share in the earnings and losses of our equity method investments. The net loss in 2009 of $107 million was primarily due to impairment charges related to our investments in NASDAQ Dubai and Agora-X and the sale of our Orc shares. See below for further discussion. The net income in 2008 of $27 million primarily related to the NASDAQ Dubai transaction in February 2008. We contributed intangible assets and $50 million in cash to NASDAQ Dubai in exchange for a 33 1/3% equity stake in NASDAQ Dubai. One of the intangible assets contributed was the Nasdaq trade name, which had a zero carrying value on Nasdaq’s books and records prior to the transfer. As a result, we recognized a $26 million gain for the difference between Nasdaq’s carrying value and the fair value of the contributed asset on this non-monetary exchange. Impairment of NASDAQ Dubai In December 2009, we agreed to participate in the realignment of the ownership structure of NASDAQ Dubai. The realignment was completed in May 2010 and at that time, NASDAQ Dubai became a wholly-owned subsidiary of DFM, a publicly traded company controlled by Borse Dubai. We received a 1% equity interest in DFM in exchange for our equity interest in NASDAQ Dubai. Our existing technology and trademark licensing arrangements with Borse Dubai and NASDAQ Dubai remain unchanged. In connection with the realignment of the ownership structure discussed above, a third-party specialist determined the fair value of NASDAQ Dubai. Based on this valuation, we determined our carrying value of NASDAQ Dubai was no longer recoverable and was in fact impaired, and we wrote down our investment to fair value which resulted in an $82 million pre-tax, non-cash impairment charge for the year ended December 31, 2009. 67 139443_020_Nasdaq_1-188.p71.pdf QC 85 Black 04-07 19:41 At the time of the realignment in May 2010, we recorded a pre-tax, non cash loss of $1 million in income (loss) from unconsolidated investees, net in the Consolidated Statements of Income, which was based on the difference between the price of DFM common stock multiplied by the number of shares of DFM acquired and the carrying value of our investment in NASDAQ Dubai at the time of the exchange. NASDAQ OMX originally contributed intangible assets and $50 million in cash to NASDAQ Dubai in exchange for a 33 1/3% equity stake in NASDAQ Dubai in February 2008. At that time, NASDAQ OMX valued its total NASDAQ Dubai investment at $128 million. Prior to the impairment, the investment had a carrying value of $120 million. Impairment of Agora-X In December 2009, we entered into an agreement to increase our investment in Agora-X from 20% to 85%. In evaluating the fair value of the total investment, it was determined that our carrying value of Agora-X was no longer recoverable and was in fact impaired, and we wrote down our investment to fair value which resulted in a pre-tax, non-cash impairment charge of $5 million. Sale of Orc Shares During the second quarter of 2009, we sold our shares in Orc, representing 25.25% of the share capital of Orc, to a group of Swedish and other international investors for $54 million in cash. As a result of the sale, we recognized a $19 million loss, which is net of costs directly related to the sale, primarily broker fees. Loss on Sale of Investment Security In connection with our business combination with OMX AB, we acquired a long-term available-for-sale investment in Oslo. During the second quarter of 2009, we made a strategic decision to sell this investment, demonstrating our intent to no longer hold this investment, and recorded a $5 million loss, which is net of costs directly related to the sale, primarily broker fees. In 2008, we recorded a non-cash other-than-temporary impairment charge of $35 million related to this investment, which was included in asset impairment charges in the Consolidated Statements of Income. See “Asset Impairment Charges” below for further discussion. Gain on Sales of Businesses In October 2009, we sold substantially all of our Carpenter Moore insurance agency business. Certain assets of the western region direct practice insurance brokerage business were sold to Woodruff-Sawyer & Co. and the eastern region insurance brokerage business was sold to Aon Risk Services Companies, Inc. In connection with these sales, we recorded a gain of $7 million. In November 2009, we sold our Broker Services operations in the United Kingdom to TD Waterhouse and recorded a gain of $5 million. Debt Conversion Expense In the third quarter of 2009, we recorded debt conversion expense of $25 million related to an inducement for conversion of most of the 3.75% convertible notes into common stock. The $25 million expense included a cash inducement of $9 million, the present value of the series A convertible preferred stock issued of $15 million, and debt issuance and other costs of $1 million. See “Conversion of 3.75% Convertible Notes,” of Note 8, “Debt Obligations,” and “Preferred Stock,” of Note 12, “Stockholders’ Equity,” to the consolidated financial statements for further discussion. 68 139443_020_Nasdaq_1-188.p72.pdf QC 86 Black 04-07 19:41 Asset Impairment Charges In 2008, we recorded a non-cash other-than-temporary impairment charge of $35 million related to our long-term available-for-sale investment security in Oslo. See “Financial Investments,” of Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements for further discussion. We also recorded a non-cash impairment loss of $7 million in 2008 from the write-down of finite-lived intangibles assets, primarily related to our insurance agency business. See Note 4, “Goodwill and Purchased Intangible Assets,” to the consolidated financial statements for further discussion. Gain (Loss) on Foreign Currency Contracts, net The loss on foreign currency contracts of $58 million in 2008 primarily related to a forward contract entered into to hedge the NOK cash payment for the Nord Pool transaction ($72 million) and our market technology forward currency contracts ($13 million), partially offset by gains on forward contracts entered into to hedge the foreign currency exposure on our business combination with OMX AB ($27 million). See Note 15, “Derivative Financial Instruments and Hedging Activities,” to the consolidated financial statements for further discussion. Income Taxes NASDAQ OMX’s income tax provision was $137 million in 2010 compared with $128 million in 2009 and $198 million in 2008. The overall effective tax rate was 26.0% in 2010, 32.7% in 2009 and 38.6% in 2008. The lower effective tax rate in 2010 when compared to 2009 was primarily due to the restructuring of certain NASDAQ OMX subsidiaries. These transactions resulted in one-time reductions in deferred tax liabilities due to a revised effective tax rate and a one-time tax deduction for a capital loss. The higher effective tax rate in 2009 was primarily due to losses on the sale of our equity method investment and an available-for-sale investment security, which are not deductible for tax purposes in the local jurisdiction where these investments were held. The lower effective tax rate in 2009 when compared with 2008 was primarily due to reductions in valuation allowances associated with certain deferred tax assets, and reductions in current year taxes in jurisdictions outside the U.S. Offsetting these decreases is the debt conversion expense, which is not deductible for U.S. tax purposes. The higher effective tax rate in 2008 was primarily due to the other-than-temporary impairment loss of $35 million on a long-term available-for-sale investment security, which is not deductible for tax purposes. The effective tax rate may vary from period to period depending on, among other factors, the geographic and business mix of earnings and losses. These same and other factors, including history of pre-tax earnings and losses, are taken into account in assessing the ability to realize deferred tax assets. In order to recognize and measure our unrecognized tax benefits, management determines whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the recognition thresholds, the position is measured to determine the amount of benefit to be recognized in the consolidated financial statements. Interest and/or penalties related to income tax matters are recognized in income tax expense. NASDAQ OMX and its eligible subsidiaries file a consolidated U.S. federal income tax return and applicable state and local income tax returns and non-U.S. income tax returns. Federal income tax returns for the years 2007 through 2009 are subject to examination by the Internal Revenue Service. Several state tax returns are currently under examination by the respective tax authorities for the years 2000 through 2008 and we are subject to examination for 2009. Non-U.S. tax returns are subject to review by the respective tax authorities for years 2003 through 2009. In August 2010 we paid the state of California $2 million with respect to audits for the years 1996 through 1998 and the years 2000 through 2006. Since this amount was included in our unrecognized tax 69 139443_020_Nasdaq_1-188.p73.pdf QC 87 Black 04-07 19:41 benefits as of December 31, 2009, such payment does not affect our 2010 effective tax rate. The outcome of these audits did not have a material impact on our financial position or results of operations. We anticipate that the amount of unrecognized tax benefits at December 31, 2010 will significantly decrease in the next twelve months as we expect to settle certain tax audits. The final outcome of such audits cannot yet be determined. We anticipate that such adjustments will not have a material impact on our consolidated financial position or results of operations. In the fourth quarter of 2010, we received an appeal from the Finnish Tax Authority in which such authority challenges certain interest expense deductions claimed by NASDAQ OMX in Finland for the years 2009 and 2008. NASDAQ OMX’s tax return position with respect to this deduction was previously reviewed and approved by the Finnish Tax Authority. The appeal also demands certain penalties be paid with regards to such tax return filing position. If the Finnish Tax Authority prevails in their challenge, additional tax and penalties for such years would total approximately $10 million. We expect the Finnish Tax Authority to agree with our position once its review is completed and, as such, it is unlikely NASDSAQ OMX will be assessed any additional tax and penalties. Through December 31, 2010, we have recorded the tax benefits associated with such filing position. In June 2009, NASDAQ OMX filed an application for an advance tax ruling with the Swedish Tax Council for Advance Tax Rulings. The application was filed to confirm whether certain interest expense is deductible for Swedish tax purposes under legislation that became effective on January 1, 2009. In June 2010, we received a favorable response from the Swedish Tax Council for Advance Tax Rulings in which all members of the Council agreed that such interest expense is deductible for Swedish tax purposes. The Swedish Tax Agency has recently appealed such ruling to the Swedish Supreme Administrative Court. We expect the Swedish Supreme Administrative Court to agree with the ruling from the Swedish Tax Council for Advance Tax Rulings. For the year ended December 31, 2010, we recorded a tax benefit of $18 million, or $0.09 per diluted share, related to this matter. Since January 1, 2009, we have recorded a tax benefit of $37 million, or $0.18 per diluted share, related to this matter. Net (Income) Loss Attributable to Noncontrolling Interests Net loss attributable to noncontrolling interests was $6 million in 2010 compared to a net loss of $3 million in 2009 and net income of $1 million in 2008. The 2010 and 2009 amounts primarily reflect losses attributable to noncontrolling interests in IDCG. The 2008 noncontrolling interests amount primarily represents 1.2% of OMX income for the period February 27, 2008 to August 27, 2008 (the effective date of the purchase of the remaining minority OMX AB shares). Liquidity and Capital Resources While 2010 was still a challenging economic environment, global market and economic conditions appear to have rebounded from adverse levels experienced during 2009, and this recovery has reinvigorated financial markets. Many lenders and institutional investors have re-established their lending practices and are now able to provide increased funding to borrowers, which has resulted in improved access to credit and positive liquidity growth. Our cost and availability of funding remain healthy and we expect to be positively impacted by continued improvements in the credit markets as we expect to be able to obtain improved terms should we seek either new debt financing or refinancing of our existing obligations. In January 2010, NASDAQ OMX refinanced its existing credit facilities by issuing $1 billion of senior unsecured notes, or the Notes, and entering into a $950 million senior unsecured three-year credit facility. The new credit facility provides for an unfunded $250 million revolving credit commitment (including a swingline facility and letter of credit facility), a $350 million funded Tranche A term loan, or the Term Loan A, and a $350 million funded Tranche X term loan, or the Term Loan X and, together with the Term Loan A, the Term Loans. The Notes were issued at a discount. As a result of the discount, the proceeds received from the issuance were less than the aggregate principal amounts. NASDAQ OMX applied the net proceeds of $996 million from the 70 139443_020_Nasdaq_1-188.p74.pdf QC 88 Black 04-07 19:41 Notes, the $700 million funded Term Loans and cash on hand to repay all amounts outstanding under our senior secured credit facilities in place as of December 31, 2009 and related fees. As a result, NASDAQ OMX terminated the associated credit agreement. In December 2010, we entered into a $400 million senior unsecured bridge facility, of which proceeds of $370 million were utilized to partially finance the purchase of 22,781,000 shares of our outstanding common stock from Borse Dubai. See “Share Repurchase from Borse Dubai,” of Note 12, “NASDAQ OMX Stockholders’ Equity,” to the consolidated financial statements for further discussion of our share repurchase from Borse Dubai. In December 2010, we also issued $370 million of 5.25% senior unsecured notes, or the 2018 Notes. The 2018 Notes were issued at a discount and pay interest semiannually at a rate of 5.25% per annum until January 16, 2018. As a result of the discount, the proceeds received from the issuance were less than the aggregate principal amount. NASDAQ OMX applied the net proceeds of $367 million from the 2018 Notes and cash on hand of $3 million to repay all amounts outstanding under our bridge facility and terminated the bridge facility as of December 31, 2010. Excluding the bridge facility, which was repaid with the net proceeds from the 2018 Notes, net proceeds from debt obligations were $2.1 billion in 2010. See “Senior Unsecured Notes, Credit Facility and Repayment of Our Senior Secured Credit Facilities in Place as of December 31, 2009,” “Bridge Facility,” and “5.25% Senior Unsecured Notes,” of Note 8, “Debt Obligations,” to the consolidated financial statements for further discussion. Historically, we have funded our operating activities and met our commitments through cash generated by operations, augmented by the periodic issuance of our common stock in the capital markets and by issuing debt obligations. In addition to these cash sources, we have a $250 million revolving credit commitment (including a swingline facility and letter of credit facility) under our credit facility to borrow funds. In the near term, we expect that our operations will provide sufficient cash to fund our operating expenses, capital expenditures, and interest payments on our debt obligations. Working capital (calculated as current assets less current liabilities) was $279 million at December 31, 2010, compared with $516 million at December 31, 2009, a decrease of $237 million. As of December 31, 2010, our cash and cash equivalents of $315 million were primarily invested in money market funds. In the long-term, we may use both internally generated funds and external sources to satisfy our debt and other long-term liabilities. Principal factors that could affect the availability of our internally-generated funds include: • • • deterioration of our revenues in any of our business segments; changes in our working capital requirements; and an increase in our expenses. Principal factors that could affect our ability to obtain cash from external sources include: • • • • • operating covenants contained in our credit facility that limit our total borrowing capacity; increases in interest rates applicable to our floating rate loans under our credit facility; credit rating downgrades, which could limit our access to additional debt; a decrease in the market price of our common stock; and volatility in the public debt and equity markets. 71 139443_020_Nasdaq_1-188.p75.pdf QC 89 Black 04-07 19:41 The following sections discuss the effects of changes in our cash and cash equivalents and cash flows, indebtedness, contractual obligations and contingent commitments and derivative clearing and broker-dealer net capital requirements on our liquidity and capital resources. Cash and Cash Equivalents and Changes in Cash Flows Cash and cash equivalents include cash in banks and all non-restricted highly liquid investments with original maturities of three months or less at the time of purchase. The balance retained in cash and cash equivalents is a function of anticipated or possible short-term cash needs, prevailing interest rates, our investment policy and alternative investment choices. Restricted cash, which was $60 million as of December 31, 2010 and $30 million as of December 31, 2009, is not available for general use by us due to regulatory and other requirements and is classified as restricted cash in the Consolidated Balance Sheets. As of December 31, 2010 and December 31, 2009, current restricted cash primarily includes cash held for regulatory purposes at NASDAQ OMX Nordic. In addition, as of December 31, 2010, restricted cash also includes cash held in customer margin accounts at IDCG and NOCC. Non-current restricted cash was $105 million at December 31, 2010 and $80 million at December 31, 2009, an increase of $25 million. As of December 31, 2010 and 2009, non-current restricted cash includes a deposit in the guaranty fund of IDCG of $80 million. In addition, as of December 31, 2010, non-current restricted cash includes $25 million segregated for NOCC to improve its liquidity position and is not available for general use. These amounts are classified as non-current restricted cash in the Consolidated Balance Sheets. The following tables summarize our cash and cash equivalents and changes in cash flows: Cash and cash equivalents(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (in millions) 315 $ 594 (47.0)% (1) Cash and cash equivalents exclude restricted cash which is not available for general use by us due to regulatory and other requirements. December 31, 2010 December 31, 2009 Percentage Change Cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . Cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of exchange rate changes on cash and cash equivalents . . . . . . $ 440 (118) (595) (6) $ 582 (53) (336) 27 (24.4)% # 77.1% # Year Ended December 31, 2010 2009 Percentage Change (in millions) # Denotes a variance greater than 100.0%. Cash and Cash Equivalents Cash and cash equivalents decreased $279 million from December 31, 2009 primarily due to cash used in financing activities and investing activities, partially offset by cash provided by operating activities. 72 139443_020_Nasdaq_1-188.p76.pdf QC 90 Black 04-07 19:41 Changes in Cash Flows Cash Provided by Operating Activities The following items impacted our cash provided by operating activities for the year ended December 31, 2010: • Net income of $389 million, plus: • Non-cash items of $172 million comprised primarily of $103 million of depreciation and amortization expense, $37 million for charges related to debt refinancing (including $28 million for the write-off of the remaining unamortized balance of debt issuance costs incurred in conjunction with our senior secured credit facilities in place as of December 31, 2009 and $9 million in costs to terminate our float-to-fixed interest rate swaps previously designated as a cash flow hedge), $33 million of share-based compensation expense, $14 million related to accretion of our 2.50% convertible senior notes, $11 million for loss on divestiture of businesses and asset retirements and impairment charges of $6 million, partially offset by deferred taxes, net of $35 million. Partially offset by an: • Increase in other assets of $79 million primarily related to a prepaid expense for a data center lease of $32 million, an increase in non-current restricted cash related to $25 million segregated for NOCC to improve its liquidity position and an increase of $30 million in current restricted cash which relates to cash held on customer margin accounts at IDCG and NOCC, as well as increases related to regulatory requirements within NASDAQ OMX Nordic. • Decrease in Section 31 fees payable to SEC of $55 million primarily due to the timing of payments, which are made twice a year in September and March, as well as lower fee rates. The following items impacted our cash provided by operating activities for the year ended December 31, 2009: • Net income of $263 million, plus: • Non-cash items of $271 million comprised primarily of loss from unconsolidated investees, net of $107 million, depreciation and amortization of $104 million, share-based compensation of $35 million, debt conversion expense of $25 million, accretion of 2.50% convertible senior notes of $13 million and asset retirements and impairment charges of $13 million, partially offset by gain on sales of businesses of $12 million and deferred taxes, net of $10 million. • Decrease in other assets of $130 million primarily due to a decrease in restricted cash as a result of the release of NASDAQ OMX Commodities clearing capital due to changes in our clearing capital model. • Increase in Section 31 fees payable to SEC of $88 million due to higher Section 31 fees as a result of rate increases. • Decrease in receivables, net of $33 million primarily due to decreases in our transaction services trade receivables reflecting increased tape rebates, which are netted against our tape revenue billings. • Partially offset by a: • Decrease in accounts payable and accrued expenses of $125 million primarily due to lower rebates as a result of decreased trading activity, as well as the wind-down of activities at Carpenter Moore and our Broker Services operations in the United Kingdom, which were sold in the fourth quarter of 2009. 73 139443_020_Nasdaq_1-188.p77.pdf QC 91 Black 04-07 19:41 • Decrease in accrued personnel costs of $41 million primarily due to a decrease in our incentive compensation accrual reflecting stronger financial performance in 2008, as well as a reduction in the number of employees in 2009. • Decrease in other current liabilities of $37 million primarily due to decreases in accrued taxes as a result of payments made. We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, accounts receivable collections, share-based compensation and the timing and amount of other payments that we make. Cash Used in Investing Activities Cash used in investing activities for the year ended December 31, 2010 is primarily due to purchases of trading securities, cash used for acquisitions, and purchases of property and equipment, partially offset by proceeds from sales and redemptions of trading securities. In 2009, cash used in investing activities primarily related to cash used in connection with the purchase of trading securities, as well as purchases of property and equipment. Partially offsetting cash used in 2009 was cash received from sales and redemptions of trading securities and our available-for-sale investment in Oslo, as well as cash received from the sale of our 25.25% equity method investment in Orc. Cash Used in Financing Activities Cash used in financing activities in 2010 primarily consisted of the repayment of debt obligations of $2.2 billion consisting of the repayment of our senior secured credit facilities in place as of December 31, 2009 of $1.7 billion, repayment of our bridge facility of $370 million, repayment of $130 million on our Term Loans, including optional payments totaling $60 million made in the second and third quarters of 2010, and a $16 million payment related to the payoff of our subordinated debt obligation assumed in the acquisition of Nord Pool’s derivatives clearing and consulting subsidiaries. We also utilized $797 million of cash in connection with our share repurchase program, which includes our stock repurchase from Borse Dubai. These decreases were partially offset by the net proceeds from debt obligations of $2.4 billion, as discussed above. See “Indebtedness” below for further discussion of our debt obligations. See “Share Repurchase from Borse Dubai,” and “Share Repurchase Program,” of Note 12, “NASDAQ OMX Stockholders’ Equity,” to the consolidated financial statements for further discussion of our share repurchase program. Cash used in financing activities for 2009 consisted of $225 million in principal payments made on our senior secured term loan facilities in place as of December 31, 2009 and a $71 million payment to repay in full the vendor note issued to the previous owners of Nord Pool in connection with the acquisition of certain businesses of Nord Pool. In addition, we repurchased $47 million principal amount of our 2.50% convertible senior notes for a cash payment of $40 million and recognized a pre-tax gain of $4 million, net of debt issuance and other costs, and made a $4 million payment on our other credit facilities in 2009. We also made a $9 million payment in connection with an inducement for the conversion of our 3.75% convertible notes. For further discussion of the $9 million inducement payment, see Note 8, “Debt Obligations,” and “Preferred Stock,” of Note 12, “Stockholders’ Equity,” to the consolidated financial statements. 74 139443_020_Nasdaq_1-188.p78.pdf QC 92 Black 04-07 19:41 Indebtedness The following table summarizes our debt obligations by contractual maturity: Maturity Date December 31, 2010 December 31, 2009 3.75% convertible notes (net of discount)(1) . . . . . . . . . . . . . . . . . . . October 2012 January 2013 $700 million senior unsecured term loan facility(2) August 2013 2.50% convertible senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 2015 4.00% senior unsecured notes (net of discount) . . . . . . . . . . . . . . . . January 2018 5.25% senior unsecured notes (net of discount) . . . . . . . . . . . . . . . . January 2020 5.55% senior unsecured notes (net of discount) . . . . . . . . . . . . . . . . Repaid May 6.25% subordinated debt assumed from the acquisition of Nord 2010 Repaid January 2010 $2,000 million senior secured term loan facility . . . . . . . . . . . . . . . . Pool’s derivatives clearing and consulting subsidiaries . . . . . . . . Total debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ (in millions) — 570 388 398 367 598 — — 2,321 (140) — — 374 — — — 18 1,700 2,092 (225) Total long-term debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,181 $ 1,867 (1) As of December 31, 2010 and December 31, 2009, approximately $0.5 million aggregate principal amount (2) of the 3.75% convertible notes remained outstanding. In addition to our scheduled $70 million quarterly payments, we made optional payments totaling $60 million of principal on our Term Loans during the second and third quarters of 2010. Senior Unsecured Notes, Credit Facility and Repayment of Our Senior Secured Credit Facilities in Place as of December 31, 2009 As discussed above and in Note 8, “Debt Obligations,” to the consolidated financial statements, in January 2010 NASDAQ OMX issued $1 billion of Notes and entered into a $950 million senior unsecured three-year credit facility. The credit facility provides for an unfunded $250 million revolving credit commitment (including a swingline facility and letter of credit facility) and $700 million of funded Term Loans. NASDAQ OMX applied the net proceeds from the Notes, the $700 million funded Term Loans and cash on hand to repay all amounts outstanding under our senior secured credit facilities in place as of December 31, 2009 and related fees. As a result, NASDAQ OMX terminated the associated credit agreement. The senior unsecured credit facility contains financial and operating covenants. Financial covenants include an interest expense coverage ratio and a maximum leverage ratio. The interest expense coverage ratio requires NASDAQ OMX to maintain a minimum ratio of adjusted earnings before interest, taxes, depreciation and amortization (as defined by the credit agreement) to cash interest expense (as defined by the credit agreement) of 4.0 to 1.0. The maximum leverage ratio of debt (excluding up to $100 million of short term borrowings in connection with regulatory requirements) to adjusted earnings before interest, taxes, depreciation and amortization (as defined by the credit agreement), is initially set at 3.5 to 1.0, stepping down to 3.25 to 1.0 beginning January 2012. Operating covenants include limitations on NASDAQ OMX’s ability to incur additional indebtedness, grant liens on assets, enter into affiliate transactions and pay dividends. The credit facility also contains customary affirmative covenants, including access to financial statements, notice of defaults and certain other material events, maintenance of business and insurance, and events of default, including cross-defaults to our material indebtedness. NASDAQ OMX is permitted to repay borrowings under the credit facility at any time in whole or in part, without penalty. We also are required to repay loans outstanding under the credit facility with net cash proceeds 75 139443_020_Nasdaq_1-188.p79.pdf QC 93 Black 04-07 19:41 from sales of property and assets of NASDAQ OMX and its subsidiaries (excluding inventory sales and other sales in the ordinary course of business) and casualty and condemnation proceeds, in each case subject to specified exceptions and thresholds. Bridge Facility As discussed above and in Note 8, “Debt Obligations,” to the consolidated financial statements, in December 2010, NASDAQ OMX entered into a $400 million senior unsecured bridge facility of which proceeds of $370 million were utilized to partially finance the purchase of our stock from Borse Dubai. We applied the net proceeds from the issuance of our 2018 notes, discussed below, and cash on hand to repay all amounts outstanding under the bridge facility and terminated the bridge facility as of December 31, 2010. 5.25% Senior Unsecured Notes In December 2010, NASDAQ OMX issued $370 million of 5.25% senior unsecured notes due 2018, at a discount. The net proceeds were $367 million. The 2018 Notes pay interest semiannually at a rate of 5.25% per annum until January 16, 2018.We applied the net proceeds from the 2018 Notes of $367 million and cash on hand of $3 million to repay all amounts outstanding under our bridge facility, as discussed above, as well as related fees. Other Credit Facilities In addition to the $250 million revolving credit commitment discussed above, we also have other credit facilities related to our clearinghouses in order to meet liquidity and regulatory requirements. These credit facilities, which are available in multiple currencies, primarily Swedish Krona and U.S. dollar, totaled $440 million ($196 million in available liquidity and $244 million to satisfy regulatory requirements), none of which was utilized at December 31, 2010. At December 31, 2009, these credit facilities totaled $417 million ($185 million in available liquidity and $232 million to satisfy regulatory requirements), none of which was utilized. Debt Covenants At December 31, 2010, we were in compliance with the covenants of all of our debt obligations. Debt Obligations by Contract Maturity See “Contractual Obligations and Contingent Commitments” below for our debt obligations by contract maturity, which includes both principal and interest obligations. See Note 8, “Debt Obligations,” to the consolidated financial statements for further discussion of our debt obligations. Derivative Clearing and Broker-Dealer Net Capital Requirements Derivative Clearing Operations Regulatory Capital Requirements We are required to maintain minimum levels of regulatory capital for our clearing operations for NASDAQ OMX Stockholm, NASDAQ OMX Commodities and IDCG. The level of regulatory capital required to be maintained is dependent upon many factors, including market conditions and creditworthiness of the counterparty. At December 31, 2010, we were required to maintain regulatory capital of $273 million which is comprised of: • • • $3 million of restricted cash; $80 million of non-current restricted cash; and $190 million primarily in Swedish government debt securities. These securities are included in financial investments, at fair value in the Consolidated Balance Sheets as of December 31, 2010. 76 139443_020_Nasdaq_1-188.p80.pdf QC 94 Black 04-07 19:41 In addition, we have available credit facilities of $244 million which can be utilized to satisfy our regulatory capital requirements. Broker-Dealer Net Capital Requirements Our broker-dealer subsidiaries, Nasdaq Execution Services and NASDAQ Options Services, are subject to regulatory requirements intended to ensure their general financial soundness and liquidity. These requirements obligate these subsidiaries to comply with minimum net capital requirements. At December 31, 2010, Nasdaq Execution Services was required to maintain minimum net capital of $0.3 million and had total net capital of approximately $8.1 million, or $7.8 million in excess of the minimum amount required. At December 31, 2010, NASDAQ Options Services also was required to maintain minimum net capital of $0.3 million and had total net capital of approximately $5.4 million, or $5.1 million in excess of the minimum amount required. Other Capital Requirements NASDAQ Options Services also is required to maintain a $2.0 million minimum level of net capital under our clearing arrangement with OCC. Non-GAAP Financial Measures In addition to disclosing results determined in accordance with GAAP, we have also provided non-GAAP net income attributable to NASDAQ OMX and non-GAAP diluted earnings per share. Management uses this non-GAAP information internally, along with GAAP information, in evaluating our performance and in making financial and operational decisions. We believe our presentation of these measures provides investors with greater transparency and supplemental data relating to our financial condition and results of operations. In addition, we believe the presentation of these measures is useful to investors for period-to-period comparison of results as the items described below do not reflect historical operating performance. These measures are not in accordance with, or an alternative to, GAAP, and may be different from non-GAAP measures used by other companies. Investors should not rely on any single financial measure when evaluating our business. We recommend investors review the GAAP financial measures included in this Annual Report on Form 10-K, including our consolidated financial statements and the notes thereto. When viewed in conjunction with our GAAP results and the accompanying reconciliation, we believe these non-GAAP measures provide greater transparency and a more complete understanding of factors affecting our business than GAAP measures alone. Our management uses these measures to evaluate operating performance and management decisions made during the reporting period by excluding certain items that we believe have less significance on, or do not impact, the day-to-day performance of our business. We understand that analysts and investors regularly rely on non-GAAP financial measures, such as non-GAAP net income and non-GAAP diluted earnings per share, to assess operating performance. We use non-GAAP net income attributable to NASDAQ OMX and non-GAAP diluted earnings per share because they more clearly highlight trends in our business that may not otherwise be apparent when relying solely on GAAP financial measures, since these measures eliminate from our results specific financial items that have less bearing on our operating performance. Non-GAAP net income attributable to NASDAQ OMX for the periods presented below is calculated by adding net income attributable to NASDAQ OMX and various non-recurring, infrequent or other charges that are not routine operating expenses, and their related income tax effects. We do not believe these items are representative of our future operating performance since these charges were not consistent with our historical and normal operating performance. Non-GAAP adjustments for the year ended December 31, 2010 primarily related to the following: (i) debt related charges associated with the repayment of our senior secured credit facilities in place as of December 31, 2009, (ii) loss on divestiture of businesses due to our decision to close the businesses of both NEURO and Agora-X in the second quarter of 2010, (iii) asset retirement charges primarily related to obsolete 77 139443_020_Nasdaq_1-188.p81.pdf QC 95 Black 04-07 19:41 technology, (iv) workforce reduction costs, (v) sublease loss reserve charge recorded on the space we occupy in Philadelphia, San Francisco and London due to our decision to vacate this space, (vi) merger and strategic initiatives costs, primarily legal and consulting, related to our recent acquisitions of SMARTS and FTEN, as well as costs related to other strategic initiatives, (vii) adjustment to the income tax provision to reflect these non-GAAP adjustments, and (viii) non-recurring tax items, net primarily due to the permanent tax effect of the restructuring of certain NASDAQ OMX subsidiaries. This resulted in a one-time reduction in deferred tax liabilities due to a revised effective tax rate and a one-time tax deduction for a capital loss. Non-GAAP adjustments for the year ended December 31, 2009 primarily related to the following: (i) debt conversion expense related to an inducement for conversion of most of our 3.75% convertible notes into common stock, (ii) gain on early extinguishment of a portion of our 2.50% convertible senior notes, net of costs, (iii) impairment charges related to our investments in NASDAQ Dubai and Agora-X, as well as the sale of our Orc shares, (iv) asset retirement charges primarily related to obsolete technology, (v) loss on the sale of our available-for-sale investment security in Oslo, (vi) gain on the sale of substantially all of our Carpenter Moore insurance agency business and a gain on the sale of our Broker Services operations in the United Kingdom, (vii) workforce reduction costs, (viii) sublease loss reserve charge recorded as a result of our decision to exercise our option to terminate our lease contract for space we occupy in Stockholm before its term and our decision to vacate part of this space, (ix) merger and strategic initiatives costs, directly attributable to the business combination with OMX AB and the acquisition of PHLX, which did not qualify as purchase accounting adjustments, (x) adjustment to the income tax provision to reflect these non-GAAP adjustments, (xi) non-recurring tax items, net primarily due to reductions in 2008 U.S. tax liabilities based on recent tax return filings and reductions in U.S. tax liabilities for years which are no longer subject to examination, and (xii) other. Non-GAAP adjustments for the year ended December 31, 2008 primarily related to the following: (i) asset impairment charges related to a non-cash other-than-temporary impairment charge on our long-term available-for-sale investment security in Oslo and a non-cash impairment loss from the write-down of finite-lived intangible assets, primarily related to our Carpenter Moore insurance agency business, (ii) net loss on foreign currency contracts primarily related to our foreign currency forward contracts used to economically hedge our exposure related to our business combination with OMX AB and the Nord Pool transaction, (iii) a non-recurring gain on the contribution of the Nasdaq trade name in the transaction with NASDAQ Dubai, (iv) workforce reduction costs, (v) merger and strategic initiatives costs, directly attributable to the business combination with OMX AB and the acquisition of PHLX, which did not qualify as purchase accounting adjustments, (vi) adjustment to the income tax provision to reflect these non-GAAP adjustments, and (vii) other. 78 139443_020_Nasdaq_1-188.p82.pdf QC 96 Black 04-07 19:41 The following table represents reconciliations between GAAP net income and diluted earnings per share and non-GAAP net income and diluted earnings per share: Year Ended December 31, 2010 Year Ended December 31, 2009 Year Ended December 31, 2008 Net Income Diluted Earnings Per Share Net Income Diluted Earnings Per Share Net Income Diluted Earnings Per Share (in millions, except per share amounts) GAAP net income and diluted earnings per share attributable to NASDAQ OMX . . . . . . . . . . . . . . . . . Non-GAAP adjustments: Debt repayment . . . . . . . . . . . . . . . . . . Debt conversion expense . . . . . . . . . . . Gain on early extinguishment of debt . Impairment of NASDAQ Dubai . . . . . Impairment of Agora-X . . . . . . . . . . . . Sale of Orc shares . . . . . . . . . . . . . . . . Loss on divestiture of businesses . . . . Asset retirements . . . . . . . . . . . . . . . . . Loss on sale of investment security . . Gain on sale of businesses . . . . . . . . . . Asset impairment charges . . . . . . . . . . Net loss on foreign currency contracts . . . . . . . . . . . . . . . . . . . . . Gain on our transaction with NASDAQ Dubai . . . . . . . . . . . . . . . Workforce reductions . . . . . . . . . . . . . Sublease reserves . . . . . . . . . . . . . . . . . Merger and strategic initiatives . . . . . . Adjustment to the income tax provision to reflect non-GAAP adjustments(1) . . . . . . . . . . . . . . . . . . Non-recurring tax items, net . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-GAAP adjustments, $ 395 $ 1.91 $ 266 $ 1.25 $ 314 $ 40 — — — — — 11 2 — — — — — 9 5 4 0.20 — — — — — 0.05 0.01 — — — — 25 (4) 82 5 19 — 13 5 (12) — — — 0.12 — (0.02) — — 0.38 — 0.02 — 0.09 — — — 0.06 0.02 — (0.06) — 42 — — — — 58 — 0.04 0.03 0.02 — 15 8 17 — 0.07 0.04 0.08 (26) 2 — 25 (28) (32) 5 (0.14) (0.15) 0.02 (47) (8) 5 (17) (0.21) (0.04) — 0.02 2 1.55 — — — — — — — — — — 0.21 0.28 (0.13) 0.01 — 0.12 (0.08) — 0.01 net of tax . . . . . . . . . . . . . . . . . 16 0.08 123 0.57 86 0.42 Non-GAAP net income and diluted earnings per share attributable to NASDAQ OMX . . . . . . . . . . . . . . . . . Denominator for diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . $ 411 $ 1.99 $ 389 $ 1.82 $ 400 $ 1.97 206,514,655 214,537,907 204,514,862 (1) We determine the tax effect of each item based on the tax rules in the respective jurisdiction where the transaction occurred. The foreign currency revaluation has no associated tax impact. 79 139443_020_Nasdaq_1-188.p83.pdf QC 97 Black 04-07 19:41 Contractual Obligations and Contingent Commitments NASDAQ OMX has contractual obligations to make future payments under debt obligations by contract maturity, minimum rental commitments under non-cancelable operating leases, net and other obligations. The following table shows these contractual obligations as of December 31, 2010: Contractual Obligations Total Less than 1 year 1-3 years 3-5 years More than 5 years Debt obligations by contract maturity (See Note 8, “Debt Obligations”)(1) . . . . . . . . . . . . . . . . . $2,947 $222 $1,026 $530 $1,169 Minimum rental commitments under (in millions) Payments Due by Period non-cancelable operating leases, net(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other obligations(3) 515 25 82 3 137 22 108 — 188 — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,487 $307 $1,185 $638 $1,357 (1) Our debt obligations include both principal and interest obligations. A weighted-average interest rate of 2.41% at December 31, 2010 was used to compute the amount of the contractual obligations for interest on our Term Loans. All other debt obligations were calculated on a 360-day basis at the contractual fixed rate multiplied by the aggregate principal amount at December 31, 2010. (2) We lease some of our office space and equipment under non-cancelable operating leases with third parties (3) and sublease office space to third parties. Some of our leases contain renewal options and escalation clauses based on increases in property taxes and building operating costs. In connection with our acquisitions of FTEN and SMARTS, we entered into escrow agreements to secure the payment of post-closing adjustments and other closing conditions. At December 31, 2010, these agreements provide for future payments of $25 million. Off-Balance Sheet Arrangements Collateral Received for Clearing Operations, Guarantees Issued and Credit Facilities Available Collateral Received for Clearing Operations Through our clearing operations in the derivatives markets with NASDAQ OMX Commodities, NASDAQ OMX Stockholm and IDCG, as well as riskless principal trading at NOCC and the resale and repurchase market with NASDAQ OMX Stockholm, we are the legal counterparty for each position traded and thereby guarantee the fulfillment of each contract. We also act as the counterparty for certain trades on OTC derivative contracts. The derivatives are not used by us for the purpose of trading on our own behalf and the resale and repurchase agreements are not used by us for financing purposes. The structure and operations of NASDAQ OMX Commodities and NASDAQ OMX Stockholm differ from other clearinghouses. See “Derivative Positions, at Fair Value,” of Note 14, “Fair Value of Financial Investments,” for further discussion. As a legal counterparty of each transaction, we bear the counterparty risk between the purchaser and seller in the contract. The counterparty risks are measured using models that are agreed to with the Financial Supervisory Authority of the application country, which requires us to provide minimum guarantees and maintain certain levels of regulatory capital. We require our customers and clearing members to pledge collateral and meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations. Total customer pledged collateral with NASDAQ OMX Commodities and NASDAQ OMX Stockholm was $8.7 billion at December 31, 2010 and $6.1 billion at December 31, 2009. This pledged collateral is held by a third-party custodian bank for the benefit of the clearing members and is accessible by NASDAQ OMX in the event of default. Since these funds are not held by NASDAQ OMX Commodities or NASDAQ OMX Stockholm and they are not available for our use, we do not receive any interest income on these funds. 80 139443_020_Nasdaq_1-188.p84.pdf QC 98 Black 04-07 19:41 We also require market participants at IDCG and NOCC to meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations and to provide collateral to cover the daily margin call. Customer pledged cash collateral held by IDCG and NOCC, which was $15 million at December 31, 2010, is included in restricted cash with an offsetting liability included in other current liabilities in the Consolidated Balance Sheets, as the risks and rewards of collateral ownership, including interest income, belongs to IDCG and NOCC. Clearing member pledged cash collateral, included in IDCG’s guaranty fund, was $8 million at December 31, 2010. This cash is included in non-current restricted cash with an offsetting liability included in other liabilities in the Consolidated Balance Sheets, as the risks and rewards of collateral ownership, including interest income, belongs to IDCG. Through our clearing operations in the resale and repurchase markets with NASDAQ OMX Stockholm, pledged collateral which is transferred through NASDAQ OMX Stockholm at initiation of the bilateral contract between the two clearing member counterparties, primarily consists of Swedish government debt securities. In addition, market participants must meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations. In the event that one of the members cannot fulfill its obligation to deliver or receive the underlying security at the agreed upon price, NASDAQ OMX Stockholm is required to buy or sell the security in the open market to fulfill its obligation. In order to protect itself against a price movement in the value of the underlying security, or price risk, NASDAQ OMX Stockholm requires all members to provide additional margin as needed, which is valued on a daily basis and is maintained at a third-party custodian bank for the benefit of the clearing members and is accessible by NASDAQ OMX Stockholm in the event of default. Guarantees Issued and Credit Facilities Available In addition to the collateral pledged by market participants discussed above, we have obtained financial guarantees and credit facilities which are guaranteed by us through counter indemnities, to provide further liquidity and default protection. At December 31, 2010, financial guarantees issued to us totaled $5 million. Credit facilities, which are available in multiple currencies, primarily Swedish Krona and U.S. dollar, totaled $440 million ($196 million in available liquidity and $244 million to satisfy regulatory requirements), none of which was utilized at December 31, 2010. At December 31, 2009, these facilities totaled $417 million ($185 million in available liquidity and $232 million to satisfy regulatory requirements), none of which was utilized. We believe that the potential for us to be required to make payments under these arrangements is mitigated through the pledged collateral and our risk management policies. Accordingly, no contingent liability is recorded in the Consolidated Balance Sheets for these arrangements. Leases We lease some of our office space and equipment under non-cancelable operating leases with third parties and sublease office space to third parties. Some of our leases contain renewal options and escalation clauses based on increases in property taxes and building operating costs. Other Guarantees We have provided other guarantees as of December 31, 2010 of $18 million, primarily related to obligations for our rental and leasing contracts. In addition, for certain Market Technology contracts, we have performance guarantees of $6 million related to the delivery of software technology and support services. We have received financial guarantees from various financial institutions to support these guarantees. These guarantees totaled $35 million at December 31, 2009. We have also provided a $25 million guarantee to our wholly-owned subsidiary, NOCC, to cover losses associated with customer defaults, net of any collateral posted against such losses. 81 139443_020_Nasdaq_1-188.p85.pdf QC 99 Black 04-07 19:41 We believe that the potential for us to be required to make payments under these arrangements is unlikely. Accordingly, no contingent liability is recorded in the Consolidated Balance Sheets for the above guarantees. Brokerage Activities Nasdaq Execution Services and NASDAQ Options Services provide guarantees to securities clearinghouses and exchanges under their standard membership agreements, which require members to guarantee the performance of other members. If a member becomes unable to satisfy its obligations to the clearinghouses, other members would be required to meet its shortfalls. To mitigate these performance risks, the exchanges and clearinghouses often require members to post collateral as well as meet certain minimum financial standards. Nasdaq Execution Services’ and NASDAQ Options Services’ maximum potential liability under these arrangements cannot be quantified. However, we believe that the potential for Nasdaq Execution Services and NASDAQ Options Services to be required to make payments under these arrangements is unlikely. Accordingly, no contingent liability is recorded in the Consolidated Balance Sheets for these arrangements. Quantitative and Qualitative Disclosures About Market Risk As a result of our operating and financing activities, we are exposed to market risks such as interest rate risk, foreign currency exchange rate risk, equity risk and credit risk. We have implemented policies and procedures to measure, manage, monitor and report risk exposures, which are reviewed regularly by management and the board of directors. We identify risk exposures and monitor and manage such risks on a daily basis. We perform sensitivity analyses to determine the effects that market risk exposures may have. We may use derivative instruments solely to hedge financial risks related to our financial positions or risks that are incurred during the normal course of business. We do not use derivative instruments for speculative purposes. Interest Rate Risk The following table summarizes our significant exposure to interest rate risk on our financial assets and liabilities as of December 31, 2010: Floating rate positions(3) Fixed rate positions(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Assets Financial Liabilities(1) Negative impact of a 100 bp adverse shift in interest rate(2) $ $ 480 220 700 $ $ (in millions) 570 1,798 2,368 $ $ 1 2 3 (1) Represents total contractual debt obligations. (2) Annualized impact of a 100 basis point parallel adverse shift in the yield curve. (3) (4) Includes floating rate and fixed interest rates with a maturity or reset date due within 12 months. Financial assets primarily consist of Swedish government debt securities, which are classified as trading investment securities, with an average duration of 1.60 years. We are exposed to cash flow risk on floating rate positions, which totaled $480 million at December 31, 2010. When interest rates on financial assets of floating rate positions decrease, net interest income decreases. When interest rates on financial liabilities of floating rate positions increase, net interest expense increases. Based on December 31, 2010 positions, each 1.0% change in interest rates on our net floating rate positions would impact annual pre-tax income negatively by $1 million in total as reflected in the table above. 82 139443_020_Nasdaq_1-188.p86.pdf QC 100 Black 04-07 19:41 We are exposed to price risk on our fixed rate financial investments, which totaled $220 million at December 31, 2010. At December 31, 2010, these fixed rate positions have an average outstanding maturity or reset date falling in more than one year. A shift of 1.0% of the interest rate curve would in aggregate impact the fair value of these positions by approximately $4 million. The average duration of the portfolio was 1.60 years. The net effect of such a yield curve shift, taking into account the change in fair value and the increase in interest income, would impact annual pre-tax income negatively by $2 million. Foreign Currency Exchange Rate Risk As an international company, we are subject to currency translation risk. For the year ended December 31, 2010, approximately 33.9% of our revenues less transaction rebates, brokerage, clearance and exchange fees and 26.4% of our operating income were derived in currencies other than the U.S. dollar, primarily the Swedish Krona, Euro, Norwegian Krone and Danish Krone. For the year ended December 31, 2009, approximately 34.5% of our revenues less transaction rebates, brokerage, clearance and exchange fees and 21.2% of our operating income were derived in currencies other than the U.S. dollar, primarily the Swedish Krona, Euro and Norwegian Krone. The increase in the percentage of our operating income in currencies other than the U.S. dollar was primarily due to an increase in U.S. dollar operating expenses. In January 2010, we recorded a pre-tax charge of $40 million, which included the write-off of the remaining unamortized balance of debt issuance costs incurred in conjunction with our senior secured credit facilities in place as of December 31, 2009 of $28 million, costs to terminate our float-to-fixed interest rate swaps previously designated as a cash flow hedge of $9 million and other costs of $3 million. Our primary exposure to foreign denominated revenues less transaction rebates, brokerage, clearance and exchange fees and operating income for the year ended December 31, 2010 is presented in the following table: Average foreign currency rate to the U.S. dollar in 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1391 1.3272 0.1657 0.1782 # Swedish Krona Euro Norwegian Krone Danish Krone Other Foreign Currencies (in millions, except currency rate) Percentage of revenues less transaction rebates, brokerage, clearance and exchange fees . . . . . . . . . . Percentage of operating income . . . . . . . . . . . . . . . . . . Impact of a 10% adverse currency fluctuation on revenues less transaction rebates, brokerage, clearance and exchange fees . . . . . . . . . . . . . . . . . . . Impact of a 10% adverse currency fluctuation on operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ # Represents multiple foreign currency rates. 22.3% 16.6% 3.4% 5.6% 3.0% 4.0% 3.0% 4.4% 2.2% (4.2)% (34) $ (5) $ (5) $ (10) $ (3) $ (3) $ (5) (3) $ (4) $ — Our primary exposure to foreign denominated revenues less transaction rebates, brokerage, clearance and exchange fees and operating income for the year ended December 31, 2009 is presented in the following table: Average foreign currency rate to the U.S. dollar in 2009 . . . . . . . . Percentage of revenues less transaction rebates, brokerage, clearance and exchange fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percentage of operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of a 10% adverse currency fluctuation on revenues less transaction rebates, brokerage, clearance and exchange fees . . . Impact of a 10% adverse currency fluctuation on operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . # Represents multiple foreign currency rates. 83 Swedish Krona Euro Norwegian Krone Other Foreign Currencies (in millions, except currency rate) 0.1315 1.3941 0.1598 21.0% 11.3% 4.3% 6.4% 3.1% 3.5% # 6.1% — $ $ (30) $ (6) $ (7) $ (4) $ (5) (2) $ (9) $ (2) 139443_020_Nasdaq_1-188.p87.pdf QC 101 Black 04-07 19:41 For the year ended December 31, 2008, our primary exposures to foreign currencies were to the Swedish Krona, Euro and Danish Krone. The average foreign currency exchange rate to the U.S. dollar in 2008 was 0.1516 for the Swedish Krona, 1.4712 for the Euro, and 0.1963 for the Danish Krone. Of our total consolidated operating income for the year ended December 31, 2008, 2% was denominated in Swedish Krona, 19% in Euros, and 2% in Danish Krones. Equity Risk Our investments in foreign subsidiaries are exposed to volatility in currency exchange rates through translation of the foreign subsidiaries’ net assets or equity to U.S. dollars. Substantially all of our foreign subsidiaries operate in functional currencies other than the U.S. dollar. Fluctuations in currency exchange rates may create volatility in our reported results as we are required to translate the balance sheets and operational results of these foreign currency denominated subsidiaries into U.S. dollars for consolidated reporting. The translation of foreign subsidiaries non-U.S. dollar balance sheets into U.S. dollars for consolidated reporting results in a cumulative translation adjustment which is recorded in accumulated other comprehensive (income) loss within stockholders’ equity in the Consolidated Balance Sheets. Our primary exposure to this equity risk as of December 31, 2010 is presented by foreign currency in the following table: Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Norwegian Krone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Australian Dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Swedish Krona . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Danish Krone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact on Consolidated Equity of a 10% Decrease in Foreign Currency Net Investment (millions of dollars) $21 14 9 9 8 $211 143 90 88 75 Credit Risk We are exposed to credit risk from third parties, including customers, counterparties and clearing agents. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. We limit our exposure to credit risk by rigorously selecting the counterparties with which we make investments and execute agreements. The financial investment portfolio objective is to invest in securities to preserve principal while maximizing yields, without significantly increasing risk. Credit risk associated with investments is minimized substantially by ensuring that these financial assets are placed with governments which have investment grade ratings, well-capitalized financial institutions and other creditworthy counterparties. Nasdaq Execution Services and NASDAQ Options Services may be exposed to credit risk, due to the default of trading counterparties, in connection with the clearing and routing services they provide for our trading customers. System trades in cash equities routed to other market centers for members of The NASDAQ Stock Market are cleared by Nasdaq Execution Services, as a member of NSCC. System trades in derivative contracts executed in the opening and closing cross and trades routed to other market centers are cleared by NASDAQ Options Services, as a member of the OCC. Pursuant to the rules of the NSCC and Nasdaq Execution Services’ clearing agreement, Nasdaq Execution Services is liable for any losses incurred due to a counterparty or a clearing agent’s failure to satisfy its contractual obligations, either by making payment or delivering securities. Pursuant to the rules of the OCC and NASDAQ Options Services’ clearing agreement, NASDAQ Options Services is also liable for any losses incurred due to a counterparty or a clearing agent’s failure to satisfy its contractual obligations, either by making 84 139443_020_Nasdaq_1-188.p88.pdf QC 102 Black 04-07 19:41 payment or delivering securities. Adverse movements in the prices of securities and derivative contracts that are subject to these transactions can increase our credit risk. However, we believe that the risk of material loss is limited, as Nasdaq Execution Services’ and NASDAQ Options Services’ customers are not permitted to trade on margin and NSCC and OCC rules limit counterparty risk on self-cleared transactions by establishing credit limits and capital deposit requirements for all brokers that clear with NSCC and OCC. Historically, neither Nasdaq Execution Services nor NASDAQ Options Services has incurred a liability due to a customer’s failure to satisfy its contractual obligations as counterparty to a system trade. Credit difficulties or insolvency or the perceived possibility of credit difficulties or insolvency of one or more larger or visible market participants could also result in market-wide credit difficulties or other market disruptions. Through our clearing operations in the derivative markets with NASDAQ OMX Commodities, NASDAQ OMX Stockholm and IDCG, as well as riskless principal trading at NOCC and the resale and repurchase market with NASDAQ OMX Stockholm, we are the legal counterparty for each position traded and thereby guarantee the fulfillment of each contract. See “Collateral Received for Clearing Operations, Guarantees Issued and Credit Facilities Available,” of “Off-Balance Sheet Arrangements,” above for further discussion. We also have credit risk related to transaction fees that are billed to customers on a monthly basis, in arrears. Our potential exposure to credit losses on these transactions is represented by the receivable balances in our Consolidated Balance Sheets. Our customers are financial institutions whose ability to satisfy their contractual obligations may be impacted by volatile securities markets. On an ongoing basis we review and evaluate changes in the status of our counterparty’s creditworthiness. Credit losses such as those described above could adversely affect our consolidated financial position and results of operations. Critical Accounting Policies and Estimates The preparation of Consolidated Financial Statements in conformity with U.S. GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. The following critical accounting policies are based on, among other things, judgments and assumptions made by management that include inherent risk and uncertainties. Management’s estimates are based on the relevant information available at the end of each period. For a summary of our significant accounting policies, including the accounting policies discussed below, see Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements for further discussion. Revenue Recognition Issuer Services Revenues Global Listing Services Listing Services revenues in the U.S. include annual renewal fees, listing of additional shares fees and initial listing fees. Annual renewal fees do not require any judgments or assumptions by management as these amounts are recognized ratably over the following 12-month period. However, listing of additional shares fees and initial listing fees are recognized on a straight-line basis over estimated service periods, which are four and six years, respectively, based on our historical listing experience and projected future listing duration. Market Technology Revenues The Market Technology segment delivers technology and services to marketplaces, brokers and regulators throughout the world. Market Technology provides technology solutions for trading, clearing, settlement, and information dissemination, and also offers facility management integration, surveillance solutions and advisory services. 85 139443_020_Nasdaq_1-188.p89.pdf QC 103 Black 04-07 19:41 Revenues are derived from the following primary sources: licensing, support and facility management revenues, delivery project revenues, as well as change request, advisory and broker surveillance revenues. We enter into multiple-element sales arrangements to provide technology solutions and services to our customers. In order to recognize revenues associated with each individual element of a multiple-element sales arrangement separately, we are required to establish the existence of VSOE of fair value for each element. When VSOE for individual elements of an arrangement cannot be established, revenue is generally deferred and recognized over either the final element of the arrangement or the entire term of the arrangement for which the services will be delivered. License and support revenues are derived from the system solutions developed and sold by NASDAQ OMX that are generally entered into in multiple-element sales arrangements. After we have developed and sold a system solution, the customer licenses the right to use the software and may require post contract support and other services. Facility management revenues are also generally entered into in multiple-element sales arrangements and are derived when NASDAQ OMX assumes responsibility for the continuous operation of a system platform for a customer and receives facility management revenues which can be both fixed and volume- based. Revenues for license, support and facility management services are generally deferred and recognized over either the final element of the arrangement or the entire term of the arrangement for which the services will be delivered. We record the deferral of revenue associated with multiple-element sales arrangements in deferred revenue and non-current deferred revenue and the deferral of costs in other current assets and other assets in the Consolidated Balance Sheets. Delivery project revenues are derived from the installation phase of the system solutions developed and sold by NASDAQ OMX. The majority of our delivery projects involve individual adaptations to the specific requirements of the customer, such as those relating to functionality and capacity. We may customize our software technology and make significant modifications to the software to meet the needs of our customers, and as such, we account for these arrangements under contract accounting. Under contract accounting, when VSOE for valuing certain elements of an arrangement cannot be established, total revenues, as well as costs incurred, are deferred until the customization and significant modifications are complete and are then recognized over the post contract support period. We record the deferral of this revenue in deferred revenue and non-current deferred revenue and the deferral of costs in other current assets and other assets in the Consolidated Balance Sheets. Change request, advisory and broker surveillance revenues do not require any judgments or assumptions by management as these amounts are recognized in revenue when earned. Reserve for Bad Debts 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. In circumstances where a specific customer’s inability to meet its financial obligations is known (i.e., bankruptcy filings), we record a specific provision for bad debts against amounts due to reduce the receivable to the amount we reasonably believe will be collected. Due to changing economic, business and market conditions, we review the reserve for bad debts monthly and make changes to the reserve through the provision for bad debts as appropriate. If circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major customer’s ability to pay), our estimates of recoverability could be reduced by a material amount. 86 139443_020_Nasdaq_1-188.p90.pdf QC 104 Black 04-07 19:41 Goodwill and Indefinite-Lived Intangible Assets and Related Impairment Our business acquisitions typically result in the recording of goodwill and intangible assets, and the recorded values of those assets may become impaired in the future. As of December 31, 2010, goodwill totaled $5.1 billion and indefinite-lived intangible assets totaled $993 million. The determination of the value of such goodwill and indefinite-lived intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. Goodwill for our three reporting units and indefinite-lived intangible assets are reviewed for impairment annually, or in interim periods if certain events occur indicating that the carrying value may be impaired. We test for impairment during the fourth quarter of our fiscal year using October 1st carrying values. We assess potential impairments to goodwill and indefinite-lived intangible assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. For goodwill, 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. For indefinite-lived intangible assets, impairment exists if the carrying value of the intangible asset exceeds its fair value. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate cash flows. Our judgments regarding the existence of impairment indicators and future cash flows related to goodwill and indefinite-lived intangible assets are based on the operational performance of our acquired businesses, market conditions, relevant trading multiples of comparable companies, the trading price of our common stock and other factors. Although there are inherent uncertainties in this assessment process, the estimates and assumptions we use are consistent with our internal planning. However, disruptions to our business such as economic weakness and unexpected significant declines in operating results of reporting units, may result in our having to perform an impairment test for goodwill for some or all of our reporting units and indefinite-lived intangible assets prior to the required annual assessment. These types of events and the resulting analysis could result in goodwill or indefinite-lived intangible asset impairment charges in the future. As of December 31, 2010, there were no reporting units deemed to be at risk of failing the goodwill impairment test. Also, we do not have any indefinite-lived intangible assets at risk of failing our impairment test. There have been no significant events since the timing of our impairment tests that would have triggered additional impairment testing. No impairments of goodwill or indefinite-lived intangible assets were recorded in 2010, 2009 or 2008. Other Long-Lived Assets and Related Impairment We also assess potential impairments to our other long-lived assets, including finite-lived intangible assets, equity method investments, property and equipment and other assets, 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. We evaluate our equity method investments for other-than-temporary declines in value by considering a variety of factors such as the earnings capacity of the investment and the fair value of the investment compared to its carrying amount. In addition, for investments where the market value is readily determinable, we consider the underlying stock price as an additional factor. 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. In 2009, we recorded losses of $87 million due to impairment charges related to NASDAQ Dubai and Agora-X. These charges were included in income (loss) from unconsolidated investees, net in the Consolidated Statements of Income. See Note 5, “Investments,” to the consolidated financial statements for further discussion. In 2008, we recorded an impairment loss of finite-lived intangible assets of $7 million primarily related to our insurance agency business, which was part of Corporate Solutions within our Issuer Services segment. This 87 139443_020_Nasdaq_1-188.p91.pdf QC 105 Black 04-07 19:41 charge was included in asset impairment charges in the Consolidated Statements of Income. See Note 4, “Goodwill and Purchased Intangible Assets,” to the consolidated financial statements for further discussion. No other impairments of long-lived assets were recorded in 2010, 2009 or 2008. Amortization Periods of Intangible Assets with Finite-Lives Intangible assets, net, primarily include exchange and clearing registrations, customer relationships, trade names, licenses and technology. Intangible assets with finite-lives are amortized on a straight-line basis over their average estimated useful lives as follows: • Technology: 3—10 years • Customer relationships: 10—30 years • Other: 4—10 years The estimated useful life of developed and new technology is based on the likely duration of benefits to be derived from the technology. We consider such factors as the migration cycle for re-platforming existing technologies and the development of future generations of technology. We also give consideration to the pace of the technological changes in the industries in which we sell our products. The estimated useful life of customer relationships is determined based on an analysis of the historical attrition rates of customers and an analysis of the legal, regulatory, contractual, competitive, economic, or other factors that limit the useful life of customer relationships. See Note 3, “Acquisitions and Strategic Initiatives,” and Note 4, “Goodwill and Purchased Intangible Assets,” to the consolidated financial statements for further discussion of intangible assets. Income Taxes Estimates and judgments are required in the calculation of certain tax liabilities and in the determination of the recoverability of certain deferred tax assets, which arise from net operating loss carryforwards, tax credit carryforwards and temporary differences between the tax and financial statement recognition of revenue and expense. Our deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. Management is required to determine whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the recognition thresholds, the position is measured to determine the amount of benefit to be recognized in the consolidated financial statements. Interest and/or penalties related to income tax matters are recognized in income tax expense. In assessing the need for a valuation allowance, we consider all available evidence including past operating results, the existence of cumulative losses in the most recent fiscal years, estimates of future taxable income and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. In addition, the calculation of our tax liabilities involves uncertainties in the application of tax regulations in the U.S. and other tax jurisdictions. We recognize potential liabilities for anticipated tax audit issues in such jurisdictions based on our estimate of whether, and the extent to which, additional taxes and interest may be due. While we believe that our tax liabilities reflect the probable outcome of identified tax uncertainties, it is reasonably possible that the ultimate resolution of any tax matter may be greater or less than the amount accrued. If events occur and the payment of these amounts ultimately proves unnecessary, the reversal of the liabilities 88 139443_020_Nasdaq_1-188.p92.pdf QC 106 Black 04-07 19:41 would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. Pension and Post-Retirement Benefits Pension and other post-retirement benefit plan information for financial reporting purposes is developed using actuarial valuations. We assess our pension and other post-retirement benefit plan assumptions on a regular basis. In evaluating these assumptions, we consider many factors, including evaluation of the discount rate, expected rate of return on plan assets, healthcare cost trend rate, retirement age assumption, our historical assumptions compared with actual results and analysis of current market conditions and asset allocations. See Note 10, “Employee Benefits,” to the consolidated financial statements for further discussion. Discount rates used for pension and other post-retirement benefit plan calculations are evaluated annually and modified to reflect the prevailing market rates at the measurement date of a high-quality fixed-income debt instrument portfolio that would provide the future cash flows needed to pay the benefits included in the benefit obligations as they come due. Actuarial assumptions are based upon management’s best estimates and judgment. The expected rate of return on plan assets for our U.S. pension plans represents our long-term assessment of return expectations which may change based on significant shifts in economic and financial market conditions. The long-term rate of return on plan assets is derived from return assumptions based on targeted allocations for various asset classes. While we consider the pension plans’ recent performance and other economic growth and inflation factors, which are supported by long-term historical data, the return expectations for the targeted asset categories represents a long-term prospective return. Share-Based Compensation The accounting for share-based compensation requires the measurement and recognition of compensation expense for all share-based awards made to employees based on estimated fair values. Share-based awards, or equity awards, include employee stock options, restricted stock and performance service units, or PSUs. Prior to October 2008, restricted stock generally refers to restricted stock awards and after October 2008, restricted stock generally refers to restricted stock units. We estimate the fair value of employee stock options using the Black-Scholes valuation model. Assumptions used in the Black-Scholes valuation model include the expected life of the award, the weighted- average risk free rate, the expected volatility, and the dividend yield. Our computation of expected life is based on historical exercise patterns. The risk free interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. Our computation of expected volatility is based on a combination of historical and market-based implied volatility. Our credit facilities restrict our ability to pay dividends. Before our credit facilities were in place, it was not our policy to declare or pay cash dividends on our common stock. See Note 11, “Share-Based Compensation,” to the consolidated financial statements for further discussion. Software Costs We capitalize and amortize significant purchased application software and operational software that are an integral part of computer hardware on the straight-line method over their estimated useful lives, generally two to five years. We expense other purchased software as incurred. Certain costs incurred in connection with developing or obtaining internal use software are capitalized. We capitalize internal and third party costs incurred in connection with the development of internal use software. 89 139443_020_Nasdaq_1-188.p93.pdf QC 107 Black 04-07 19:41 Under our Market Technology segment, costs of computer software to be sold, leased, or otherwise marketed as a separate product or as part of a product or process are capitalized after the product has reached technological feasibility. Technological feasibility is established upon completion of a detail program design or, in its absence, completion. Thereafter, all software production costs shall be capitalized. Prior to reaching technological feasibility, all costs are charged to expense. Capitalized costs are amortized on a straight-line basis over the remaining estimated economic life of the product and are included in depreciation and amortization expense in the Consolidated Statements of Income. Foreign Currency Translation Foreign denominated assets and liabilities are remeasured into the functional currency at exchange rates in effect at the balance sheet date through the income statement. Gains or losses resulting from foreign currency transactions are remeasured using the rates on the dates on which those elements are recognized during the period, and are included in general, administrative and other expense in the Consolidated Statements of Income. Translation gains or losses resulting from translating our subsidiaries’ financial statements from the local functional currency to the reporting currency, net of tax, are included in accumulated other comprehensive income (loss) within stockholders’ equity in the Consolidated Balance Sheets. Assets and liabilities are translated at the balance sheet date while revenues and expenses are recorded at the date the transaction occurs or at an applicable average rate. Recently Adopted Accounting Pronouncements ASC Topic 605.25—In October 2009, the Financial Accounting Standards Board, or FASB, issued authoritative guidance on FASB Accounting Standards Codification, or ASC, Topic 605.25, “Revenue Recognition—Multiple-Element Arrangements.” This guidance modifies the revenue recognition guidance for arrangements that involve the delivery of multiple-elements, such as product, software, services or support, to a customer at different times as part of a single revenue generating transaction. This standard provides principles and application guidance to determine whether multiple deliverables exist, how the individual deliverables should be separated and how to allocate the revenue in the arrangement among those separate deliverables. The standard also expands the disclosure requirements for multiple deliverable revenue arrangements. This accounting guidance was effective for us on January 1, 2011, but allowed for early adoption as of the first quarter of 2010 or through a retrospective application to all revenue arrangements for all periods presented in the financial statements. We adopted this guidance in the first quarter of 2010. The adoption did not have a significant impact on our financial position or results of operations. ASC Topic 820—In January 2010, the FASB issued amended guidance relating to ASC Topic 820, “Fair Value Measurements and Disclosures.” The amended guidance requires new disclosures as follows: • Amounts related to transfers in and out of Levels 1 and 2 shall be disclosed separately and the reasons for the transfers shall be described. • In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements on a gross basis. The guidance also provides amendments that clarify existing disclosures related to the following: • Reporting fair value measurement disclosures for each class of assets and liabilities. • Providing disclosure surrounding the valuation techniques and inputs used to measure fair value for both Level 2 and Level 3 fair value measurements. 90 139443_020_Nasdaq_1-188.p94.pdf QC 108 Black 04-07 19:41 This accounting guidance was effective for us beginning on January 1, 2010, except for the disclosure requirements surrounding the reconciliation of Level 3 fair value measurements, which were effective for us on January 1, 2011. Since this guidance only requires additional disclosure, it did not and will not affect our financial position or results of operations. ASC Topic 855—In February 2010, the FASB issued amended guidance on subsequent events. Under this amended guidance, entities that file with the SEC are no longer required to disclose the date through which subsequent events have been evaluated in originally issued or revised financial statements. This amended guidance was effective immediately and we adopted the new requirements as of March 31, 2010. Summarized Quarterly Financial Data (Unaudited) 1st Qtr 2010 2nd Qtr 2010 3rd Qtr 2010 4th Qtr 2010 (in millions, except per share amounts) Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 771 (411) $ 886 (496) $ 758 (386) $ 783 (383) Revenues less transaction rebates, brokerage, clearance and exchange fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360 248 112 Net income attributable to NASDAQ OMX . . . . . . . . . . . . . . . . . . . $ 61 Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.29 Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.28 1st Qtr 2009 Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 895 (526) Revenues less transaction rebates, brokerage, clearance and exchange fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369 203 166 Net income attributable to NASDAQ OMX . . . . . . . . . . . . . . . . . . . $ 94 Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.47 Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.44 390 211 179 $ 96 $0.46 $0.46 372 207 165 $ 101 $0.51 $0.50 400 225 175 $ 137 $0.70 $0.69 2nd Qtr 2009 $ 889 (522) 3rd Qtr 2009 $ 810 (461) 4th Qtr 2009 $ 817 (448) 367 208 159 $ 69 $0.34 $0.33 349 218 131 $ 60 $0.30 $0.28 369 220 149 $ 43 $0.20 $0.20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Information about quantitative and qualitative disclosures about market risk is incorporated herein by reference from “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk.” Item 8. Financial Statements and Supplementary Data. NASDAQ OMX’s consolidated financial statements, including Consolidated Balance Sheets as of December 31, 2010 and 2009, Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008, Consolidated Statements of Changes in Equity for the years ended December 31, 2010, 2009 and 2008, Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2010, 2009 and 91 139443_020_Nasdaq_1-188.p95.pdf QC 109 Black 04-07 19:41 2008, Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008 and notes to our consolidated financial statements, together with a report thereon of Ernst & Young LLP, dated February 24, 2011, are attached hereto as pages F-1 through F-79 and incorporated by reference herein. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. Item 9A. Controls and Procedures. (a). Disclosure controls and procedures. NASDAQ OMX’s management, with the participation of NASDAQ OMX’s Chief Executive Officer and Executive Vice President and Chief Financial Officer, has evaluated the effectiveness of NASDAQ OMX’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, NASDAQ OMX’s Chief Executive Officer and Executive Vice President and Chief Financial Officer have concluded that, as of the end of such period, NASDAQ OMX’s disclosure controls and procedures are effective. (b). Internal controls over financial reporting. There have been no changes in NASDAQ OMX’s internal controls over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, NASDAQ OMX’s internal controls over financial reporting. Management’s Report on Internal Control Over Financial Reporting Management is responsible for the preparation and integrity of the consolidated financial statements appearing in the reports that we file with the SEC. The consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles and include amounts based on management’s estimates and judgments. Management is also responsible for establishing and maintaining adequate internal control over NASDAQ OMX’s financial reporting. Although there are inherent limitations in the effectiveness of any system of internal control over financial reporting, we maintain a system of internal control that is designed to provide reasonable assurance as to the fair and reliable preparation and presentation of the consolidated financial statements, as well as to safeguard assets from unauthorized use or disposition that could have a material effect on the financial statements. Our management assessed the effectiveness of our internal control over financial reporting, as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on its assessment, our management believes that, as of December 31, 2010, our internal control over financial reporting is effective. Ernst & Young LLP, an independent registered public accounting firm, has issued an attestation report on NASDAQ OMX’s internal control over financial reporting, which is included herein. 92 139443_020_Nasdaq_1-188.p96.pdf QC 110 Black 04-07 19:41 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of The NASDAQ OMX Group, Inc. We have audited The NASDAQ OMX Group, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The NASDAQ OMX Group, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis of our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, The NASDAQ OMX Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria. We also have audited, in accordance with the standard of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The NASDAQ OMX Group, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in equity, comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2010 of The NASDAQ OMX Group, Inc. and our report dated February 24, 2011 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP New York, New York February 24, 2011 93 139443_020_Nasdaq_1-188.p97.pdf QC 111 Black 04-07 19:41 Item 9B. Other Information. None. Part III Item 10. Directors, Executive Officers and Corporate Governance. Information about NASDAQ OMX’s directors, as required by Item 401 of Regulation S-K, is incorporated by reference from the discussion under the caption “Proposal I: Election of Directors” in NASDAQ OMX’s proxy statement for the 2011 Annual Meeting of Stockholders, or the Proxy. Information about NASDAQ OMX’s executive officers, as required by Item 401 of Regulation S-K, is incorporated by reference from the discussion under the caption “Executive Officers of NASDAQ OMX” in the Proxy. Information about Section 16 reports, as required by Item 405 of Regulation S-K, is incorporated by reference from the discussion under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy. Information about NASDAQ OMX’s code of ethics, as required by Item 406 of Regulation S-K, is incorporated by reference from the discussion under the caption “NASDAQ OMX Corporate Governance Guidelines and Code of Ethics” in the Proxy. Information about NASDAQ OMX’s nomination procedures, audit committee and audit committee financial experts, as required by Items 407(c)(3), 407(d)(4) and 407(d)(5) of Regulation S-K, is incorporated by reference from the discussion under the caption “Proposal I: Election of Directors” in the Proxy. Item 11. Executive Compensation. Information about NASDAQ OMX’s director and executive compensation, as required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K, is incorporated by reference from the discussion under the captions “Compensation Discussion and Analysis,” “Director Compensation” and “Executive Compensation” in the Proxy. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Information about security ownership of certain beneficial owners and management, as required by Item 403 of Regulation S-K, is incorporated by reference from the discussion under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy. 94 139443_020_Nasdaq_1-188.p98.pdf QC 112 Black 04-07 19:41 Equity Compensation Plan Information NASDAQ OMX’s Equity Plan provides for the issuance of our equity securities to our officers and other employees, directors and consultants. In addition, most employees of NASDAQ OMX and its subsidiaries are eligible to participate in the NASDAQ OMX Employee Stock Purchase Plan, or ESPP, at 85.0% of the fair market value of our common stock on the price calculation date. The Equity Plan and the ESPP have been approved previously by our stockholders. In 2003, we granted non-qualified stock options for 1,000,000 shares of common stock and 100,000 shares of restricted stock to Robert Greifeld, our Chief Executive Officer, as inducement awards to secure his employment with NASDAQ OMX. These two inducement awards were outside of the Equity Plan. The following table sets forth information regarding outstanding options and shares reserved for future issuance under all of NASDAQ OMX’s compensation plans as of December 31, 2010. Plan Category Equity compensation plans approved by Number of shares to be issued upon exercise of outstanding options, warrants and rights (a)(1) Weighted-average exercise price of outstanding options, warrants and rights (b) stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,412,842 Equity compensation plans not approved by stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700,000(3)(4) 10,112,842 $17.79 $ 5.28 $16.92 Number of shares remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a))(c) 12,316,604(2) 12,316,604(2) (1) (2) The amounts in this column include only the number of shares to be issued upon exercise of outstanding options, warrants and rights. At December 31, 2010, we also had 3,857,720 shares to be issued upon vesting of outstanding restricted stock and PSUs. This amount includes 8,445,563 shares of common stock that may be awarded pursuant to the Equity Plan and 3,871,041 shares of common stock that may be issued pursuant to the ESPP. (3) Mr. Greifeld received an inducement award of non-qualified stock options exercisable for 1,000,000 shares of common stock pursuant to the terms of his 2003 employment agreement, of which he has exercised 300,000 shares. The award was granted on April 15, 2003 at an exercise price of $5.28 per share and expires on April 15, 2013. The option became exercisable with respect to 250,000 shares on July 10, 2003 and became exercisable with respect to 250,000 shares on each of April 15, 2004, 2005 and 2006. In the event Mr. Greifeld’s employment is terminated by NASDAQ OMX for cause or by Mr. Greifeld without good reason (each as defined in the employment agreement he entered into with us in 2003), the vested options will remain exercisable for a period ending on the earlier of ten days after termination or the expiration date. In the event Mr. Greifeld’s employment is terminated by NASDAQ OMX without cause, by Mr. Greifeld for good reason or in the event of death or disability, Mr. Greifeld would have the earlier of 24 months after the termination date or the expiration date to exercise the vested options. If Mr. Greifeld’s employment terminates as a result of retirement (as defined in the employment agreement he entered into with us in 2003), he would have the earlier of 370 days or the expiration date to exercise the vested options. In the event Mr. Greifeld’s employment terminates as a result of a non-renewal by NASDAQ OMX, any vested options will be exercisable until the earlier of 24 months from termination or the expiration date. This inducement award is transferable by Mr. Greifeld only to certain immediate family members or to a trust or other entity for the exclusive benefit of such immediate family members. (4) Does not include 100,000 shares of restricted stock granted to Mr. Greifeld as an inducement award on June 11, 2003. The shares of restricted stock vested in equal amounts on each of the first three anniversaries of May 12, 2003, Mr. Greifeld’s date of commencement of employment. This inducement award is transferable only by the laws of descent and distribution. 95 139443_020_Nasdaq_1-188.p99.pdf QC 113 Black 04-07 19:41 Item 13. Certain Relationships and Related Transactions, and Director Independence. Information about certain relationships and related transactions, as required by Item 404 of Regulation S-K, is incorporated herein by reference from the discussion under the caption “Certain Relationships and Related Transactions” in the Proxy. Information about director independence, as required by Item 407(a) of Regulation S-K, is incorporated herein by reference from the discussion under the caption “Proposal I: Election of Directors” in the Proxy. Item 14. Principal Accountant Fees and Services. Information about principal accountant fees and services, as required by Item 9(e) of Schedule 14A, is incorporated herein by reference from the discussion under the caption “Proposal II: Ratify the Appointment of Independent Registered Public Accounting Firm” in the Proxy. Part IV Item 15. Exhibits, Financial Statement Schedules. (a)(1) Financial Statements See “Index to Consolidated Financial Statements.” (a)(2) Financial Statement Schedules See “Index to Consolidated Financial Statements.” All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (a)(3) Exhibits Exhibit Index Exhibit Number 3.1 Restated Certificate of Incorporation of NASDAQ OMX (incorporated herein by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 filed on August 7, 2009). 3.1.1 Certificate of Designation of Series A Convertible Preferred Stock of NASDAQ OMX (incorporated herein by reference to Exhibit 3.1.8 to the Current Report on Form 8-K filed on October 6, 2009). 3.2 4.1 4.2 By-Laws of NASDAQ OMX (incorporated herein by reference to Exhibit 3.2 to the Current Report on Form 8-K filed on April 22, 2010). Form of Common Stock certificate (incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form 10 filed on April 30, 2001). Amended and Restated Securityholders Agreement, dated as of April 22, 2005, among Norway Acquisition SPV, LLC, Hellman & Friedman Capital Partners IV, L.P., H&F Executive Fund IV, L.P., H&F International Partners IV-A, L.P., and H&F International Partners IV-B, L.P., Silver Lake Partners TSA, L.P., Silver Lake Investors, L.P., VAB Investors, LLC and Integral Capital Partners VI, L.P. (incorporated herein by reference to Exhibit 4.5 to the Current Report on Form 8-K filed on April 28, 2005). 96 139443_020_Nasdaq_1-188.p100.pdf QC 114 Black 04-07 19:41 Exhibit Number 4.3 4.4 4.5 4.6 4.7 4.7.1 4.8 4.8.1 4.9 4.10 4.11 4.12 10.1 10.2 Registration Rights Agreement, dated as of April 22, 2005, among Nasdaq, Hellman & Friedman Capital Partners IV, L.P., H&F Executive Fund IV, L.P., H&F International Partners IV-A, L.P., and H&F International Partners IV-B, L.P., Silver Lake Partners TSA, L.P., Silver Lake Investors, L.P., VAB Investors, LLC and Integral Capital Partners VI, L.P. (incorporated herein by reference to Exhibit 4.4 to the Current Report on Form 8-K filed on April 28, 2005). Indenture, dated as February 26, 2008, between Nasdaq and The Bank of New York (incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on March 3, 2008) Form of 2.50% Convertible Senior Note due 2013 (incorporated herein by reference to Exhibit 4.2 to the Current Report on Form 8-K filed on March 3, 2008). Registration Rights Agreement, dated February 26, 2008, among The NASDAQ OMX Group, Inc., J.P. Morgan Securities Inc. and Banc of America Securities LLC (incorporated herein by reference to Exhibit 4.3 to the Current Report on Form 8-K filed on March 3, 2008). The NASDAQ OMX Group Inc.’s Stockholders’ Agreement, dated as of February 27, 2008, between The NASDAQ OMX Group, Inc. and Borse Dubai Limited (incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on March 3, 2008). First Amendment to The NASDAQ OMX Group Inc.’s Stockholders’ Agreement, dated as of February 19, 2009, between The NASDAQ OMX Group, Inc. and Borse Dubai Limited (incorporated herein by reference to Exhibit 4.10.1 to the Annual Report on Form 10-K for the year ended December 31, 2009 filed on February 26, 2009). Registration Rights Agreement, dated as of February 27, 2008, among The NASDAQ OMX Group, Inc., Borse Dubai Limited and Borse Dubai Nasdaq Share Trust (incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on March 3, 2008). First Amendment to Registration Rights Agreement, dated as of February 19, 2009, among The NASDAQ OMX Group, Inc., Borse Dubai Limited and Borse Dubai Nasdaq Share Trust (incorporated herein by reference to Exhibit 4.11.1 to the Annual Report on Form 10-K for the year ended December 31, 2009 filed on February 26, 2009). Indenture, dated as of January 15, 2010, between NASDAQ OMX and Wells Fargo Bank, National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on January 19, 2010). Supplemental Indenture, dated as of January 15, 2010, among NASDAQ OMX and Wells Fargo Bank, National Association, as Trustee (incorporated herein by reference to Exhibit 4.2 to the Current Report on Form 8-K filed on January 19, 2010). Supplemental Indenture, dated as of December 17, 2010, among NASDAQ OMX and Wells Fargo Bank, National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on December 21, 2010). NASDAQ Stockholders’ Agreement, dated as of December 16, 2010, between The NASDAQ OMX Group, Inc. and Investor AB. Amended and Restated Board Compensation Policy, approved as of July 27, 2010 (incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 filed on August 4, 2010).* The NASDAQ OMX Group, Inc. 2010 Executive Corporate Incentive Plan, effective as of January 1, 2010 (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 filed on August 4, 2010).* 97 139443_020_Nasdaq_1-188.p101.pdf QC 115 Black 04-07 19:41 Exhibit Number 10.3 10.4 10.5 10.6 10.7 10.7.1 10.8 10.9 10.9.1 10.10 10.11 10.12 10.13 10.14 10.15 10.16 Form of NASDAQ OMX Non-Qualified Stock Option Award Certificate.* Form of NASDAQ OMX Restricted Unit Award Certificate (employees).* Form of NASDAQ OMX Restricted Stock Unit Agreement (directors) (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 filed on August 7, 2009).* Form of NASDAQ OMX Performance Share Unit Agreement.* Amended and Restated Supplemental Executive Retirement Plan, dated as of December 17, 2008 (incorporated herein by reference to Exhibit 10.6 to the Annual Report on Form 10-K for the year ended December 31, 2009 filed on February 26, 2009).* Amendment No. 1 to Amended and Restated Supplemental Executive Retirement Plan, effective as of December 31, 2008 (incorporated herein by reference to Exhibit 10.6.1 to the Annual Report on Form 10-K for the year ended December 31, 2009 filed on February 26, 2009).* The NASDAQ OMX Group, Inc. Supplemental Employer Retirement Contribution Plan, dated as of December 17, 2008 (incorporated herein by reference to Exhibit 10.7 to the Annual Report on Form 10-K for the year ended December 31, 2009 filed on February 26, 2009).* Employment Agreement by and between Nasdaq and Robert Greifeld, effective as of January 1, 2007 (incorporated herein by reference to Exhibit 10.5 to the Annual Report on Form 10-K filed on February 28, 2007).* Amendment to Employment Agreement by and between NASDAQ OMX and Robert Greifeld, effective as of December 31, 2008 (incorporated herein by reference to Exhibit 10.8.1 to the Annual Report on Form 10-K for the year ended December 31, 2009 filed on February 26, 2009).* Nonqualified Stock Option Agreement between Nasdaq and Robert Greifeld reflecting December 13, 2006 grant (incorporated herein by reference to Exhibit 10.13 to the Annual Report on Form 10-K for the year ended December 31, 2007 filed on February 25, 2008).* Nonqualified Stock Option Agreement between NASDAQ OMX and Robert Greifeld reflecting June 30, 2009 grant (incorporated herein by reference to Exhibit 10.11 to the Annual Report on Form 10-K for the year ended December 31, 2009 filed on February 18, 2010).* 2007 Performance Share Unit Agreement between Nasdaq and Robert Greifeld (incorporated herein by reference to Exhibit 10.14 to the Annual Report on Form 10-K for the year ended December 31, 2007 filed on February 25, 2008).* 2008 Performance Share Unit Agreement between Nasdaq and Robert Greifeld (incorporated herein by reference to Exhibit 10.15 to the Annual Report on Form 10-K for the year ended December 31, 2007 filed on February 25, 2008).* 2009 Performance Share Unit Agreement between NASDAQ OMX and Robert Greifeld (incorporated herein by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 filed on August 7, 2009).* 2010 Performance Share Unit Agreement between NASDAQ OMX and Robert Greifeld (incorporated herein by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 filed on November 3, 2010).* Form of Amended and Restated Letter Agreement, effective as of December 31, 2008, between NASDAQ OMX and Certain Executive Officers (incorporated herein by reference to Exhibit 10.12 to the Annual Report on Form 10-K for the year ended December 31, 2009 filed on February 26, 2009).* 98 139443_020_Nasdaq_1-188.p102.pdf QC 116 Black 04-07 19:41 Exhibit Number 10.17 10.17.1 10.17.2 10.18 10.19 10.20 Employment Agreement between Nasdaq and Edward Knight, effective as of December 29, 2000 Nasdaq (incorporated herein by reference to Exhibit 10.14 to the Annual Report on Form 10-K for the year ended December 31, 2002 filed on March 31, 2003).* First Amendment to Employment Agreement between Nasdaq and Edward Knight, effective February 1, 2002 Nasdaq (incorporated herein by reference to Exhibit 10.14.1 to the Annual Report on Form 10-K for the year ended December 31, 2002 filed on March 31, 2003).* Second Amendment to Employment Agreement between NASDAQ OMX and Edward Knight, effective as of December 31, 2008 (incorporated herein by reference to Exhibit 10.13.2 to the Annual Report on Form 10-K for the year ended December 31, 2009 filed on February 26, 2009).* Amendment to Nonqualified Stock Option Agreements, effective as of October 21, 2009, between NASDAQ OMX and David P. Warren (incorporated herein by reference to Exhibit 10.17 to the Annual Report on Form 10-K for the year ended December 31, 2009 filed on February 18, 2010).* Employment Agreement, dated as of June 24, 2008, between OMX AB and Hans-Ole Jochumsen (incorporated herein by reference to Exhibit 10.18 to the Annual Report on Form 10-K for the year ended December 31, 2009 filed on February 18, 2010).* Credit Agreement, dated as of January 15, 2010, among NASDAQ OMX, the Lenders party thereto, Bank of America, N.A., as administrative agent, Nordea Bank AB (publ.) and Skandinaviska Enskilda Banken AB (publ.), as Nordic Lead Arrangers and Joint Bookrunning Managers, Banc of America Securities LLC and J.P. Morgan Securities Inc., as U.S. Lead Arrangers and Joint Bookrunning Managers and J.P. Morgan Chase Bank, N.A., Nordea Bank AB (publ.) and Skandinaviska Enskilda Banken AB (publ.) as documentation agents (incorporated herein by reference to Exhibit 4.2 to the Current Report on Form 8-K filed on January 19, 2010). 10.21 Credit Agreement, dated as of December 17, 2010, among NASDAQ OMX, the Lenders party thereto, J.P. Morgan Chase Bank, N.A., as administrative agent, and J.P. Morgan Securities LLC, as Sole Lead Arranger and Sole Lead Bookrunning Manager. 11 12.1 21.1 23.1 24.1 31.1 31.2 32.1 Statement regarding computation of per share earnings (incorporated herein by reference from Note 13 to the consolidated financial statements under Part II, Item 9 of this Form 10-K). Computation of Ratio of Earnings to Fixed Charges. List of all subsidiaries. Consent of Ernst & Young. Powers of Attorney. Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 (“Sarbanes-Oxley”). Certification of Executive Vice President and Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley. Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes- Oxley. 101.INS XBRL Instance Document** 101.SCH XBRL Taxonomy Extension Schema 99 139443_020_Nasdaq_1-188.p103.pdf QC 117 Black 04-07 19:41 Exhibit Number 101.CAL XBRL Taxonomy Extension Calculation Linkbase 101.DEF Taxonomy Extension Definition Linkbase 101.LAB XBRL Taxonomy Extension Label Linkbase 101.PRE XBRL Taxonomy Extension Presentation Linkbase * Management contract or compensatory plan or arrangement. ** The following materials from The NASDAQ OMX Group, Inc. Annual Report on Form 10-K for the year ended December 31, 2010, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008; (ii) Consolidated Balance Sheets at December 31, 2010 and December 31, 2009; (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2010, 2009 and 2008; (iv) Consolidated Statements of Changes in Equity for the years ended December 31, 2010, 2009 and 2008: (v) Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008; and (vi) notes to consolidated financial statements, tagged as block of text. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. (b) Exhibits: See Item 15(a)(3) above. (c) Financial Statement Schedules: See Item 15(a)(2) above. 100 139443_020_Nasdaq_1-188.p104.pdf QC 118 Black 04-07 19:41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 24, 2011. THE NASDAQ OMX GROUP, INC. By: Name: Title: /s/ ROBERT GREIFELD Robert Greifeld Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of February 24, 2011. Name Title /s/ ROBERT GREIFELD Robert Greifeld /s/ ADENA T. FRIEDMAN Adena T. Friedman /s/ RONALD HASSEN Ronald Hassen * H. Furlong Baldwin * Urban Bäckström * Michael Casey * Börje Ekholm * Lon Gorman * Glenn H. Hutchins * Birgitta Kantola * Essa Kazim * John D. Markese Chief Executive Officer and Director (Principal Executive Officer) Executive Vice President and Chief Financial Officer (Principal Financial Officer) Senior Vice President and Controller (Principal Accounting Officer) Chairman of the Board Deputy Chairman of the Board Director Director Director Director Director Director Director 101 139443_020_Nasdaq_1-188.p105.pdf QC 119 Black 04-07 19:41 Name * Hans Munk Nielsen * Thomas F. O’Neill * James S. Riepe * Michael R. Splinter * Lars Wedenborn * Deborah L. Wince-Smith * Pursuant to Power of Attorney By: /s/ EDWARD S. KNIGHT Edward S. Knight Attorney-in-Fact Title Director Director Director Director Director Director 102 139443_020_Nasdaq_1-188.p106.pdf QC 120 Black 04-07 19:41 THE NASDAQ OMX GROUP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE The following consolidated financial statements of The NASDAQ OMX Group, Inc. and its subsidiaries are presented herein on the page indicated: Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4 Consolidated Statements of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Comprehensive Income (Loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9 1 Financial Statement Schedule: Schedule II—Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . F-1 139443_020_Nasdaq_1-188.p107.pdf QC 121 Black 04-07 19:41 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of The NASDAQ OMX Group, Inc. We have audited the accompanying consolidated balance sheets of The NASDAQ OMX Group, Inc. (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in equity, comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The NASDAQ OMX Group, Inc. at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The NASDAQ OMX Group, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2011 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP New York, New York February 24, 2011 F-2 139443_020_Nasdaq_1-188.p108.pdf QC 122 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Consolidated Balance Sheets (in millions, except share and par value amounts) Assets Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial investments, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Open clearing contracts: Derivative positions, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Resale agreements, at contract value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2009 2010 315 60 253 298 13 4,037 3,441 93 8,510 105 164 433 5,127 1,719 149 $ 594 30 308 301 25 2,054 — 58 3,370 80 164 504 4,800 1,631 173 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,207 $10,722 Liabilities Current liabilities: Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Section 31 fees payable to SEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued personnel costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Open clearing contracts: Derivative positions, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase agreements, at contract value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and contingencies Series A convertible preferred stock Equity NASDAQ OMX stockholders’ equity: Common stock, $0.01 par value, 300,000,000 shares authorized, shares issued: 213,370,086 at December 31, 2010 and 211,713,186 at December 31, 2009; shares outstanding: 175,782,683 at December 31, 2010 and 211,385,464 at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred stock, 30,000,000 shares authorized, series A convertible preferred stock: shares issued: 1,600,000 at December 31, 2010 and December 31, 2009; shares outstanding: none at December 31, 2010 and 1,600,000 at December 31, 2009 (classified above at December 31, 2009 as temporary equity) . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock in treasury, at cost: 37,587,403 shares at December 31, 2010 and 327,722 shares at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total NASDAQ OMX stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 142 82 122 122 119 26 4,037 3,441 140 8,231 2,181 698 170 198 11,478 — $ 125 137 114 105 71 23 2,054 — 225 2,854 1,867 683 160 199 5,763 15 2 2 — 3,780 (796) (272) 2,004 4,718 11 4,729 — 3,736 (10) (406) 1,610 4,932 12 4,944 Total liabilities, series A convertible preferred stock and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,207 $10,722 See accompanying notes to consolidated financial statements. F-3 139443_020_Nasdaq_1-188.p109.pdf QC 123 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Consolidated Statements of Income (in millions, except per share amounts) Year Ended December 31, 2010 2009 2008 Revenues Market Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuer Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,700 344 152 1 $ 2,934 $ 3,176 343 119 12 330 145 2 Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,197 3,411 3,650 Cost of revenues Transaction rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brokerage, clearance and exchange fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,312) (363) (1,475) (483) (1,744) (446) Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,675) (1,958) (2,190) Revenues less transaction rebates, brokerage, clearance and exchange fees . . . 1,522 1,453 1,460 Operating Expenses Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marketing and advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional and contract services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Computer operations and data communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Regulatory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Merger and strategic initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General, administrative and other Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend and investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on divestiture of businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) from unconsolidated investees, net . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on sale of investment security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sales of businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt conversion expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain (loss) on foreign currency contracts, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (income) loss attributable to noncontrolling interests . . . . . . . . . . . . . . . . . . . . . Net income attributable to NASDAQ OMX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 416 20 103 78 58 88 35 4 89 891 631 9 (102) (3) (11) 2 — — — — — 526 137 389 6 395 $ 412 15 104 76 58 81 32 17 55 850 603 13 (102) 2 — (107) (5) 12 (25) — — 391 128 263 3 266 401 19 93 72 54 65 29 25 62 820 640 35 (97) 8 — 27 — — — (42) (58) 513 198 315 (1) $ 314 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic and diluted earnings per share: Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.94 $ 1.30 $ 1.65 Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.91 $ 1.25 $ 1.55 See accompanying notes to consolidated financial statements. F-4 139443_020_Nasdaq_1-188.p110.pdf QC 124 Black 04-07 19:41 . c n I , p u o r G X M O Q A D S A N e h T y t i u q E n i s e g n a h C f o s t n e m e t a t S d e t a d i l o s n o C ) s t n u o m a e r a h s t p e c x e , s n o i l l i m n i ( 5 1 3 7 0 2 , 2 $ 1 — $ 4 1 3 0 3 0 , 1 $ ) 5 ( $ — l a t o T s t s e r e t n I g n i l l o r t n o c n o N d e n i a t e R s g n i n r a E e v i s n e h e r p m o C ) s s o L ( e m o c n I d e t a l u m u c c A r e h t O ) 7 ( ) 6 ( ) 1 0 6 ( 3 8 2 , 2 2 2 1 5 3 1 3 2 3 — — — 6 1 — — — — — — — — — — — — — — ) 6 ( ) 7 ( ) 1 0 6 ( — — — — — — 3 6 2 3 0 3 , 4 $ ) 3 ( 7 1 $ 6 6 2 4 4 3 , 1 $ ) 9 1 6 ( $ — 1 5 1 2 ) 3 ( 8 1 1 ) 3 ( 0 2 2 2 7 ) 7 ( 8 — — — — — — — — ) 5 ( 3 — — — — — — — — — — ) 3 ( 1 5 1 2 — — — — — — — n o m m o C n i k c o t S t a y r u s a e r T t s o C l a n o i t i d d A n i - d i a P l a t i p a C n o m m o C t a k c o t S e u l a V r a P f o r e b m u N n o m m o C s e r a h S g n i d n a t s t u O ) 8 ( $ 9 8 1 , 1 $ 1 $ 0 5 1 , 9 6 8 , 8 3 1 — — — — — — — ) 2 ( — — 2 2 1 5 5 1 3 2 3 — — — — 6 6 2 , 2 1 — — — — — — — — — — 7 0 5 , 4 6 1 0 6 8 , 2 1 7 7 1 2 , 7 5 ) 0 1 ( $ 9 6 5 , 3 $ 2 $ 0 0 7 , 6 9 8 , 1 0 2 — — — — — — — — — — — — — — — 8 1 1 ) 3 ( 0 2 2 2 7 ) 2 ( 5 — — — — — — — — — — — — — — — 0 8 6 , 6 4 2 , 8 — 1 2 7 , 0 6 2 5 7 5 , 4 1 8 8 8 7 , 6 6 1 — — 4 4 9 , 4 $ 2 1 $ 0 1 6 , 1 $ ) 6 0 4 ( $ ) 0 1 ( $ 6 3 7 , 3 $ 2 $ 4 6 4 , 5 8 3 , 1 1 2 — — — — 5 1 5 , 1 6 5 , 0 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 0 0 2 , 1 y r a u n a J t a e c n a l a B . . . . . . . . . . . . . e m o c n i t e N s t n e m u r t s n i l a i c n a n i f e v i t a v i r e d n o s e s s o l d e z i l a e r n u n i e g n a h C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 $ f o x a t f o t e n , s e g d e h w o l f h s a c s a y f i l a u q t a h t . . . 7 3 4 $ f o x a t f o t e n , n o i t a l s n a r t y c n e r r u c n g i e r o F 1 $ f o x a t f o t e n , s t n e m t s u j d a n a l p t i f e n e b e e y o l p m E . . . . . . . . . . . . B A X M O h t i w n o i t a n i b m o c s s e n i s u B f o e s i c r e x e d n a s e t o n e l b i t r e v n o c % 5 7 . 3 f o n o i s r e v n o C 1 5 4 , 1 3 5 , 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s t n a r r a w e l b i t r e v n o c % 0 5 . 2 r o f e c n a d i u g g n i t n u o c c a w e n f o n o i t p o d A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s t n e m u r t s n i l a i c n a n i f e v i t a v i r e d n o s e s s o l d e z i l a e r n u n i e g n a h C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ) 1 $ ( f o x a t f o t e n , s e g d e h w o l f h s a c s a y f i l a u q t a h t . . . ) 4 8 1 $ ( f o x a t f o t e n , n o i t a l s n a r t y c n e r r u c n g i e r o F . . . . . . . . . . s e t o n e l b i t r e v n o c % 5 7 . 3 f o n o i s r e v n o C 6 $ f o x a t f o t e n , s t n e m t s u j d a n a l p t i f e n e b e e y o l p m E r o i n e s e l b i t r e v n o c % 0 5 . 2 f o n o i t r o p a f o t n e m h s i u g n i t x e y l r a E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s e t o n s U S P d n a k c o t s d e t c i r t s e r f o g n i t s e v d n a n o i t a z i t r o m A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . t e n , d e s i c r e x e s n o i t p o k c o t S t e n , k c o t s n o m m o c f o s e s a h c r u p r e h t O s t s e r e t n i g n i l l o r t n o c n o n m o r f s e r a h s y r a i d i s b u s f o s e s a h c r u P . . . . . . . . . . . . s t s e r e t n i g n i l l o r t n o c n o n o t s e r a h s y r a i d i s b u s f o e l a S . . . . . . . . . . . . . . . . . 9 0 0 2 , 1 3 r e b m e c e D t a e c n a l a B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . t e n , d e s i c r e x e s n o i t p o k c o t S t e n , k c o t s n o m m o c f o s e s a h c r u p r e h t O . . . . . . . . . . . . 8 0 0 2 , 1 3 r e b m e c e D t a e c n a l a B . . . . . . . . . . . ) s s o l ( e m o c n i t e N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s e t o n r o i n e s s U S P d n a k c o t s d e t c i r t s e r f o g n i t s e v d n a n o i t a z i t r o m A F-5 139443_020_Nasdaq_1-188.p111.pdf QC 125 Black 04-07 19:41 l a t o T s t s e r e t n I g n i l l o r t n o c n o N d e n i a t e R s g n i n r a E e v i s n e h e r p m o C ) s s o L ( e m o c n I d e t a l u m u c c A r e h t O n o m m o C n i k c o t S t a y r u s a e r T t s o C l a n o i t i d d A n i - d i a P l a t i p a C n o m m o C t a k c o t S e u l a V r a P f o r e b m u N n o m m o C s e r a h S g n i d n a t s t u O 9 8 3 ) 6 ( 5 9 3 ) 3 ( 6 3 3 1 ) 2 ( ) 7 9 7 ( 5 1 9 1 4 1 7 ) 2 ( 6 — — — — — — — — — ) 1 ( 6 — — — — — ) 1 ( — — — — — — 6 3 3 1 ) 3 ( ) 2 ( — — — — — — — — — — — — ) 7 9 7 ( ) 4 ( 9 6 — — — — — — — — — 6 1 3 2 5 1 ) 1 ( — — — — — — — — — — — — — — — — — — 6 4 6 , 5 4 8 9 5 7 , 9 7 5 1 3 7 , 8 0 7 0 3 7 , 4 9 — — ) 7 4 6 , 1 3 8 , 7 3 ( 9 2 7 , 4 $ 1 1 $ 4 0 0 , 2 $ ) 2 7 2 ( $ ) 6 9 7 ( $ 0 8 7 , 3 $ 2 $ 3 8 6 , 2 8 7 , 5 7 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ) s s o l ( e m o c n i t e N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ) 3 $ ( f o x a t f o t e n , s e g d e h w o l f h s a c ) 8 9 $ ( f o x a t f o t e n , n o i t a l s n a r t y c n e r r u c n g i e r o F 2 $ f o x a t f o t e n , s e s s o l t n e m t s u j d a n a l p t i f e n e b e e y o l p m E e l a s - r o f - e l b a l i a v a n o ) s e s s o l ( s n i a g g n i d l o h d e z i l a e r n u t e N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 $ f o x a t f o t e n , s e i t i r u c e s . . m a r g o r p e s a h c r u p e r e r a h S n o m m o c o t k c o t s d e r r e f e r p e l b i t r e v n o c A s e i r e s f o n o i s r e v n o C n o e m o c n i t e n n i d e z i l a e r s s o l r o f t n e m t s u j d a n o i t a c i f i s s a l c e R . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . n o i t e r c c a d n a k c o t s s U S P d n a k c o t s d e t c i r t s e r f o g n i t s e v d n a n o i t a z i t r o m A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . t e n , d e s i c r e x e s n o i t p o k c o t S t e n , k c o t s n o m m o c f o s e s a h c r u p r e h t O s t s e r e t n i g n i l l o r t n o c n o n m o r f s e r a h s y r a i d i s b u s f o s e s a h c r u P r e h t o d n a s t s e r e t n i g n i l l o r t n o c n o n o t s e r a h s y r a i d i s b u s f o e l a S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s t n e m t s u j d a 0 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B F-6 139443_020_Nasdaq_1-188.p112.pdf QC 126 Black 04-07 19:41 . s t n e m e t a t s l a i c n a n i f d e t a d i l o s n o c o t s e t o n g n i y n a p m o c c a e e S The NASDAQ OMX Group, Inc. Consolidated Statements of Comprehensive Income (Loss) (in millions) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss): Net unrealized holding losses on available-for-sale investment securities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized holding losses arising during the period . . . . . . . . . . . . . . . . Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification adjustment for losses realized in net income on available-for-sale investment security . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation gains (losses): Net foreign currency translation gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax (expense) benefit Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gains (losses) on cash flow hedges: Unrealized gains (losses) on cash flow hedges arising during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax (expense) benefit Reclassification adjustment for loss realized in net income on cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit recognized in net income during the period . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee benefit plans: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee benefit plan adjustment losses . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . Comprehensive income (loss) Comprehensive (income) loss attributable to noncontrolling interests . . . . . Year Ended December 31, 2010 2009 2008 $ 389 $ 263 $ 315 (3) 1 — (2) 231 (98) 133 — — 9 (3) 6 (5) 2 (3) 134 523 6 (5) — 5 — (35) — 35 — 399 (184) 215 (1,038) 437 (601) 2 (1) — — 1 (9) 6 (3) 213 476 3 (11) 4 — — (7) (7) 1 (6) (614) (299) (1) Comprehensive income (loss) attributable to NASDAQ OMX . . . . . . . . . . . . $ 529 $ 479 $ (300) See accompanying notes to consolidated financial statements. F-7 139443_020_Nasdaq_1-188.p113.pdf QC 127 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Consolidated Statements of Cash Flows (in millions) Cash flows from operating activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess tax benefits related to share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on divestiture of businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charges related to debt refinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on the early extinguishment of debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on sale of investment security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sales of businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (income) loss from unconsolidated investees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt conversion expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset retirements and impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on foreign currency contracts, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion of 2.50% convertible senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-cash items included in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in operating assets and liabilities, net of effects of acquisitions and divestitures: Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Section 31 fees payable to SEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued personnel costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash provided by operating activities Cash flows from investing activities Purchases of trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of equity method investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales and redemptions of trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales and redemptions of available-for-sale investment securities . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales of equity method investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of foreign currency contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlement of foreign currency contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions of businesses, net of cash and cash equivalents acquired and purchase accounting adjustments . . . . Dispositions of businesses, net of cash and cash equivalents disposed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of property and equipment Cash used in investing activities Year Ended December 31, 2010 2009 2008 $ 389 $ 263 $ 315 103 33 (2) 11 5 37 — (35) — — (2) — 6 — 14 2 5 (79) 4 (55) 2 14 6 (18) 440 (237) — 350 — 1 — — (190) — (42) (118) 104 35 (4) — 1 — (4) (10) 5 (12) 107 25 13 — 13 (2) 33 130 (125) 88 (41) 4 (37) (4) 582 (607) (16) 542 25 54 — — (6) 14 (59) 93 26 (5) — 4 — — (107) — — (27) — 42 58 11 2 31 (181) 20 (54) 21 (42) (9) 18 216 (164) — — 15 — (13) 67 (2,999) — (55) (53) (3,149) Cash flows from financing activities Proceeds from debt obligations, net of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments of debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash paid for repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from contributions of noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash inducement payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net proceeds from exercise of warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuances of common stock, net of treasury stock purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess tax benefits related to share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,409 (2,216) — (340) (797) — (2) 3 — — 6 2 (6) 7 (9) — 8 4 Cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (595) (336) Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) (279) 594 27 220 374 2,422 (428) — — — — 22 8 5 2,029 (47) (951) 1,325 Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 315 $ 594 $ 374 Supplemental Disclosure Cash Flow Information Cash paid for: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes, net of refund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 53 148 $ 71 $ 153 $ $ 67 266 See accompanying notes to consolidated financial statements. F-8 139443_020_Nasdaq_1-188.p114.pdf QC 128 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements 1. Organization and Nature of Operations We are a leading global exchange group that delivers trading, clearing, exchange technology, securities listing, and public company services across six continents. Our global offerings are diverse and include trading and clearing across multiple asset classes, market data products, financial indexes, capital formation solutions, financial services and market technology products and services. Our technology powers markets across the globe, supporting cash equity trading, derivatives trading, clearing, and settlement and many other functions. In the U.S., we operate The NASDAQ Stock Market, a registered national securities exchange. The NASDAQ Stock Market is the largest single cash equities securities market in the U.S. in terms of listed companies and in the world in terms of share value traded. As of December 31, 2010, The NASDAQ Stock Market was home to 2,778 listed companies with a combined market capitalization of approximately $4.6 trillion. In addition, in the U.S. we operate two additional cash equities trading markets, two options markets, a futures market and a derivatives clearinghouse. We also engage in riskless principal trading of OTC power and gas contracts. In Europe, we operate exchanges in Stockholm (Sweden), Copenhagen (Denmark), Helsinki (Finland), and Iceland as NASDAQ OMX Nordic, and exchanges in Tallinn (Estonia), Riga (Latvia) and Vilnius (Lithuania) as NASDAQ OMX Baltic. Collectively, the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic offer trading in cash equities, bonds, structured products and ETFs, as well as trading and clearing of derivatives and clearing of resale and repurchase agreements. Our Nordic and Baltic operations also offer alternative marketplaces for smaller companies called NASDAQ OMX First North. As of December 31, 2010, the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, together with NASDAQ OMX First North, were home to 780 listed companies with a combined market capitalization of approximately $1.1 trillion. We also operate NASDAQ OMX Armenia. In addition, NASDAQ OMX Commodities operates the world’s largest power derivatives exchange, one of Europe’s largest carbon exchanges and N2EX, a marketplace for physical U.K. power contracts. In some of the countries where we operate exchanges, we also provide clearing, settlement and depository services. We manage, operate and provide our products and services in three business segments: Market Services, Issuer Services and Market Technology. Market Services Our Market Services segment includes our U.S. and European Transaction Services businesses, as well as our Market Data and Broker Services businesses. We offer trading on multiple exchanges and facilities across several asset classes, including cash equities, derivatives, debt, commodities, structured products and ETFs. In addition, in some of the countries where we operate exchanges, we also provide clearing, settlement and depository services. U.S. Transaction Services In the U.S., we offer trading in cash equity securities, derivatives and ETFs on The NASDAQ Stock Market, The NASDAQ Options Market, NASDAQ OMX PHLX, NASDAQ OMX BX, NASDAQ OMX PSX and NFX, and engage in riskless principal trading of OTC power and gas contracts through NOCC. Our transaction-based F-9 139443_020_Nasdaq_1-188.p115.pdf QC 129 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) platforms in the U.S. provide market participants with the ability to access, process, display and integrate orders and quotes for cash equity securities, derivatives and ETFs. The platforms allow the routing and execution of buy and sell orders as well as the reporting of transactions for cash equity securities, derivatives and ETFs, providing fee-based revenues. Cash Equities Trading The NASDAQ Stock Market is the largest single pool of liquidity for trading U.S.-listed cash equities, matching an average of approximately 18.8% of all U.S. cash equities volume for 2010. In January 2009, we launched a second U.S. cash equities market called NASDAQ OMX BX. With NASDAQ OMX BX, we offer a second quote within the U.S. cash equities marketplace providing our customers enhanced trading choices and pricing flexibility within the U.S. cash equities marketplace. During the year ended December 31, 2010, NASDAQ OMX BX matched an average of approximately 3.3% of all U.S. cash equities volume. In October 2010, we launched a third U.S. cash equities market, called NASDAQ OMX PSX. This new market utilizes a price-size priority model and also runs on INET technology, leveraging the speed and efficiency benefits offered throughout NASDAQ OMX globally. U.S. Derivative Trading and Clearing In the U.S., we operate The NASDAQ Options Market and NASDAQ OMX PHLX for the trading of equity options, ETF options, index options and currency options. As of December 31, 2010, NASDAQ OMX PHLX was the largest options market in the U.S. NASDAQ OMX PHLX operates a hybrid electronic and floor-based market as a distinct market alongside The NASDAQ Options Market. During the year ended December 31, 2010, NASDAQ OMX PHLX and The NASDAQ Options Market had an average combined market share of approximately 27.4% in the U.S. equity options market, consisting of approximately 23.4% at NASDAQ OMX PHLX and approximately 4.0% at The NASDAQ Options Market. Together, the 27.4% represented the largest share of the U.S. equity and ETF options market. Our options trading platforms provide trading opportunities to both retail investors and high frequency trading firms, who tend to prefer electronic trading, and institutional investors, who typically pursue more complex trading strategies and often prefer to trade on the floor. In the U.S., we also operate NFX which offers trading for currency futures and other financial futures. Most futures traded on NFX clear at the OCC. In addition, NFX serves as the designated contract market for interest rate swap futures that are cleared through IDCH. Through IDCH, our majority-owned subsidiary IDCG brings a centrally-cleared solution to the largest segment of the OTC derivatives marketplace, specifically interest rate derivative products. IDCH acts as the CCP for clearing interest rate swap futures contracts. IDCH utilizes NASDAQ OMX matching and clearing technology to clear and settle these interest rate derivative products. With the purchase of the assets of North American Energy Credit and Clearing Corp. in March 2010 by our newly-established subsidiary NOCC, NASDAQ OMX expanded its presence in the OTC energy commodity markets. European Transaction Services Nordic Transaction Services The exchanges that comprise NASDAQ OMX Nordic offer trading for cash equities and bonds, trading and clearing services for derivatives, and clearing services for resale and repurchase agreements. Our platform allows F-10 139443_020_Nasdaq_1-188.p116.pdf QC 130 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) the exchanges to share the same trading system which enables efficient cross-border trading and settlement, cross membership and a single source for Nordic market data. Trading is offered in Nordic securities such as cash equities and depository receipts, warrants, convertibles, rights, fund units, ETFs, bonds and other interest-related products. NASDAQ OMX Stockholm and NASDAQ OMX Copenhagen also offer trading in derivatives, such as stock options and futures, index options and futures, fixed-income options and futures and stock loans. Settlement and registration of cash trading takes place in Sweden, Finland, Denmark and Iceland via the local central securities depositories. On NASDAQ OMX Stockholm, we offer clearing services for fixed-income options and futures, stock options and futures and index options and futures by serving as the CCP. In doing so, we guarantee the completion of the transaction and market participants can thereby limit their counterparty risk. We also act as the counterparty for certain OTC contracts. Beginning in October 2009, most of our cash equity trades on the exchanges that comprise NASDAQ OMX Nordic are centrally cleared by EMCF, a leading European clearinghouse in which we own a 22% equity stake. In September 2010, NASDAQ OMX launched a clearing service for resale and repurchase agreements. As a result of an agreement between the Swedish Money Market Council and NASDAQ OMX, the entire Swedish Interbank resale and repurchase market will ultimately be cleared through NASDAQ OMX Stockholm. For further discussion of our Nordic clearing operations, see “Derivative Positions, at Fair Value,” and “Resale and Repurchase Agreements, at Contract Value,” of Note 2, “Summary of Significant Accounting Policies.” In 2009, NASDAQ OMX expanded its trading offering to include cash equities listed in Norway and launched a new portfolio of Norwegian derivatives products. The offering is designed to provide lower trading costs and other benefits for customers seeking to trade all Nordic equity products on one platform. Baltic Transaction Services NASDAQ OMX Baltic operations comprise the exchanges in Tallinn (Estonia), Riga (Latvia) and Vilnius (Lithuania). During the first quarter of 2010, we acquired the remaining 7% minority holding in NASDAQ OMX Tallinn and an additional ownership stake of 0.4% in NASDAQ OMX Vilnius, both for immaterial amounts. As of December 31, 2010, NASDAQ OMX owns 100% of NASDAQ OMX Tallinn, 95% of NASDAQ OMX Vilnius and 93% of NASDAQ OMX Riga. In addition, NASDAQ OMX Tallinn owns 100% of the central securities depository in Estonia, NASDAQ OMX Riga owns 100% of the central securities depository in Latvia, and NASDAQ OMX Vilnius owns 40% of the central securities depository in Lithuania. The exchanges that comprise NASDAQ OMX Baltic offer their members trading, clearing, payment and custody services. Issuers, primarily large local companies, are offered listing and a distribution network for their securities. The securities traded are mainly cash equities, bonds and treasury bills. Clearing, payment and custody services are offered through the central securities depositories in Estonia, Latvia and Lithuania. In addition, in Estonia and Latvia, NASDAQ OMX offers registry maintenance of fund units included in obligatory pension funds, and in Estonia, NASDAQ OMX offers the maintenance of shareholder registers for listed companies. The Baltic central securities depositories offer a complete range of cross-border settlement services. Pan-European Transaction Services In the second quarter of 2010, we made a strategic decision to close the business of NEURO. We retained our London office and data hub, where we support trading and market data clients, run the U.K. power exchange F-11 139443_020_Nasdaq_1-188.p117.pdf QC 131 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) N2EX, and manage our overseas listings operation. As a result of this decision, we recorded a loss of $6 million in the second quarter of 2010. This charge was included in loss on divestiture of businesses in the Consolidated Statements of Income for the year ended December 31, 2010. Our decision to close the business of NEURO will not have a significant impact on our future results of operations. Commodities Trading and Clearing NASDAQ OMX Commodities offers derivatives and carbon products, operates a clearing business and offers consulting services to commodities markets globally. With our acquisition of Nord Pool, NASDAQ OMX Commodities’ offering now includes the world’s largest power derivatives exchange and one of Europe’s largest carbon exchanges. NASDAQ OMX Commodities has 361 members across a wide range of energy producers and consumers, as well as financial institutions. NASDAQ OMX Commodities’ offering is designed for banks, brokers, hedge funds and other financial institutions, as well as power utilities, industrial, manufacturing and oil companies. NASDAQ OMX Commodities offers clearing services for energy derivative and carbon product contracts by serving as the CCP. In doing so, we guarantee the completion of the transaction and market participants can thereby limit their counterparty risk. We also act as the counterparty for certain trades on OTC derivative contracts. In January 2010, NASDAQ OMX Commodities and Nord Pool Spot launched N2EX, a marketplace for physical UK power contracts. For further discussion of our NASDAQ OMX Commodities clearing operations, see “Derivative Positions, at Fair Value,” of Note 2, “Summary of Significant Accounting Policies.” Access Services We provide market participants with several alternatives for accessing our markets for a fee. We provide co-location services to market participants whereby firms may lease space for equipment within our data center. These participants are charged monthly fees for cabinet space, connectivity and support. We also earn revenues from annual and monthly exchange membership and registration fees. Market Data We earn Market Data revenues from U.S. tape plans and U.S. and European proprietary market data products. Net U.S. Tape Plans The NASDAQ Stock Market operates as the exclusive Securities Information Processor of the UTP Plan for the collection and dissemination of best bid and offer information and last transaction information from markets that quote and trade in NASDAQ-listed securities. The NASDAQ Stock Market, NASDAQ OMX BX and NASDAQ OMX PSX are participants in the UTP Plan and share in the net distribution of revenue according to the plan on the same terms as the other plan participants. In the role as the Securities Information Processor, The NASDAQ Stock Market collects and disseminates quotation and last sale information for all transactions in NASDAQ-listed securities whether traded on The NASDAQ Stock Market or other exchanges. We sell this information to market participants and to data distributors, who then provide the information to subscribers. After deducting costs associated with our role as an exclusive Securities Information Processor, as permitted under the F-12 139443_020_Nasdaq_1-188.p118.pdf QC 132 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) revenue sharing provision of the UTP Plan, we distribute the tape revenues to the respective UTP Plan participants, including The NASDAQ Stock Market, NASDAQ OMX BX and NASDAQ OMX PSX, based on a formula required by Regulation NMS that takes into account both trading and quoting activity. In addition, all quotes and trades in NYSE- and NYSE Amex-listed securities are reported and disseminated in real time, and as such, we share in the tape revenues for information on NYSE- and NYSE Amex-listed securities. U.S. Market Data Products Our market data products enhance transparency and provide critical information to professional and non-professional investors. We collect, process and create information and earn revenues as a distributor of our own, as well as select third-party content. We provide varying levels of quote and trade information to market participants and to data distributors, who in turn provide subscriptions for this information. Our systems enable distributors to gain direct access to our market depth, index values, mutual fund valuation, order imbalances, market sentiment and other analytical data. We earn revenues primarily based on the number of data subscribers and distributors of our data. European Market Data Products The exchanges that comprise NASDAQ OMX Nordic, NASDAQ OMX Baltic and NASDAQ OMX Commodities offer European market data products and services. These data products and services provide critical market transparency to professional and non-professional investors who participate in European marketplaces and, at the same time, give investors greater insight into these markets. European market data products and services are based on the trading information from the exchanges that comprise NASDAQ OMX Nordic, NASDAQ OMX Baltic and NASDAQ OMX Commodities for four classes of assets: cash equities, bonds, derivatives and commodities. We provide varying levels of quote and trade information to market participants and to data distributors, who in turn provide subscriptions for this information. Revenues from European market data are subscription-based and are generated primarily based on the number of data subscribers and distributors of our data. Broker Services Our Broker Services operations offer technology and customized securities administration solutions to financial participants in the Nordic market. Broker Services provide services through a registered securities company which is regulated by the SFSA. The primary services consist of flexible back-office systems, which allow customers to entirely or partly outsource their company’s back-office functions. We offer customer and account registration, business registration, clearing and settlement, corporate action handling for reconciliations and reporting to authorities. Available services also include direct settlement with the Nordic central securities depositories, real-time updating and communication via SWIFT to deposit banks. Revenues are based on a fixed basic fee for back-office brokerage services, such as administration or licensing, maintenance and operations, and a variable portion that depends on the number of transactions completed. Acquisition of FTEN In December 2010, we completed our acquisition of FTEN, a leading provider of RTRM solutions for the financial securities market. As a market leader in RTRM, FTEN is well positioned to grow as the industry is becoming more focused on solutions for effectively managing risk. Market participants are seeking tools that F-13 139443_020_Nasdaq_1-188.p119.pdf QC 133 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) provide real-time, low latency enterprise-wide risk management, market awareness and control. FTEN’s technology provides broker-dealers and their clients the ability to manage risk more effectively in real-time, which leads to better utilization of capital as well as improved regulatory compliance. We will offer FTEN solutions to our global base of broker-dealers and the international exchange community. For further discussion of our FTEN acquisition, see Note 3, “Acquisitions and Strategic Initiatives.” Issuer Services Our Issuer Services segment includes our Global Listing Services and Global Index Group businesses. We operate a variety of listing platforms around the world to provide multiple global capital raising solutions for private and public companies. Our main listing markets are The NASDAQ Stock Market and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic. We offer a consolidated global listing application to companies to enable them to apply for listing on The NASDAQ Stock Market and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, as well as NASDAQ Dubai. Global Listing Services Our Global Listing Services business includes our U.S. Listings, European Listings and Corporate Solutions businesses. U.S. Listings Companies listed on The NASDAQ Stock Market represent a diverse array of industries including health care, consumer products, telecommunication services, information technology, financial services, industrials and energy. There are three types of fees applicable to companies that list on The NASDAQ Stock Market: an annual renewal fee, a listing of additional shares fees and an initial listing fee. Annual renewal fees for securities listed on The NASDAQ Stock Market are based on total shares outstanding. The fee for listing of additional shares is also based on the total shares outstanding, which we review quarterly, and the initial listing fee for securities listed on The NASDAQ Stock Market includes a listing application fee and a total shares outstanding fee. European Listings We also offer listings on our Nordic and Baltic exchanges and NASDAQ OMX First North. Revenues are generated through annual fees paid by companies listed on these exchanges, which are measured in terms of the listed company’s market capitalization on a trailing 12-month basis. Our European listing customers are organizations such as companies, funds or governments that issue and list securities on the exchanges of NASDAQ OMX Nordic and NASDAQ OMX Baltic. Customers issue securities in the forms of cash equities, depository receipts, warrants, ETFs, convertibles, rights, options, bonds and fixed-income related products. For smaller companies and growth companies, we offer access to the financial markets through the NASDAQ OMX First North alternative marketplaces. Corporate Solutions Our Corporate Solutions business provides customer support services, products and programs to companies, including companies listed on our exchanges. Through our Corporate Solutions offerings, companies gain access F-14 139443_020_Nasdaq_1-188.p120.pdf QC 134 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) to innovative products and services that ease transparency, mitigate risk, maximize board efficiency and facilitate better corporate governance. Acquisition of Zoomvision Mamato In December 2010, we completed our acquisition of ZVM, a provider of webcasting and investor relations communication services for companies in the Nordic regions. ZVM, which is the leading provider of webcasting services in Northern Europe, will add to the growing range of capabilities and services NASDAQ OMX offers public and private companies in the U.S. and Europe. Global Index Group We develop and license NASDAQ OMX branded indexes, associated derivatives and financial products as part of our Global Index Group. We believe that these indexes and products leverage, extend and enhance the NASDAQ OMX brand. License fees for our trademark licenses vary by product based on a percentage of underlying assets, dollar value of a product issuance, number of products or number of contracts traded. In addition to generating licensing revenues, these products, particularly mutual funds and ETFs, lead to increased investments in companies listed on our global exchanges, which enhances our ability to attract new listings. We also license cash-settled options, futures and options on futures on our indexes. Market Technology The Market Technology segment delivers technology and services to marketplaces, brokers and regulators throughout the world. Market Technology provides technology solutions for trading, clearing, settlement, and information dissemination, and also offers facility management integration, surveillance solutions and advisory services to over 70 exchanges, clearing organizations and central securities depositories in more than 50 countries. We serve as a technology partner to some of the world’s most prominent exchanges, and we also provide critical technical support to start-ups and new entrants in the exchange space. Revenues are derived from the following primary sources: • • • license, support and facility management revenues; delivery project revenues; and change request, advisory and broker surveillance revenues License and support revenues are derived from the system solutions developed and sold by NASDAQ OMX. After we have developed and sold a system solution, the customer licenses the right to use the software and may require post contract support and other services. Facility management revenues are derived when NASDAQ OMX assumes responsibility for the continuous operation of a system platform for a customer. Delivery project revenues are derived from the installation phase of the system solutions developed and sold by NASDAQ OMX. The majority of our delivery projects involve individual adaptations to the specific requirements of the customer, such as those relating to functionality and capacity. Change request revenues include customer specific adaptations and modifications of the system solution sold by NASDAQ OMX after delivery has occurred. Advisory services are designed to support our customers’ strategies and help them with critical decisions in a highly demanding business environment. Broker surveillance revenues are derived from surveillance solutions targeting brokers and regulators throughout the world. In August 2010, we completed our acquisition of SMARTS, a leading technology provider of surveillance solutions to exchanges, regulators and brokers. This acquisition is part of our strategy to diversify our Market F-15 139443_020_Nasdaq_1-188.p121.pdf QC 135 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Technology business and enter the broker surveillance and compliance market. We believe that this acquisition will strengthen our position as the leading technology partner to marketplaces worldwide. For further discussion of our SMARTS acquisition, see Note 3, “Acquisitions and Strategic Initiatives.” For further discussion of our segments, see Note 18, “Segments.” For further discussion of our revenue recognition policies, see “Revenue Recognition and Cost of Revenues,” of Note 2, “Summary of Significant Accounting Policies.” 2. Summary of Significant Accounting Policies Basis of Presentation and Principles of Consolidation The consolidated financial statements are prepared in accordance with U.S. GAAP. The financial statements include the accounts of NASDAQ OMX, its wholly-owned subsidiaries and other entities in which NASDAQ OMX has a controlling financial interest. All significant intercompany accounts and transactions have been eliminated in consolidation. We consolidate those entities in which we are the primary beneficiary of a variable- interest entity, or VIE, and entities where we have a controlling financial interest. We were not the primary beneficiary of any VIE for any of the three years in the period ended December 31, 2010. When NASDAQ OMX is not the primary beneficiary of a VIE or does not have a controlling interest in an entity but exercises significant influence over the entity’s operating and financial policies, such investment is accounted for under the equity method of accounting. We recognize our share of earnings or losses of an equity method investee based on our ownership percentage. As permitted under U.S. GAAP, for certain equity method investments for which financial information is not sufficiently timely for us to apply the equity method of accounting currently, we record our share of the earnings or losses of an investee from the most recent available financial statements on a lag. See Note 5, “Investments,” for further discussion of our equity method investments. We have evaluated our subsequent events through the issuance date of this Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation. Use of Estimates The preparation of 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 consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Foreign Currency Translation Foreign denominated assets and liabilities are remeasured into the functional currency at exchange rates in effect at the balance sheet date through the income statement. Gains or losses resulting from foreign currency transactions are remeasured using the rates on the dates on which those elements are recognized during the period, and are included in general, administrative and other expense in the Consolidated Statements of Income. Translation gains or losses resulting from translating our subsidiaries’ financial statements from the local functional currency to the reporting currency, net of tax, are included in accumulated other comprehensive income (loss) within stockholders’ equity in the Consolidated Balance Sheets. Assets and liabilities are translated at the balance sheet date while revenues and expenses are translated at the date the transaction occurs or at an applicable average rate. Cash and Cash Equivalents Cash and cash equivalents include cash in banks and all non-restricted highly liquid investments with original maturities of three months or less at the time of purchase. Such equivalent investments included in cash F-16 139443_020_Nasdaq_1-188.p122.pdf QC 136 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) and cash equivalents in the Consolidated Balance Sheets were $215 million as of December 31, 2010 and $314 million as of December 31, 2009. Cash equivalents are carried at cost plus accrued interest, which approximates fair value due to the short maturities of these investments. Restricted Cash Restricted cash, which was $60 million as of December 31, 2010 and $30 million as of December 31, 2009, is not available for general use by us due to regulatory and other requirements and is classified as restricted cash in the Consolidated Balance Sheets. Non-current restricted cash was $105 million as of December 31, 2010 and $80 million as of December 31, 2009. As of December 31, 2010 and 2009, non-current restricted cash includes a deposit in the guaranty fund of IDCG of $80 million which may consist of cash, cash equivalents, or short-term investments. As of December 31, 2010, a portion of IDCG’s guaranty fund was invested in short-term reverse repurchase agreements. These reverse repurchase agreements, which totaled $16 million as of December 31, 2010, are recorded at the contract amount plus accrued interest, which approximates fair value. In addition, as of December 31, 2010, non-current restricted cash includes our $25 million capital injection to NOCC to improve its liquidity position. These amounts are classified as non-current restricted cash in the Consolidated Balance Sheets. Financial Investments Financial investments, at fair value in the Consolidated Balance Sheets, represent debt securities that are classified as trading investment securities and our available-for-sale investment security in DFM. Debt securities are bought principally to meet regulatory capital requirements for NASDAQ OMX Stockholm’s clearing operations and are generally sold in the near term. Changes in fair value of trading investment securities are included in dividend and investment income in the Consolidated Statements of Income. Equity securities that are classified as long-term available-for-sale investment securities are carried at fair value in the Consolidated Balance Sheets in other assets with unrealized gains and losses, net of tax, reported in accumulated other comprehensive income (loss) within stockholders’ equity. Realized gains and losses on these securities are included in earnings upon disposition of the securities using the specific identification method. In addition, realized losses are recognized when management determines that a decline in value is other-than-temporary, which requires judgment regarding the amount and timing of recovery. Indicators of other-than-temporary impairment for debt securities include issuer downgrade, default, or bankruptcy. For equity securities we also consider the extent to which cost exceeds fair value, the duration of that difference and management’s judgment about the issuer’s current and prospective financial condition, as well as our intent and ability to hold the security until recovery of the unrealized losses. In addition, for equity securities we also consider the performance of the investee’s stock price in relation to industry indexes and review the investee’s credit profile. In 2008, we recorded an other-than-temporary impairment loss on our Oslo long-term available-for-sale investment security of $35 million in asset impairment charges in the Consolidated Statements of Income. In 2009, we sold this investment security and recognized a $5 million loss which is recorded in loss on sale of investment security in the Consolidated Statements of Income. Fair value of both available-for-sale and trading investment securities are generally obtained from third party pricing sources. When available, quoted market prices are used to determine fair value. If quoted market prices are not available, fair values are estimated using pricing models, where the inputs to those models are based on observable market inputs. The inputs to the valuation models vary by the type of security being priced but are typically benchmark yields, reported trades, broker dealer quotes, and prices of similar assets. Pricing models generally do not entail material subjectivity because the methodologies employed use inputs observed from active markets. See Note 14, “Fair Value of Financial Instruments,” for further discussion of fair value measures. F-17 139443_020_Nasdaq_1-188.p123.pdf QC 137 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Receivables, net Our receivables are concentrated with our member firms, market data distributors, listed companies and market technology customers. 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. In circumstances where a specific customer’s inability to meet its financial obligations is known (i.e., bankruptcy filings), we record a specific provision for bad debts against amounts due to reduce the receivable to the amount we reasonably believe will be collected. Due to changing economic, business and market conditions, we review the reserve for bad debts monthly and make changes to the reserve through the provision for bad debts as appropriate. If circumstances change (i.e., higher than expected defaults or an unexpected material adverse change in a major customer’s ability to pay), our estimates of recoverability could be reduced by a material amount. Total reserves netted against receivables in the Consolidated Balance Sheets were $3 million at December 31, 2010 and December 31, 2009. Derivative Positions, at Fair Value Through our clearing operations in the derivative markets with NASDAQ OMX Commodities and NASDAQ OMX Stockholm, we are the legal counterparty for each derivative position traded and thereby guarantee the fulfillment of each contract. We also act as the counterparty for certain trades on OTC derivative contracts. The derivatives are not used by NASDAQ OMX Commodities or NASDAQ OMX Stockholm for the purpose of trading on their own behalf. As the legal counterparty of each transaction, NASDAQ OMX Commodities and NASDAQ OMX Stockholm bear the counterparty risk between the purchaser and the seller in the contract. The counterparty risks are measured using models that are agreed to with the Financial Supervisory Authority of the applicable country, which requires us to provide minimum guarantees and maintain certain levels of regulatory capital. The structure and operations of NASDAQ OMX Commodities and NASDAQ OMX Stockholm differ from other clearinghouses. NASDAQ OMX Commodities and NASDAQ OMX Stockholm are not member-owned organizations, do not maintain a guarantee fund to which members contribute and do not enforce loss sharing assessments amongst members. In addition, unlike other clearinghouses, they do not record any margin deposits and guarantee funds in the Consolidated Balance Sheets, as all risks and rewards of collateral ownership, including interest, belongs to the counterparty. Market participants must provide collateral to cover the daily margin call as needed, which is in addition to the initial collateral placed when entering into the transaction. Acceptable collateral is cash and eligible securities in a pledged bank account and/or an on-demand guarantee. All collateral is maintained at a third-party custodian bank for the benefit of the clearing members and is accessible by NASDAQ OMX in the event of default. In addition, market participants must meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations. For NASDAQ Commodities, trading on the contracts can take place up until the delivery period which can occur over a period of several years. For NASDAQ OMX Stockholm, following the completion of a transaction, settlement primarily takes place between parties by net cash settlement or with the exchange of securities and funds. For those transactions where there is an exchange of securities and funds, the transfer of ownership is registered and the securities are stored on the owner’s behalf. The fair value of these derivative contracts with NASDAQ OMX Commodities and NASDAQ OMX Stockholm is reported gross in the Consolidated Balance Sheets as a receivable pertaining to the purchasing party F-18 139443_020_Nasdaq_1-188.p124.pdf QC 138 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) and a payable pertaining to the selling party. Such receivables and liabilities attributable to outstanding derivative positions have been netted to the extent that such a legal offset right exists and, at the same time, that it is our intention to settle these items. We have the responsibility for clearing, or settlement of payment, for the derivative and equity transactions. Certain timing differences may exist related to the periodic cash settlement of counterparty trades between NASDAQ OMX Stockholm and other clearinghouses and customers, where we are acting as intermediary and guaranteeing the fulfillment of each contract. We have recorded receivables and payables associated with such timing differences in other current assets and other current liabilities, respectively, in the Consolidated Balance Sheets. Nord Pool is responsible for exchange operations and trading activities on all counterparty trades where NASDAQ OMX Commodities is acting as intermediary. There are no timing differences related to the settlement of these transactions as all trades occur through Nord Pool and not between other exchanges with different settlement requirements. Resale and Repurchase Agreements, at Contract Value Through our clearing operations in the resale and repurchase markets with NASDAQ OMX Stockholm, we are the legal counterparty for each resale and repurchase contract traded and thereby guarantee the fulfillment of each contract. We only clear these transactions once a bilateral contract between members has been entered into whereby the two members have agreed on all terms in the transaction. The resale and repurchase agreements are not used for financing purposes by NASDAQ OMX Stockholm. As the legal counterparty of each transaction, NASDAQ OMX Stockholm bears the counterparty risk between the purchaser and the seller in the resale and repurchase agreement. The structure and operations for the resale and repurchase market is similar to the derivative markets for NASDAQ OMX Commodities and NASDAQ OMX Stockholm. As discussed above in “Derivative Positions, at Fair Value,” NASDAQ OMX Commodities and NASDAQ OMX Stockholm are not member-owned organizations, do not maintain a guarantee fund to which members contribute and do not enforce loss sharing assessments amongst members. In addition, unlike other clearinghouses, they do not record any margin deposits and guarantee funds in the Consolidated Balance Sheets, as all risks and rewards of collateral ownership, including interest, belongs to the counterparty. For resale and repurchase agreements, collateral is not held by NASDAQ OMX Stockholm. All resale and repurchase clearing activities are transacted under our clearing member agreements that give us the right, in the event of default, to liquidate collateral pledged between the clearing members and to offset receivables and payables with the same counterparty. Pledged collateral, which is transferred through NASDAQ OMX Stockholm at initiation of the bilateral contract between the two clearing member counterparties, primarily consists of Swedish government debt securities. Market participants must meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations. In the event that one of the participants cannot fulfill its obligation to deliver or receive the underlying security at the agreed upon price, NASDAQ OMX Stockholm is required to buy or sell the security in the open market to fulfill its obligation. In order to protect itself against a price movement in the value of the underlying security, or price risk, NASDAQ OMX Stockholm requires all participants to provide additional margin as needed, which is valued on a daily basis and is maintained at a third-party custodian bank for the benefit of the clearing members and is accessible by NASDAQ OMX Stockholm in the event of default. We record resale and repurchase agreements at contract value plus interest gross in the Consolidated Balance Sheets as a receivable pertaining to the purchasing party and a payable pertaining to the selling party. Such receivables and liabilities attributable to outstanding resale and repurchase agreements have been netted to the extent that such a legal offset right exists and, at the same time, that it is our intention to settle these items. F-19 139443_020_Nasdaq_1-188.p125.pdf QC 139 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Derivative Financial Instruments and Hedging Activities At December 31, 2009, we held derivative financial instruments which were designated and qualified for hedge accounting. Derivative financial instruments, which are designated or qualify for hedge accounting, are recognized in the balance sheets at fair value as either assets or liabilities. The fair value of our derivative financial instruments is determined using either market quotes or valuation models that are based upon the net present value of estimated future cash flows and incorporate current market data inputs. We report our derivative assets in either other current assets or other assets and our derivative liabilities in either other current liabilities or other liabilities in the Consolidated Balance Sheets depending on the terms of the contract. Any ineffectiveness is recorded in earnings. The accounting for the change in the fair value of a derivative financial instrument depends on its intended use and the resulting hedge designation, if any. As of December 31, 2010, there were no derivative financial instruments that were designated or qualified for hedge accounting. As of December 31, 2009, our derivative financial instruments which were designated and qualified for hedge accounting were cash flow hedges of our floating rate debt. As such, the accounting for the change in fair value of the derivative was included in accumulated other comprehensive loss in the Consolidated Balance Sheets. In the first quarter of 2010, in connection with the repayment of our senior secured credit facilities in place as of December 31, 2009, we terminated our interest rate swaps and reclassified into earnings the unrealized loss of $9 million which was included in accumulated other comprehensive loss in the Consolidated Balance Sheets at December 31, 2009. This loss is included in general, administrative and other expense in the Consolidated Statements of Income for the year ended December 31, 2010. Any ineffectiveness would impact earnings through interest expense. There was no material ineffectiveness recorded in earnings for the years ended December 31, 2010 and December 31, 2009. For further discussion of hedging activities, see below and Note 15, “Derivative Financial Instruments and Hedging Activities.” Derivative Financial Instruments that Qualify for Hedge Accounting Derivative financial instruments that are entered into for hedging purposes are designated as such when we enter into the contract. For all derivative financial instruments that are designated for hedging activities, we formally document all of the hedging relationships between the hedge instruments and the hedged items at the inception of the relationships. We also formally document our risk management objectives and strategies for entering into the hedge transactions. We formally assess, at inception and on a quarterly basis, whether derivatives designated as hedges are highly effective in offsetting the fair value or cash flows of hedged items. If it is determined that a derivative is no longer highly effective as a hedge, we will discontinue the application of hedge accounting. Non-Designated Derivatives We also use derivatives as economic hedges that are not designed as accounting hedges or do not qualify for hedge accounting treatment. For derivative financial instruments that do not qualify for hedge accounting or are not designated as hedges, changes in fair value are reported in current period earnings. As of December 31, 2008, we had open foreign currency contracts hedging currency risk and recorded a $58 million net loss within gain (loss) on foreign currency contracts in the Consolidated Statements of Income. See Note 15, “Derivative Financial Instruments and Hedging Activities,” for further discussion. We did not enter into any material economic hedges that did not qualify for or were not designated for hedge accounting during the years ended December 31, 2010 and 2009. Property and Equipment, net Property and equipment, including leasehold improvements, are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are generally recognized over the estimated useful F-20 139443_020_Nasdaq_1-188.p126.pdf QC 140 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) lives of the related assets. Estimated useful lives generally range from 10 to 40 years for buildings and improvements, two to five years for data processing equipment and software and five to 10 years for furniture and equipment. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining term of the related lease. Depreciation and amortization are computed using the straight-line method. See Note 6, “Property and Equipment, net,” for further discussion. Goodwill Goodwill represents the excess of 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. We are 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. We test for impairment during the fourth quarter of our fiscal year using October 1st 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 factors. There was no impairment of goodwill for the years ended December 31, 2010, 2009 and 2008. Although there is no impairment as of December 31, 2010, 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 4, “Goodwill and Purchased Intangible Assets,” for further discussion. Intangible Assets, net Intangible assets, net, primarily include exchange and clearing registrations, customer relationships, trade names, licenses and technology. Intangible assets with finite lives are amortized on a straight-line basis over their average estimated useful lives as follows: • Technology: 3—10 years • Customer relationships: 10—30 years • Other: 4—10 years Intangible assets deemed to have indefinite useful lives are not amortized but instead are tested for impairment at least annually and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than its carrying amount. Similar to goodwill impairment testing, we test for impairment of indefinite-lived intangible assets during the fourth quarter of our fiscal year using October 1st carrying values. Impairment exists if the carrying value of the indefinite-lived intangible asset exceeds its fair value. For 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. In 2008, we recorded an impairment loss of finite-lived intangible assets of $7 million primarily related to our insurance agency business, which was part of Corporate Solutions within our Issuer Services segment. This charge was included in asset impairment charges in the Consolidated Statements of Income. See Note 4, “Goodwill and Purchased Intangible Assets,” for further discussion. There was no impairment of finite-lived intangible assets in the years ended December 31, 2010 and 2009. There was no impairment of indefinite-lived intangible assets in the years ended December 31, 2010, 2009 and 2008. F-21 139443_020_Nasdaq_1-188.p127.pdf QC 141 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Valuation of Other Long-Lived Assets We also assess potential impairments to our other long-lived assets, including property and 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 years ended December 31, 2010, 2009 and 2008. Equity Method Investments The equity method of accounting is used when we own less than 50% of the outstanding voting stock of a company, but exercise significant influence over the operating and financial policies of that company. We have certain investments in which we have determined that we have significant influence and as such account for the investments under the equity method of accounting. As such, we record our pro-rata share of earnings or losses each period and record any dividends as a reduction in the investment balance. We evaluate our equity method investments for other-than-temporary declines in value by considering a variety of factors such as the earnings capacity of the investment and the fair value of the investment compared to its carrying amount. In addition, for investments where the market value is readily determinable, we consider the underlying stock price as an additional factor. If the estimated fair value of the investment is less than the carrying value and management considers the decline in value to be other-than-temporary, the excess of the carrying value over the estimated fair value is recognized in the financial statements as an impairment. In December 2009, we recorded impairment losses on equity method investments of $87 million related to our investments in NASDAQ Dubai and Agora-X. No other impairments of equity method investments were recorded in 2010, 2009 or 2008. We also recognized a $19 million loss on the sale of our Orc shares during 2009. See Note 5, “Investments,” for further discussion. Revenue Recognition and Cost of Revenues Market Services Revenues Transaction Services U.S. Cash Equity Trading U.S. cash equity trading revenues are variable, based on individual customer share volumes, and recognized as transactions occur. We charge transaction fees for executing cash equity trades in NASDAQ-listed and other listed securities on The NASDAQ Stock Market, NASDAQ OMX BX, and NASDAQ OMX PSX, as well as on orders that are routed to other market venues for execution. In the U.S., we record execution revenues from transactions on a gross basis in revenues and record related expenses as cost of revenues. Nasdaq Execution Services, which is registered with the SEC as a broker-dealer, operates as The NASDAQ Stock Market’s, NASDAQ OMX BX’s and NASDAQ OMX PSX’s routing broker- dealer for sending orders to other venues for execution in accordance with member order instructions and requirements. F-22 139443_020_Nasdaq_1-188.p128.pdf QC 142 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Under our Limitation of Liability Rule and procedures, we, subject to certain caps, provide compensation for losses directly resulting from the systems’ actual failure to correctly process an order, quote, message or other data into our platform. We do not record a liability for any potential claims that may be submitted under the Limitation of Liability Rule unless they meet the provisions required in accordance with U.S. GAAP. As such, losses arising as a result of the rule are accrued and charged to expense only if the loss is probable and estimable. The Limitation of Liability Rule and procedures apply to both U.S. cash equity and U.S. derivative trading in the aggregate. For The NASDAQ Stock Market and NASDAQ OMX PSX we credit a portion of the per share execution charge to the market participant that provides the liquidity. For NASDAQ OMX BX we credit a portion of the per share execution charge to the market participant that takes the liquidity. We record these transaction rebates as U.S. cash equity trading cost of revenues in the Consolidated Statements of Income. These transaction rebates are paid on a monthly basis and the amounts due are included in accounts payable and accrued expenses in the Consolidated Balance Sheets. Also, we pay Section 31 fees to the SEC for supervision and regulation of securities markets. We pass these costs along to our customers through our cash equity trading fees. We collect the fees as a pass-through charge from organizations executing eligible trades on NASDAQ’s, NASDAQ OMX BX’s and NASDAQ OMX PSX’s platforms and we recognize these amounts in U.S. cash equity trading cost of revenues when incurred. Section 31 fees received are included in cash and cash equivalents in the Consolidated Balance Sheets, at the time of receipt and, as required by law, the amount due to the SEC is remitted semiannually and recorded as Section 31 fees payable to the SEC in the Consolidated Balance Sheets until paid. Since the amount recorded in revenues is equal to the amount recorded in cost of revenues, there is no impact on our revenues less transaction rebates, brokerage, clearance and exchange fees. As we hold the cash received until payment to the SEC, we earn interest income on the related cash balances. European Cash Equity Trading We charge transaction fees for executing trades on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic. The transaction fee for executing trades on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic is charged per executed order and as per value traded. The exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic do not have any revenue sharing agreements or cost of revenues, such as transaction rebates and brokerage, clearance and exchange fees. U.S. Derivative Trading and Clearing U.S. derivative trading and clearing revenues are variable, based on traded and cleared volumes, and recognized when executed or when contracts are cleared. The principal types of derivative contracts traded on NASDAQ OMX PHLX and The NASDAQ Options Market are equity options, ETF options, index options and currency options. We also operate NFX, which offers trading for currency futures and other financial futures. Similar to U.S. cash equity trading, we record derivative trading and clearing revenues from transactions on a gross basis in revenues and record related expenses as cost of revenues, as we have certain risk associated with trade execution. For further discussion see “U.S. Cash Equity Trading” above. As discussed under U.S. cash equity trading, for U.S. derivative trading and clearing we also credit a portion of the per share execution charge to the market participant that provides the liquidity and record the transaction rebate as U.S. derivative trading and clearing cost of revenues in the Consolidated Statements of Income. These transaction rebates are paid on a monthly basis and the amounts due are included in receivables, net in the Consolidated Balance Sheets. F-23 139443_020_Nasdaq_1-188.p129.pdf QC 143 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Also, we pay Section 31 fees to the SEC for supervision and regulation of securities markets. We pass these costs along to our customers through our derivative trading and clearing fees. We collect the fees as a pass- through charge from organizations executing eligible trades on NASDAQ OMX PHLX and The NASDAQ Options Market platforms and we recognize these amounts in U.S. derivative trading and clearing cost of revenues when incurred. Through NOCC, we engage in riskless principal trading of OTC power and gas contracts. Revenues are based on notional amounts or volume of power and gas transacted and/or delivered and are recognized upon settlement of the contracts. As discussed above, in the U.S., our Limitation of Liability Rule and procedures apply to both U.S. cash equity and U.S. derivative trading and clearing in the aggregate. Under this rule, we, subject to certain caps, provide compensation for losses directly resulting from the systems’ actual failure to correctly process an order, quote, message or other data into our platform. European Derivative Trading and Clearing European derivative trading and clearing revenues are also variable, based on the volume of traded and cleared contracts, and recognized when executed or when contracts are cleared. Derivative trading and clearing is conducted on NASDAQ OMX Stockholm and NASDAQ OMX Copenhagen. The principal types of derivative contracts traded are stock options and futures, index options and futures, fixed-income options and futures and stock loans. On NASDAQ OMX Stockholm, we offer clearing services for fixed-income options and futures, stock options and futures and index options and futures by serving as the CCP. In doing so, we guarantee the completion of the transaction and market participants can thereby limit their counterparty risk. We also act as the counterparty for certain OTC contracts. On NASDAQ OMX Stockholm, we also offer clearing services for resale and repurchase agreements. Clearing revenues for resale and repurchase agreements are based on the value and length of the contract and are recognized when cleared. European derivative trading and clearing revenues also include clearing revenues for commodities. NASDAQ OMX Commodities provides access to the world’s largest power derivatives markets and one of Europe’s largest carbon markets. NASDAQ OMX Commodities offers trading of international power derivatives and carbon products, operates a clearing business and offers consulting services to commodities markets globally. Our clearing revenues from trading transactions on Nord Pool are variable, based on cleared volume, and recognized when contracts are cleared. We also generate clearing revenues for contracts traded on the OTC derivative market which are also recognized when contracts are cleared. In addition, European derivatives revenues include annual renewal fees. Each January, NASDAQ OMX Commodities members are billed an annual fee which is recognized ratably over the following 12-month period. NASDAQ OMX Commodities and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic do not have any revenue sharing agreements or cost of revenues, such as transaction rebates and brokerage, clearance and exchange fees. Access Services We generate revenues by providing market participants with several alternatives for accessing our markets for a fee. The type of connectivity is determined by the level of functionality a customer needs. As a result, F-24 139443_020_Nasdaq_1-188.p130.pdf QC 144 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) access services revenues vary depending on the type of connection provided to customers. We provide co-location services to market participants whereby firms may lease space for equipment within our data center. These participants are charged monthly fees for cabinet space, connectivity and support. We also earn revenues from annual and monthly exchange membership and registration fees. Revenues for providing access to our markets, co-location services and revenues for monthly exchange membership and registration fees are recognized on a monthly basis as the service is provided. Revenues from annual fees for exchange membership and registration fees are recognized ratably over the following 12-month period. Market Data We earn Market Data revenues from U.S. tape plans and U.S. and European proprietary market data products. Net U.S. Tape Plans Revenues from U.S. tape plans include eligible UTP Plan revenues which are shared among UTP Plan participants and are presented on a net basis. See “Market Data Revenue Sharing” below for further discussion of net reporting. Under the revenue sharing provision of the UTP Plan, we are permitted to deduct costs associated with acting as the exclusive Securities Information Processor from the total amount of tape revenues collected. After these costs are deducted from the tape revenues, we distribute to the respective UTP Plan participants, including The NASDAQ Stock Market, NASDAQ OMX BX and NASDAQ OMX PSX, their share of tape revenues based on a formula, required by Regulation NMS, that takes into account both trading and quoting activity. In addition, all quotes and trades in NYSE- and NYSE Amex-listed securities are reported and disseminated in real time, and as such, we share in the tape revenues for information on NYSE- and NYSE Amex-listed securities. Revenues from net U.S. tape plans are recognized on a monthly basis. U.S. Market Data Products We collect and process information and earn revenues as a distributor of our market data. We provide varying levels of quote and trade information to market participants and to data distributors, who in turn sell subscriptions for this information to the public. We earn revenues primarily based on the number of data subscribers and distributors of our data. U.S. Market Data revenues are recognized on a monthly basis. These revenues, which are subscription based, are recorded net of amounts due under revenue sharing arrangements with market participants. European Market Data Products European Market Data revenues, which are subscription based, are generated primarily through the sale and distribution of trading information based on data generated through trading on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic and are recognized on a monthly basis. Market Data Revenue Sharing The most significant component of Market Data revenues presented on a net basis is the UTP Plan revenue sharing in the U.S. All indicators of gross vs. net reporting under U.S. GAAP have been considered in analyzing the appropriate presentation of UTP Plan revenue sharing. However, the following are the primary indicators of net reporting: • Primary Obligor: We are the Securities Information Processor for the UTP Plan, in addition to being a participant in the UTP Plan. In our unique role as Securities Information Processor, we facilitate the F-25 139443_020_Nasdaq_1-188.p131.pdf QC 145 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) collection and dissemination of revenues on behalf of the UTP Plan participants. As a participant, we share in the net distribution of revenues according to the plan on the same terms as all other plan participants. • Risk of Loss/Credit Risk: Risk of loss on the revenue is shared equally among plan participants according to the UTP Plan. • Price Latitude: The operating committee of the UTP Plan, which is comprised of representatives from each of the participants, including us solely in our capacity as a UTP Plan participant, is responsible for setting the level of fees to be paid by distributors and subscribers and taking action in accordance with the provisions of the UTP Plan, subject to SEC approval. The exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic do not have any market data revenue sharing agreements or cost of revenues, such as transaction rebates and brokerage, clearance and exchange fees. Broker Services Our Broker Services operations offer technology and customized securities administration solutions to financial participants in the Nordic market. The primary services consist of flexible back-office systems, which allow customers to entirely or partly outsource their company’s back-office functions. Revenues from broker services are based on a fixed basic fee for administration or licensing, maintenance and operations, and a variable portion that depends on the number of transactions completed. Broker Services revenues are recognized on a continuous basis as services are rendered. Prior to November 2009, we also offered Broker Services operations in the United Kingdom. In November 2009, we sold our Broker Services operations in the United Kingdom to TD Waterhouse and recorded a gain of $5 million, which is included in gain on sales of businesses in the Consolidated Statements of Income for the year ended December 31, 2009. Issuer Services Revenues Global Listing Services U.S. Listing Services Listing Services revenues in the U.S. include annual renewal fees, listing of additional shares fees and initial listing fees. Annual renewal fees are recognized ratably over the following 12-month period. Listing of additional shares fees and initial listing fees are recognized on a straight-line basis over estimated service periods, which are four and six years, respectively, based on our historical listing experience and projected future listing duration. European Listing Services European listing fees, which are comprised of revenues derived from annual fees received from listed companies on our Nordic and Baltic exchanges and NASDAQ OMX First North , are directly related to the listed companies’ market capitalization on a trailing 12-month basis. These revenues are recognized ratably over the following 12-month period. Corporate Solutions Global Listing Services revenues also include fees from Corporate Solutions. These fees include subscription income from Shareholder.com and Directors Desk, fees from GlobeNewswire and revenues from F-26 139443_020_Nasdaq_1-188.p132.pdf QC 146 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Corporate Solutions Nordic. Prior to October 2009, Corporate Solutions revenues also included commission income from our Carpenter Moore insurance agency business. In October 2009, we sold substantially all of our Carpenter Moore business and recorded a gain of $7 million which is included in gain on sales of businesses in the Consolidated Statements of Income for the year ended December 31, 2009. Fee income for services other than placement of insurance coverage is recognized as those services are provided. Shareholder.com revenues are based on subscription agreements with customers. Revenues from subscription agreements are recognized ratably over the contract period, generally one year in length. As part of subscription services, customers also are charged usage fees based upon actual usage of the services provided. Revenues from usage fees and other services are recognized when earned. Directors Desk revenues are based on subscriptions for online services for directors. Subscriptions are one year in length and revenues are recognized ratably over the year. GlobeNewswire generates fees primarily from wire distribution services, and revenues are recognized as services are provided. For our insurance agency business, commission income was recognized when coverage became effective, the premium due under the policy was known or could be reasonably estimated, and substantially all required services related to placing the insurance had been provided. Broker commission adjustments and commissions on premiums billed directly by underwriters were recognized when such amounts could be reasonably estimated. Global Index Group We develop and license NASDAQ OMX branded indexes, associated derivatives and financial products as part of our Global Index Group business. Revenues primarily include license fees from these branded indexes, associated derivatives and financial products in the U.S. and abroad. We also generate revenues by licensing and listing third-party structured products and third-party sponsored ETFs. We primarily have two types of license agreements: transaction-based licenses and asset-based licenses. Transaction-based licenses are generally renewable long-term agreements. Customers are charged based on transaction volume or a minimum contract amount, or both. If a customer is charged based on transaction volume, we recognize revenue when the transaction occurs. If a customer is charged based on a minimum contract amount, we recognize revenue on a pro-rata basis over the licensing term. Asset-based licenses are also generally long-term agreements. Customers are charged based on a percentage of assets under management for licensed products, per the agreement, on a monthly or quarterly basis. These revenues are recorded on a monthly or quarterly basis over the term of the license agreement. Market Technology Revenues The Market Technology segment delivers technology and services to marketplaces, brokers and regulators throughout the world. Market Technology provides technology solutions for trading, clearing, settlement and information dissemination, and also offers facility management integration, surveillance solutions and advisory services. Revenues are derived from the following primary sources: licensing, support and facility management revenues, delivery project revenues, as well as change request, advisory and broker surveillance revenues. We enter into multiple-element sales arrangements to provide technology solutions and services to our customers. In order to recognize revenues associated with each individual element of a multiple-element sales arrangement separately, we are required to establish the existence of Vendor Specific Objective Evidence, or VSOE, of fair value for each element. When VSOE for individual elements of an arrangement cannot be established, revenue is generally deferred and recognized over either the final element of the arrangement or the entire term of the arrangement for which the services will be delivered. License and support revenues are derived from the system solutions developed and sold by NASDAQ OMX and are generally entered into in multiple-element sales arrangements. After we have developed and sold a F-27 139443_020_Nasdaq_1-188.p133.pdf QC 147 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) system solution, the customer licenses the right to use the software and may require post contract support and other services. Facility management revenues are also generally entered into in multiple-element sales arrangements and are derived when NASDAQ OMX assumes responsibility for the continuous operation of a system platform for a customer and receives facility management revenues which can be both fixed and volume- based. Revenues for license, support and facility management services are generally deferred and recognized over either the final element of the arrangement or the entire term of the arrangement for which the services will be delivered. We record the deferral of revenue associated with multiple-element sales arrangements in deferred revenue and non-current deferred revenue and the deferral of costs in other current assets and other assets in the Consolidated Balance Sheets. Delivery project revenues are derived from the installation phase of the system solutions developed and sold by NASDAQ OMX. The majority of our delivery projects involve individual adaptations to the specific requirements of the customer, such as those relating to functionality and capacity. We may customize our software technology and make significant modifications to the software to meet the needs of our customers, and as such, we account for these arrangements under contract accounting. Under contract accounting, when VSOE for valuing certain elements of an arrangement cannot be established, total revenues, as well as costs incurred, are deferred until the customization and significant modifications are complete and are then recognized over the post contract support period. We record the deferral of this revenue in deferred revenue and non-current deferred revenue and the deferral of costs in other current assets and other assets in the Consolidated Balance Sheets. Change request revenues include customer specific adaptations and modifications of the system solution sold by NASDAQ OMX after delivery has occurred. Change request revenues are recognized in revenue when earned. Advisory services are designed to support our customers’ strategies and help them with critical decisions in a highly demanding business environment. Advisory services revenues are recognized in revenue when earned. Broker surveillance revenues are derived from surveillance solutions targeting brokers and regulators throughout the world. Broker surveillance revenues are subscription based and are recognized in revenue when earned. Earnings per Share We present both basic and diluted EPS. Basic EPS is computed by dividing net income attributable to NASDAQ OMX adjusted for accretion on our series A convertible preferred stock by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income attributable to NASDAQ OMX adjusted for accretion on our series A convertible preferred stock and the interest impact of our 3.75% convertible notes, net of tax by the weighted-average number of common shares and common share equivalents outstanding during the period and reflects the assumed conversion of all dilutive securities which consist primarily of convertible notes, employee stock options, restricted stock and PSUs. Common share equivalents are excluded from the computation in periods for which they have an anti-dilutive effect. Stock options for which the exercise price exceeds the average market price over the period are anti- dilutive and, accordingly, are excluded from the calculation. See Note 13, “Earnings per Common Share,” for further discussion. Share-Based Compensation Accounting for share-based compensation requires the measurement and recognition of compensation expense for all equity awards based on estimated fair values. We recognize compensation expense for equity awards on a straight-line basis over the requisite service period of the award. See Note 11, “Share-Based Compensation,” for further discussion. F-28 139443_020_Nasdaq_1-188.p134.pdf QC 148 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Deferred Revenue Deferred revenue represents revenues for services not yet rendered, primarily for Global Listing Services and Market Technology. See Note 7, “Deferred Revenue,” for further discussion. Advertising Costs We expense advertising costs, which include media advertising and production costs, in the periods in which the costs are incurred. Media advertising and production costs included as marketing and advertising expense in the Consolidated Statements of Income totaled $9 million in 2010, $5 million for 2009 and $7 million for 2008. Software Costs Significant purchased application software and operational software that are an integral part of computer hardware are capitalized and amortized on a straight-line basis over their estimated useful lives, generally two to five years. All other purchased software is charged to expense as incurred. We develop systems solutions for both internal and external use. Certain costs incurred in connection with developing or obtaining internal use software are capitalized. Unamortized capitalized software development costs are included in data processing equipment and software, within property and equipment, net in the Consolidated Balance Sheets. Amortization of costs capitalized is included in depreciation and amortization expense in the Consolidated Statements of Income. Certain costs of computer software to be sold, leased, or otherwise marketed as a separate product or as part of a product or process are capitalized after the product has reached technological feasibility. Technological feasibility is established upon completion of a detail program design or, in its absence, completion. Thereafter, all software production costs are capitalized. Prior to reaching technological feasibility, all costs are charged to expense. Capitalized costs are amortized on a straight-line basis over the remaining estimated economic life of the product and are included in depreciation and amortization expense in the Consolidated Statements of Income. Leases We expense rent from non-cancellable operating leases, net of sublease income, on a straight line basis, based on future minimum lease payments. The net costs are included in occupancy expense in the Consolidated Statements of Income. See Note 16, “Leases,” for further discussion. Income Taxes We use the asset and liability method to provide income taxes on all transactions recorded in the consolidated financial statements. Deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e., temporary differences) and are measured at the enacted rates that will be in effect when these differences are realized. If necessary, a valuation allowance is established to reduce deferred tax assets to the amount that is more likely than not to be realized. In order to recognize and measure our unrecognized tax benefits, management determines whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the F-29 139443_020_Nasdaq_1-188.p135.pdf QC 149 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) recognition thresholds, the position is measured to determine the amount of benefit to be recognized in the consolidated financial statements. Interest and/or penalties related to income tax matters are recognized in income tax expense. Recently Adopted Accounting Pronouncements ASC Topic 605.25— In October 2009, the Financial Accounting Standards Board, or FASB, issued authoritative guidance on FASB Accounting Standards Codification, or ASC, Topic 605.25, “Revenue Recognition—Multiple-Element Arrangements.” This guidance modifies the revenue recognition guidance for arrangements that involve the delivery of multiple-elements, such as product, software, services or support, to a customer at different times as part of a single revenue generating transaction. This standard provides principles and application guidance to determine whether multiple deliverables exist, how the individual deliverables should be separated and how to allocate the revenue in the arrangement among those separate deliverables. The standard also expands the disclosure requirements for multiple deliverable revenue arrangements. This accounting guidance was effective for us on January 1, 2011, but allowed early adoption as of the first quarter of 2010 or through a retrospective application to all revenue arrangements for all periods presented in the financial statements. We adopted this guidance in the first quarter of 2010. The adoption did not have a significant impact on our financial position or results of operations. ASC Topic 820—In January 2010, the FASB issued amended guidance relating to ASC Topic 820, “Fair Value Measurements and Disclosures.” The amended guidance requires new disclosures as follows: • Amounts related to transfers in and out of Levels 1 and 2 shall be disclosed separately and the reasons for the transfers shall be described. • In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements on a gross basis. The guidance also provides amendments that clarify existing disclosures related to the following: • Reporting fair value measurement disclosures for each class of assets and liabilities. • Providing disclosure surrounding the valuation techniques and inputs used to measure fair value for both Level 2 and Level 3 fair value measurements. This accounting guidance was effective for us beginning on January 1, 2010, except for the disclosure requirements surrounding the reconciliation of Level 3 fair value measurements, which were effective for us on January 1, 2011. Since this guidance only requires additional disclosure, it did not and will not affect our financial position or results of operations. ASC Topic 855—In February 2010, the FASB issued amended guidance on subsequent events. Under this amended guidance, entities that file with the SEC are no longer required to disclose the date through which subsequent events have been evaluated in originally issued or revised financial statements. This amended guidance was effective immediately and we adopted the new requirements as of March 31, 2010. 3. Acquisitions and Strategic Initiatives We completed the following acquisitions and strategic initiatives in 2010, 2009 and 2008. The results of operations of each transaction are included in our Consolidated Statements of Income from the dates of each acquisition or strategic initiative. F-30 139443_020_Nasdaq_1-188.p136.pdf QC 150 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) 2010 Acquisitions We completed the following acquisitions during 2010: Purchase Consideration Total Net (Liabilities) Assets Acquired Purchased Intangible Assets Goodwill FTEN(1) SMARTS(2) Nord Pool ASA(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total for 2010 . . . . . . . . . . . . . . . . . . . . . . . . $ 110 77 17 $ 204 (in millions) $ (1) (5) 7 $ 1 $ 46 28 2 $ 76 $ 65 54 8 $ 127 (1) (2) (3) In December 2010, we acquired FTEN, a leading provider of RTRM solutions for the financial securities market for $110 million. FTEN purchase consideration includes $1 million held in escrow to be paid in 2011 and $11 million held in escrow to be paid in 2012, in accordance with the purchase agreement. We acquired net assets, at fair value, totaling $3 million and recorded a current deferred tax liability of $2 million and a non-current deferred tax liability of $16 million related to purchased intangible assets, and we also recorded a non-current deferred tax asset of $14 million related to net operating loss carry forwards, resulting in total net liabilities acquired of $1 million. The total deferred tax liabilities of $18 million represent the tax effect of the difference between the estimated assigned fair value of the acquired intangible assets ($46 million) and the tax basis ($0) of such assets. The estimated amount of $18 million is determined by multiplying the difference of $46 million by FTEN’s effective tax rate of 39.55%. The purchased intangible assets of $46 million consisted of $23 million in customer relationships, $12 million in technology, $9 million for the FTEN trade name and $2 million related to non-compete agreements. In August 2010, we acquired SMARTS, a leading technology provider of surveillance solutions to exchanges, regulators and brokers to diversify our Market Technology business and enter the broker surveillance and compliance market. We completed our acquisition of SMARTS for $77 million, which included a $75 million initial purchase price as well as a $2 million working capital adjustment. SMARTS purchase consideration also includes $2 million held in escrow to be paid in 2011 and $11 million held in escrow to be paid in 2012, in accordance with the purchase agreement. We acquired net assets, at fair value, totaling $3 million and recorded a current deferred tax liability of $1 million and a non-current deferred tax liability of $7 million related to purchased intangible assets, resulting in total net liabilities acquired of $5 million. The total deferred tax liabilities of $8 million represent the tax effect of the difference between the estimated assigned fair value of the acquired intangible assets ($28 million) and the tax basis ($0) of such assets. The estimated amount of $8 million is determined by multiplying the difference of $28 million by SMARTS’ effective tax rate of 30%. The purchased intangible assets of $28 million consisted of $11 million in technology and $17 million in customer relationships. In May 2010, we acquired Nord Pool, a derivatives trading market, for $17 million (101 million NOK). We acquired net assets, at fair value, totaling $8 million and recorded deferred tax liabilities of $1 million related to purchased intangible assets, resulting in total net assets acquired of $7 million. Through this acquisition, we now hold a Norwegian exchange license and operate the Nordic power market and the European carbon market on one trading platform. The above amounts 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 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 amounts recorded as assets and liabilities may result in a corresponding adjustment to goodwill. There were no adjustments to the provisional values during the year ended December 31, 2010. F-31 139443_020_Nasdaq_1-188.p137.pdf QC 151 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Acquisition of ZVM In December 2010, we acquired ZVM, a provider of webcasting and investor relation communication services for companies in the Nordic region, for an immaterial amount. ZVM, which is the leading provider of webcasting services in Northern Europe, will add to the growing range of capabilities and services NASDAQ OMX offers public and private companies in the U.S. and Europe. Acquisition of Assets of North American Energy Credit and Clearing Corp. In March 2010, we also purchased the assets of North American Energy Credit and Clearing Corp. for an immaterial amount. With this purchase, NASDAQ OMX expanded its presence in the OTC energy commodity markets. As previously discussed, the acquisition of these assets was effected through our newly-established subsidiary, NOCC. In March 2010, we also provided an additional $25 million in capital to NOCC to improve its liquidity position. As of December 31, 2010, this amount is classified as non-current restricted cash in the Consolidated Balance Sheets. 2010 Acquisition-related Costs For the year ended December 31, 2010, acquisition-related transaction costs for the 2010 acquisitions described above are included in merger and strategic initiatives expense in the Consolidated Statements of Income. 2009 Strategic Initiative Investment in European Multilateral Clearing Facility N.V. In January 2009, we acquired a 22% stake in EMCF, a leading European clearinghouse, which is accounted for under the equity method of accounting. 2008 Acquisitions and Strategic Initiatives Combination with OMX AB and Strategic Partnership with Borse Dubai Limited On February 27, 2008, Nasdaq and OMX AB combined their businesses pursuant to an agreement with Borse Dubai. The purchase price of OMX AB was $4.4 billion, consisting of an equity component and a cash component. Our business combination with OMX AB created a premier global exchange company, bringing together complementary businesses, diversifying our operations, enhancing our existing product offerings and solidifying our leadership in global exchange technology. Concurrently with the business combination with OMX AB, we also acquired a 33 1⁄ 3% equity stake in NASDAQ Dubai in exchange for a contribution of $50 million in cash and the entry into certain technology and trademark licensing agreements. In November 2008, we listed our common stock on NASDAQ Dubai. In December 2009, we agreed to participate in the realignment of the ownership structure of NASDAQ Dubai. As part of this realignment, NASDAQ Dubai became a wholly-owned subsidiary of DFM, a publicly traded company controlled by Borse Dubai and NASDAQ OMX received a 1% equity interest in DFM in exchange for its equity interest in NASDAQ Dubai. In connection with the realignment, in December 2009, we recorded an impairment charge of $82 million to write down our investment in NASDAQ Dubai to its estimated fair value. See Note 5, “Investments,” for further discussion. F-32 139443_020_Nasdaq_1-188.p138.pdf QC 152 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Acquisition of the Philadelphia Stock Exchange In July 2008, we completed our acquisition of PHLX, expanding our presence in the derivatives market. The acquisition of PHLX provided us with one of the largest options market in the U.S. and with increased exposure to a fast growing asset class and diversification into an area adjacent to our core equity trading business. PHLX, renamed NASDAQ OMX PHLX, operates as a distinct market alongside The NASDAQ Options Market, our options platform that was launched in March 2008. With the acquisition of PHLX and the launch of The NASDAQ Options Market, we have substantially increased our footprint in global derivatives. Acquisition of the Boston Stock Exchange We completed our acquisition of BSX in August 2008. The BSX acquisition provided us with an additional license for trading both cash equities and options and a clearing license. We used the BSX license to create a second U.S. cash equities market, called NASDAQ OMX BX, which was launched in January 2009. With NASDAQ OMX BX, we were able to offer an additional quote within the U.S. cash equities marketplace, providing our customers enhanced trading choices and price flexibility. We have been able to leverage our INET trading system, which runs The NASDAQ Stock Market, to operate NASDAQ OMX BX, providing customers an additional fast and efficient cash equities market. Acquisition of Certain Businesses from Nord Pool In October 2008, we acquired Nord Pool’s clearing, international derivatives and consulting subsidiaries. As a result of the acquisition, we launched NASDAQ OMX Commodities, which offers energy and carbon derivatives products. NASDAQ OMX Commodities provides access to the world’s largest power derivatives markets and one of Europe’s largest carbon markets. Acquisition of a Majority Interest in International Derivatives Clearing Group In December 2008, we acquired a majority interest in IDCG, and IDCG became an independently operated subsidiary of NASDAQ OMX. IDCG provides CCP clearing for interest rate swap products through its clearinghouse subsidiary IDCH. NFX is serving as the designated contract market for trading of certain of these interest rate swap products. Investment in Agora-X, LLC As of December 31, 2008, we had a 20% aggregate equity interest in Agora-X and increased our ownership interest to 85% in December 2009, resulting in a majority stake. In the second quarter of 2010, we made a strategic decision to close our Agora-X business and recorded a loss of $5 million. This charge was included in loss on divestiture of businesses in the Consolidated Statements of Income for the year ended December 31, 2010. The following table presents a summary of our acquisitions in 2008: Purchase Consideration(1) Total Net (Liabilities) Assets Acquired(2) Purchased Intangible Assets Goodwill 2008 OMX AB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PHLX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BSX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nord Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IDCG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total for 2008 . . . . . . . . . . . . . . . . . . . . . . . . $4,371 708 43 317 85 $5,524 F-33 (in millions) $(340) (99) (44) 68(3) 59 $(356) $1,207 337 52 81(3) 26 $1,703 $3,504 470 35 168(3) — $4,177 139443_020_Nasdaq_1-188.p139.pdf QC 153 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) (1) OMX AB consideration includes $2,267 million for the value of common stock issued to Borse Dubai, $2,029 million in cash and $75 million in acquisition costs. PHLX consideration includes $652 million in cash, $12 million in acquisition costs and $44 million in working capital adjustments. PHLX consideration included $15 million held in escrow at December 31, 2008, which was paid in 2009 in accordance with the purchase agreement. BSX consideration includes the $61 million purchase price, plus $5 million for the settlement of a loan, less $23 million of negative working capital adjustments. BSX consideration included $3 million held in escrow, which was paid in 2010 in accordance with the purchase agreement. Nord Pool consideration includes $249 million in cash, $66 million in a vendor note which was settled in 2009 and $2 million in acquisition costs. IDCG purchase consideration consisted primarily of cash. (2) We acquired net assets of OMX AB totaling $137 million and recorded deferred tax liabilities of $477 million related to OMX AB’s intangible assets. We acquired net assets of PHLX totaling $55 million and recorded deferred tax liabilities of $154 million related to PHLX’s intangible assets. The PHLX net assets of $55 million were reduced by $44 million of working capital, which was included as an adjustment to the purchase consideration. We acquired net liabilities of BSX totaling $22 million and recorded deferred tax liabilities of $22 million related to BSX’s intangible assets. The BSX net liabilities of $22 million include $23 million of negative working capital, which was included as an adjustment to the purchase consideration. We acquired net assets in the Nord Pool transaction totaling $91 million and recorded deferred tax liabilities of $23 million related to Nord Pool’s intangible assets. See (3) below for adjustments to Nord Pool’s intangible assets and deferred tax liabilities. We acquired net assets of IDCG of $59 million, which included cash received from NASDAQ OMX for the acquisition consideration. (3) As we finalized the purchase price allocation for the Nord Pool transaction in the fourth quarter of 2009, the fair values of the purchased intangible assets were adjusted, resulting in a decrease of $8 million, an increase to goodwill of $7 million and a decrease to deferred tax liabilities of $1 million. The impact on amortization expense was immaterial. The following table presents the details of the purchased intangible assets acquired in the above 2008 acquisitions. All purchased finite-lived intangible assets are amortized using the straight-line method. See Note 4, “Goodwill and Purchased Intangible Assets,” for further discussion. Customer Relationships Registrations, Licenses and Trade Names Total Technology Estimated Useful Life Estimated Useful Life (in Years) Amount (in Years) Amount Estimated Useful Life (in Years) Amount Amount (in millions, except years) 2008 OMX AB . . . . . . . . . . . . . . . . . . . . PHLX . . . . . . . . . . . . . . . . . . . . . . . BSX . . . . . . . . . . . . . . . . . . . . . . . . Nord Pool . . . . . . . . . . . . . . . . . . . . IDCG . . . . . . . . . . . . . . . . . . . . . . . Total for 2008 . . . . . . . . . . . . 3-10 2-5 — 7 — $ 40 11 — 1 — $ 52 20-33 19-23 17 22 — $ 420 113 2 77(6) — $ 612 Indefinite(1) Indefinite(2) Indefinite(3) 10(4) Indefinite(5) $ 747 213 50 3 26 $1,207 337 52 81 26 $1,039 $1,703 (1) (2) (3) (4) (5) Includes exchange and clearing registrations and the OMX AB trade name which we determined to have an indefinite estimated useful life. Includes exchange and futures registrations and the PHLX trade name which we determined to have an indefinite estimated useful life. Includes SRO and clearing licenses which we determined to have an indefinite estimated useful life. Includes the Nord Pool trade name which we determined to have an estimated useful life of 10 years. Includes derivative clearing license for interest rate swap products which we determined to have an indefinite estimated useful life. F-34 139443_020_Nasdaq_1-188.p140.pdf QC 154 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) (6) As we finalized the purchase price allocation for the Nord Pool transaction in the fourth quarter of 2009, the fair values of the purchased intangible assets were adjusted, resulting in a decrease of $8 million, an increase to goodwill of $7 million and a decrease to deferred tax liabilities of $1 million. The impact on amortization expense was immaterial. Pro Forma Results The consolidated financial statements for the years ended December 31, 2010, 2009 and 2008 include the financial results of the above 2010, 2009 and 2008 acquisitions and strategic initiatives from the date of each acquisition or strategic initiative. Pro forma results of operations for the acquisitions completed in 2010 and the strategic initiative completed in 2009 have not been presented since these acquisitions and the strategic initiative both individually and in the aggregate were not material to our financial results. The unaudited pro forma combined historical results for the year ended December 31, 2008, shown in the table below, include the combined historical Consolidated Statements of Income of Nasdaq, OMX AB and PHLX giving effect to the OMX AB business combination and PHLX acquisition as if they had occurred at the beginning of 2008. We also acquired BSX, Nord Pool and IDCG in 2008, but we have not included their results prior to their respective closing dates in these pro forma results as these transactions were not considered significant. Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenues less transaction rebates, brokerage, clearance and exchange fees . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to NASDAQ OMX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2008 (in millions, except per share amounts) $3,853 1,652 309 308 $ 1.54 $ 1.45 The pro forma results for the year ended December 31, 2008 primarily includes adjustments for amortization of the intangible assets acquired in the business combination with OMX AB and the PHLX acquisition, the elimination of OMX AB’s historical amortization expense, elimination of PHLX’s non-recurring expenses related to the acquisition, additional interest expense on our prior credit facilities and the 2.50% convertible senior notes, elimination of OMX AB’s historical interest expense related to OMX AB’s debt that was refinanced and related tax adjustments. The pro forma results for the year ended December 31, 2008 also include the elimination of the non-recurring gain on the contribution of the Nasdaq trade name in the transaction with NASDAQ Dubai discussed above, as well as adjustments to eliminate interest income related to the net cash received from the sale of our investment in LSE. F-35 139443_020_Nasdaq_1-188.p141.pdf QC 155 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) 4. Goodwill and Purchased Intangible Assets Goodwill The following table presents the changes in goodwill by business segment during the year ended December 31, 2010: Market Services Issuer Services Market Technology (in millions) Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . Goodwill acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation adjustment and other . . . . . $4,432 73 174 Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . $4,679 $273 — 19 $292 $ 95 54 7 $156 Total $4,800 127 200 $5,127 As of December 31, 2010, the amount of goodwill that is expected to be deductible for tax purposes in future periods is $107 million. The goodwill acquired for Market Services shown above relates to our acquisitions of FTEN in December 2010 and Nord Pool in May 2010. The goodwill acquired for Market Technology relates to our acquisition of SMARTS in August 2010. See Note 3, “Acquisitions and Strategic Initiatives,” for further discussion. Purchased Intangible Assets The following table presents details of our total purchased intangible assets, both finite- and indefinite-lived: December 31, 2010 December 31, 2009 Gross Carrying Amount Accumulated Amortization Net Intangible Assets Weighted- Average Useful Life (in Years) Gross Carrying Amount Accumulated Amortization Net Intangible Assets Weighted- Average Useful Life (in Years) (in millions) (in millions) Finite-Lived Intangible Assets Technology . . . . . . . . . . . . . . . $ Customer relationships . . . . . . Other . . . . . . . . . . . . . . . . . . . . Foreign currency translation 72 853 6 $ (41) (152) (1) adjustment . . . . . . . . . . . . . . (15) 4 Total finite-lived 6 21 8 $ 31 701 5 (11) $ 65 813 5 (45) $ (41) (110) (1) 7 $ 24 703 4 (38) 4 21 10 intangible assets . . . . . $ 916 $(190) $ 726 $ 838 $(145) $ 693 Indefinite-Lived Intangible Assets Exchange and clearing registrations . . . . . . . . . . . . . $ 790 181 78 Trade names . . . . . . . . . . . . . . Licenses . . . . . . . . . . . . . . . . . Foreign currency translation $ — — — $ 790 181 78 $ 790 173 76 $ — — — $ 790 173 76 adjustment . . . . . . . . . . . . . . Total indefinite-lived (56) — (56) (101) — (101) intangible assets . . . . . $ 993 Total intangible assets . . . . . . . $1,909 $ — $(190) $ 993 $1,719 $ 938 $1,776 $ — $(145) $ 938 $1,631 F-36 139443_020_Nasdaq_1-188.p142.pdf QC 156 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Amortization expense for purchased finite-lived intangible assets was $57 million for the years ended December 31, 2010 and 2009 and $48 million for the year ended December 31, 2008. The increase in amortization expense in 2009 compared to 2008 was primarily due to intangible asset amortization expense on identifiable finite-lived intangible assets purchased in connection with the OMX AB business combination and the acquisitions of PHLX and certain businesses of Nord Pool from the date of each acquisition. In 2008, due to an operating loss and a projection of future cash flow losses due to lower contract rates for Carpenter Moore, which was part of Corporate Solutions within our Issuer Services segment, we evaluated the ongoing value of the intangible assets associated with this business. Based on this evaluation, we determined that finite-lived intangible assets, consisting primarily of customer relationships and technology, with a carrying value of approximately $7 million, were no longer recoverable and were in fact impaired, and wrote them down to their estimated fair value of zero. The risk-adjusted discount rates used to compute the present value of the expected net cash flows of individual intangible assets were based on Carpenter Moore’s weighted average cost of capital, which ranged from 14.5% to 16.9%. These discount rates were determined after consideration of Carpenter Moore’s rate of return on debt and equity and the weighted-average return on invested capital. We recorded the impairment loss in asset impairment charges in the Consolidated Statements of Income for the year ended December 31, 2008. In October 2009, we sold substantially all of our Carpenter Moore business and recorded a gain of $7 million included in gain on sales of businesses in the Consolidated Statements of Income. The estimated future amortization expense (excluding the impact of foreign currency translation adjustments of $11 million as of December 31, 2010) of purchased intangible assets as of December 31, 2010 is as follows: 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in millions) $ 53 50 49 47 45 493 $737 5. Investments Trading Securities Trading securities, which are included in financial investments, at fair value in the Consolidated Balance Sheets, were $220 million as of December 31, 2010 and $308 million as of December 31, 2009. These securities are primarily comprised of Swedish government debt securities, of which $190 million as of December 31, 2010 and $183 million as of December 31, 2009, are restricted assets to meet regulatory capital requirements for NASDAQ OMX Stockholm’s clearing operations. Available-for-Sale Investment Securities Investment in DFM Our available-for-sale investment security, which is included in financial investments, at fair value in the Consolidated Balance Sheets, represents our 1% investment in DFM. In May 2010, we completed the exchange of our equity interest in NASDAQ Dubai for a 1% investment in DFM. See “Investment in NASDAQ Dubai” below for further discussion. F-37 139443_020_Nasdaq_1-188.p143.pdf QC 157 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) As of December 31, 2010, the cost basis of this security was $36 million and the fair value was $33 million. The $3 million change between the cost basis and fair value is reflected as an unrealized holding loss in accumulated other comprehensive loss in the Consolidated Balance Sheets. We reviewed the carrying value of this investment security to determine whether an other-than-temporary decline in value exists. We considered factors affecting the investee, factors affecting the industry the investee operates in and general market trends. We also considered the length of time the market value has been below the cost basis and the near-term prospects for recovery of unrealized losses. As of December 31, 2010, we have not recognized an other-than-temporary decline in value on this investment security. Investment in Oslo In connection with our business combination with OMX AB, we acquired a long-term available-for-sale investment security in Oslo. In 2008, we recorded an other-than-temporary impairment loss on this investment security of $35 million in asset impairment charges in the Consolidated Statements of Income. During the second quarter of 2009, we made a strategic decision to sell this investment security, demonstrating our intent to no longer hold this investment, and recorded a $5 million loss, which includes costs directly related to the sale, primarily broker fees. This loss is included in loss on sale of investment security in the Consolidated Statements of Income for the year ended December 31, 2009. Equity Method Investments The equity method of accounting is used when we own less than 50% of the outstanding voting stock, but exercise significant influence over the operating and financial policies of a company. Equity interest in our equity method investments was $27 million as of December 31, 2010, which consisted primarily of our equity interest in EMCF. Equity interest in our equity method investments was $66 million as of December 31, 2009, which consisted primarily of our equity interests in NASDAQ Dubai and EMCF. Equity method investments are included in other assets in the Consolidated Balance Sheets. As discussed above, we completed the exchange of our equity interest in NASDAQ Dubai for a 1% available-for-sale investment in DFM in May 2010. See “Investment in NASDAQ Dubai” below for further discussion. Income (loss) recognized from our equity interest in the earnings and losses of these companies was a net gain of $2 million for the year ended December 31, 2010 compared with a net loss of $107 million for the year ended December 31, 2009. The net loss during the year ended December 31, 2009 was primarily due to impairment charges relating to NASDAQ Dubai and Agora-X and the sale of our investment in Orc. See “Investment in NASDAQ Dubai,” “Investment in Orc Software,” and “Impairment of Agora-X,” below for further discussion. Income (loss) recognized from our equity method investments is included in income (loss) from unconsolidated investees, net in the Consolidated Statements of Income. Investment in NASDAQ Dubai In December 2009, we agreed to participate in the realignment of the ownership structure of NASDAQ Dubai. The realignment was completed in May 2010 and at that time, NASDAQ Dubai became a wholly-owned subsidiary of DFM, a publicly traded company controlled by Borse Dubai. We received a 1% equity interest in DFM in exchange for our equity interest in NASDAQ Dubai. Our existing technology and trademark licensing arrangements with Borse Dubai and NASDAQ Dubai remain unchanged. F-38 139443_020_Nasdaq_1-188.p144.pdf QC 158 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) In connection with the realignment of the ownership structure discussed above, a third-party specialist determined the fair value of NASDAQ Dubai. Based on this valuation, we determined our carrying value of NASDAQ Dubai was no longer recoverable and was in fact impaired, and we wrote down our investment to fair value which resulted in an $82 million pre-tax, non-cash impairment charge for the year ended December 31, 2009. At the time of the realignment in May 2010, we recorded a pre-tax, non cash loss of $1 million in income (loss) from unconsolidated investees, net in the Consolidated Statements of Income, which was based on the difference between the price of DFM common stock multiplied by the number of shares of DFM acquired and the carrying value of our investment in NASDAQ Dubai at the time of the exchange. NASDAQ Dubai and DFM are related parties, as both of them are primarily owned by Borse Dubai, our largest stockholder. Investment in Orc Software During the second quarter of 2009, we made a strategic decision to sell our investment in Orc, demonstrating our intent to no longer hold this investment. We sold shares representing 25.25% of the share capital of Orc to a group of Swedish and other international investors for $54 million in cash. As a result of the sale, we recognized a $19 million loss, which includes costs directly related to the sale, primarily broker fees. The loss is included in income (loss) from unconsolidated investees, net in the Consolidated Statements of Income for the year ended December 31, 2009. Impairment of Agora-X In December 2009, we entered into an agreement to increase our investment in Agora-X from 20% to 85%. In evaluating the fair value of the total investment, it was determined that our carrying value of Agora-X was no longer recoverable and was in fact impaired, and we wrote down our investment to fair value which resulted in a pre-tax, non-cash impairment charge of $5 million. 6. Property and Equipment, net The following table presents our major categories of property and equipment, net: December 31, 2010 2009 (in millions) Data processing equipment and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture, equipment and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 348 180 $ 313 178 Less: accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 528 (364) 491 (327) Total property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 164 $ 164 Depreciation and amortization expense for property and equipment was $46 million for the year ended December 31, 2010, $47 million for the year ended December 31, 2009 and $45 million for the year ended December 31, 2008. These amounts are included in depreciation and amortization expense in the Consolidated Statements of Income. As of December 31, 2010 and 2009, we do not own any real estate properties. F-39 139443_020_Nasdaq_1-188.p145.pdf QC 159 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) 7. Deferred Revenue Deferred revenue represents cash payments received that are yet to be recognized as revenue. At December 31, 2010, we have estimated that our deferred revenue, which is primarily related to Global Listing Services and Market Technology fees, will be recognized in the following years: Fiscal year ended: 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . Initial Listing Fees Listing of Additional Shares Fees Annual Renewal Fees and Other (in millions) Market Technology(1) Total $ 15 11 7 5 3 1 $ 42 $ 35 25 17 6 — — $ 83 $ 21 — — — — — $ 21 $ 51 29 28 19 11 8 $146 $ 122 65 52 30 14 9 $ 292 (1) The timing of recognition of our deferred Market Technology revenues is dependent upon when significant modifications are made pursuant to existing contracts. As such, as it relates to these fees, the timing represents our best estimate. Our deferred revenue during the years ended December 31, 2010 and 2009 is reflected in the following table. Initial Listing Fees Listing of Additional Shares Fees Annual Renewal Fees and Other Market Technology(2) Total Balance at January 1, 2009 . . . . . . . . . . . . . . . . . . . . . . Additions(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation adjustment . . . . . . . . . . . — $ 57 9 (20) Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . $ 46 Additions(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation adjustment . . . . . . . . . . . — 14 (18) $ 74 39 (37) — $ 76 46 (39) — (in millions) $ 21 169 (173) 1 $ 18 222 (219) — $ 101 87 (64) 1 $ 125 32 (13) 2 $ 253 304 (294) 2 $ 265 314 (289) 2 Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . $ 42 $ 83 $ 21 $ 146 $ 292 (1) The additions and amortization for initial listing fees, listing of additional shares fees and annual renewal fees and other primarily reflect Issuer Services revenues from U.S. listing fees. (2) Market Technology deferred revenues include revenues from delivered client contracts in the support phase charged during the period. Under contract accounting, where customization and significant modifications to the software are made to meet the needs of our customers, total revenues as well as costs incurred, are deferred until significant modifications are completed and delivered. Once delivered, deferred revenue and the related deferred costs are recognized over the post contract support period. We have included the deferral of costs in other current assets and other assets in the Consolidated Balance Sheets. The amortization of Market Technology deferred revenue includes revenues earned from client contracts recognized during the period and from the technology licenses contributed to NASDAQ Dubai. F-40 139443_020_Nasdaq_1-188.p146.pdf QC 160 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) 8. Debt Obligations The following table presents the changes in our debt obligations during the year ended December 31, 2010: December 31, 2009 Additions Payments, Conversions, Accretion and Other December 31, 2010 (in millions) 3.75% convertible notes due October 22, 2012 (net of discount)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — 374 2.50% convertible senior notes due August 15, 2013 . . . . . . . . . . . 4.00% senior unsecured notes due January 15, 2015 (net of $ — — $ — 14 $ — 388 discount)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.55% senior unsecured notes due January 15, 2020 (net of discount)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $700 million senior unsecured term loan facility credit agreement due January 15, 2013 (average interest rate of 2.33% for the year ended December 31, 2010)(2) . . . . . . . . . . . . . . . . . . . . . . . 5.25% senior unsecured notes due January 16, 2018, (net of discount)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior unsecured bridge facility(4) 6.25% subordinated debt assumed from the acquisition of Nord Pool’s derivatives, clearing and consulting subsidiaries repaid in May 2010(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,000 million senior secured term credit facilities repaid January . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010(2) Total debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — 18 1,700 2,092 (225) 398 598 700 367 370 — — 2,433 — — — (130) — (370) (18) (1,700) (2,204) 85 398 598 570 367 — — — 2,321 (140) Total long-term debt obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,867 $2,433 $(2,119) $2,181 (1) (2) (3) (4) In September 2009, most holders of our outstanding 3.75% convertible notes converted their outstanding positions into common stock. As of December 31, 2010 and December 31, 2009, approximately $0.5 million aggregate principal amount of the 3.75% convertible notes remained outstanding. For further discussion, see “3.75% Convertible Notes” below. See “Senior Unsecured Notes, Credit Facility and Repayment of Our Senior Secured Credit Facilities in Place as of December 31, 2009” below for further discussion. See “5.25% Senior Unsecured Notes” below for further discussion. See “Bridge Facility” below for further discussion. (5) Our subordinated debt obligation assumed in the acquisition of Nord Pool’s derivatives, clearing and consulting subsidiaries was denominated in Norwegian Krone and totaled 100 million Norwegian Krone ($18 million as of December 31, 2009 and $16 million at the time of the repayment in May 2010). The difference of $2 million reflects changes in foreign currency exchange rates. 3.75% Convertible Notes The 3.75% convertible notes were originally issued to Hellman & Friedman, or H&F ($300 million), SLP ($141 million) and other holders ($4 million) in order to finance the acquisition of INET. These notes were convertible into our common stock at a price of $14.50 per share, representing 30,689,655 shares subject to adjustment in general for any stock split, dividend, combination, recapitalization or similar event. We also issued warrants to purchase shares of our common stock at a price of $14.50 per share to H&F (3,400,000 shares), SLP F-41 139443_020_Nasdaq_1-188.p147.pdf QC 161 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) (1,523,325 shares) and other holders (39,175 shares). The warrants became exercisable on April 22, 2006 and would have expired on December 8, 2008. During 2007, H&F converted all of their 3.75% convertible notes into common stock and exercised all of their outstanding warrants prior to expiration. During 2007 and 2008, SLP and other holders converted a portion of their 3.75% convertible notes into common stock and exercised all of their outstanding warrants prior to expiration. In September 2009, SLP and another holder, or Holders, converted their remaining outstanding 3.75% convertible notes into common stock in accordance with the terms of the notes. As an inducement for conversion, we agreed to pay the Holders and certain of their affiliates an aggregate amount of $9 million in cash and issue to the Holders shares of our series A convertible preferred stock, with an aggregate initial liquidation preference amount of $16 million. See “Preferred Stock,” of Note 12, “NASDAQ OMX Stockholders’ Equity,” for further discussion. As of December 31, 2010 and 2009, approximately $0.5 million aggregate principal amount of the 3.75% convertible notes remained outstanding. 2.50% Convertible Senior Notes During the first quarter of 2008, in connection with the business combination with OMX AB, we completed the offering of $475 million aggregate principal amount of 2.50% convertible senior notes due 2013. The interest rate on the notes is 2.50% per annum payable semi-annually in arrears on February 15 and August 15 and will mature on August 15, 2013. The notes are convertible in certain circumstances specified in the indenture for the notes. Upon conversion, holders will receive, at the election of NASDAQ OMX, cash, common stock or a combination of cash and common stock. It is our current intent and policy to settle the principal amount of the notes in cash. The conversion rate will initially be 18.1386 shares of common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $55.13 per share of common stock. At December 31, 2010, the 2.50% convertible senior notes are convertible into 7,757,283 shares of our common stock, subject to adjustment upon the occurrence of specified events. Subject to certain exceptions, if we undergo a “fundamental change” as described in the indenture, holders may require us to purchase their notes at a price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest. Since the settlement structure of our 2.50% convertible senior notes permits settlement in cash upon conversion, we are required to separately account for the liability and equity components of the convertible debt in a manner that reflects our nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This entails bifurcation of a component of the debt, classification of that component in equity and then accretion of the resulting discount on the debt being reflected in the income statement as part of interest expense. The changes in the liability and equity components of our 2.50% convertible senior notes during the year ended December 31, 2010 and 2009 are as follows: Liability Component (in millions) Principal Balance Unamortized Debt Discount Net Carrying Amount Gross Equity Component Equity Component (in millions) Deferred Taxes Net Equity Component January 1, 2009 . . . . . . . . . . . . . . Accretion of debt discount . . . . . . Early extinguishment of debt . . . . December 31, 2009 . . . . . . . . . . . Accretion of debt discount . . . . . . $ 475 — (47) $ 428 — December 31, 2010 . . . . . . . . . . . $ 428 $ 74 (13) (7) $ 54 (14) $ 40 F-42 $ 401 13 (40) $ 374 14 $ 388 $ 85 — (5) $ 80 — $ 80 $ 34 — (2) $ 32 — $ 32 $ 51 — (3) $ 48 — $ 48 139443_020_Nasdaq_1-188.p148.pdf QC 162 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) The unamortized debt discount on the convertible debt was $40 million as of December 31, 2010 and $54 million as of December 31, 2009 and is included in debt obligations in the Consolidated Balance Sheets. This amount will be accreted as part of interest expense through the maturity date of the convertible debt of August 15, 2013. The effective annual interest rate on the 2.50% convertible senior notes was 6.53% for the years ended December 31, 2010 and 2009, which includes the accretion of the debt discount in addition to the annual contractual interest rate of 2.50%. As of December 31, 2010 and December 31, 2009, the equity component of the convertible debt included in additional paid-in capital in the Consolidated Balance Sheets was $48 million. This amount is calculated as follows: $80 million of excess principal of the convertible debt over the carrying amount less $32 million of deferred taxes. The deferred tax liability is determined by multiplying the $80 million of excess principal of the convertible debt over the carrying amount by the U.S. marginal tax rate of 39.55%. Interest expense recognized on our 2.50% convertible senior notes in the Consolidated Statements of Income for the years ended December 31, 2010, 2009 and 2008 is as follows: Year Ended December 31, 2009 (in millions) 2010 2008 Components of interest expense recognized on our 2.50% convertible senior notes Accretion of debt discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contractual interest $ 14 10 $ 13 11 $ 11 10 Total interest expense recognized on our 2.50% convertible senior notes . . . . . . . . . . . . . . . . $ 24 $ 24 $ 21 Early Extinguishment of Debt In 2009, we repurchased $47 million principal amount of the 2.50% convertible senior notes for a cash payment of $40 million and recognized a pre-tax gain on the early extinguishment of debt of $4 million (net of debt issuance and other costs of $0.8 million) which is recorded in general, administrative and other expense in the Consolidated Statements of Income. As a result of the $47 million repurchase, the remaining aggregate principal amount outstanding on these notes as of December 31, 2009 was $428 million. See above for further discussion. Debt Issuance Costs In 2008, in conjunction with the issuance of the 2.50% convertible senior notes, we incurred debt issuance costs of $10 million. These costs, which are capitalized and included in other assets in the Consolidated Balance Sheets, are being amortized over the life of the debt obligation. In connection with the early extinguishment of a portion of these notes, we recorded a pre-tax charge of $0.8 million for the year ended December 31, 2009 for debt issuance costs. See “Early Extinguishment of Debt” above for further discussion. Amortization expense, which is recorded as additional interest expense for these costs, was $2 million for the years ended December 31, 2010, 2009 and 2008. Senior Unsecured Notes, Credit Facility and Repayment of Our Senior Secured Credit Facilities in Place as of December 31, 2009 In January 2010, NASDAQ OMX issued $1 billion of senior unsecured notes, or the Notes, and entered into a $950 million senior unsecured three-year credit facility. The credit facility provides for an unfunded $250 F-43 139443_020_Nasdaq_1-188.p149.pdf QC 163 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) million revolving credit commitment (including a swingline facility and letter of credit facility), a $350 million funded Tranche A term loan and a $350 million funded Tranche X term loan. NASDAQ OMX applied the net proceeds from the Notes, the $700 million funded Term Loans and cash on hand to repay all amounts outstanding under our senior secured credit facilities in place as of December 31, 2009 and related fees. As a result, NASDAQ OMX terminated the associated credit agreement. The Notes The Notes were issued at a discount in two separate series consisting of $400 million aggregate principal amount of 4.00% senior notes due 2015 and $600 million aggregate principal amount of 5.55% senior notes due 2020. As a result of the discount, the proceeds received from the issuance were less than the aggregate principal amounts. As of December 31, 2010, the balance of $398 million for the 4.00% senior notes due 2015 and the balance of $598 million for the 5.55% senior notes due 2020, reflects the aggregate principal amounts, less the unamortized debt discount. The unamortized debt discount will be accreted through interest expense over the life of the Notes. The 2015 Notes pay interest semiannually at a rate of 4.00% per annum until January 15, 2015, and the 2020 Notes pay interest semiannually at a rate of 5.55% per annum until January 15, 2020. The Notes are general unsecured obligations of ours and rank equally with all of our existing and future unsubordinated obligations. The Notes are not guaranteed by any of our subsidiaries. The Notes were issued under an indenture that, among other things, limits our ability to consolidate, merge or sell all or substantially all of our assets, create liens, and enter into sale and leaseback transactions. Credit Facility The credit facility provides for an unfunded $250 million revolving credit commitment (including a swingline facility and letter of credit facility), a $350 million funded Term Loan A and a $350 million funded Term Loan X. The loans under the credit facility have a variable interest rate based on either the London Interbank Offered Rate, or LIBOR, or the Federal Funds Rate, plus an applicable margin that varies with NASDAQ OMX’s debt rating. As required under our credit facility, we paid quarterly principal payments of $35 million on our Term Loans beginning in the third quarter of 2010. Total required payments were $70 million during 2010. In addition to the required quarterly payments, we made optional payments totaling $60 million of principal on our Term Loans during 2010. The credit facility contains financial and operating covenants. Financial covenants include an interest expense coverage ratio and a maximum leverage ratio. Operating covenants include limitations on NASDAQ OMX’s ability to incur additional indebtedness, grant liens on assets, enter into affiliate transactions and pay dividends. The credit facility also contains customary affirmative covenants, including access to financial statements, notice of defaults and certain other material events, maintenance of business and insurance, and events of default, including cross-defaults to our material indebtedness. NASDAQ OMX is permitted to repay borrowings under the credit facility at any time in whole or in part, without penalty. We also are required to repay loans outstanding under the credit facility with net cash proceeds from sales of property and assets of NASDAQ OMX and its subsidiaries (excluding inventory sales and other F-44 139443_020_Nasdaq_1-188.p150.pdf QC 164 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) sales in the ordinary course of business) and casualty and condemnation proceeds, in each case subject to specified exceptions and thresholds. Debt Issuance Costs We incurred debt issuance and other costs of $21 million in connection with the issuance of the Notes and the entry into the new credit facility. These costs, which are capitalized and included in other assets in the Consolidated Balance Sheets, are being amortized over the life of the debt obligations. Amortization expense, which is recorded as additional interest expense for these costs, was $5 million for the year ended December 31, 2010. Bridge Facility In December 2010, NASDAQ OMX entered into a $400 million senior unsecured bridge facility and borrowed $370 million to partially finance the purchase of our stock from Borse Dubai. See “Share Repurchase from Borse Dubai,” of Note 12, “NASDAQ OMX Stockholders’ Equity,” for further discussion of our share repurchase from Borse Dubai. We applied the net proceeds from the issuance of our 2018 notes, discussed below, and cash on hand to repay all amounts outstanding under the bridge facility and terminated the bridge facility as of December 31, 2010. The effective interest rate on borrowings under the bridge facility was 1.76%. Interest expense was immaterial for the year ended December 31, 2010. 5.25% Senior Unsecured Notes In December 2010, NASDAQ OMX issued $370 million of 5.25% senior unsecured notes due 2018. We applied the net proceeds from the 2018 Notes of $367 million and cash on hand of $3 million to repay all amounts outstanding under our bridge facility, discussed above, as well as related fees. The 2018 Notes were issued at a discount. As a result of the discount, the proceeds received from the issuance were less than the aggregate principal amount. As of December 31, 2010, the balance of $367 million reflects the aggregate principal amount, less the unamortized debt discount. The unamortized debt discount will be accreted though interest expense over the life of the 2018 Notes. The 2018 Notes pay interest semiannually at a rate of 5.25% per annum until January 16, 2018 and may vary with NASDAQ OMX’s debt rating up to a rate not to exceed 7.25%. The 2018 Notes are general unsecured obligations of ours and rank equally with all of our existing and future unsubordinated obligations. They are not guaranteed by any of our subsidiaries. The 2018 Notes were issued under indentures that among other things, limits our ability to consolidate, merge or sell all or substantially all of our assets, create liens, and enter into sale and leaseback transactions. In addition, upon a change of control triggering event (as defined in the indenture), the terms require us to repurchase all or part of each holder’s notes for cash equal to 101% of the aggregate principal amount purchased plus accrued and unpaid interest, if any. Debt Issuance Costs We incurred debt issuance and other costs of $3 million in connection with the issuance of the 2018 Notes. These costs, which are capitalized and included in other assets in the Consolidated Balance Sheets, are being amortized over the life of the debt obligation. Amortization expense, which is recorded as additional interest expense for these costs, was immaterial for the year ended December 31, 2010. F-45 139443_020_Nasdaq_1-188.p151.pdf QC 165 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Senior Secured Credit Facilities in Place as of December 31, 2009 In connection with the business combination with OMX AB, on February 27, 2008, NASDAQ OMX entered into a credit agreement which provided for up to $2,075 million of senior secured loans, which included (i) a five-year, $2,000 million senior secured term loan facility, or the Term Loan Facility, which consisted of (a) a $1,050 million term loan facility allocated to the OMX AB business combination, (b) a $650 million term loan facility allocated to the acquisition of PHLX, and (c) a $300 million term loan facility allocated to the Nord Pool transaction, and (ii) a five-year, $75 million senior secured revolving credit facility, with a letter of credit subfacility and swingline loan subfacility, or the Revolving Credit Facility, and together with the Term Loan Facility, the senior secured credit facilities in place as of December 31, 2009. The Revolving Credit Facility was undrawn as of December 31, 2009. In addition, NASDAQ OMX may have requested that prospective additional lenders under the senior secured credit facilities in place as of December 31, 2009 agree to make available incremental term loans and incremental revolving commitments from time to time in an aggregate amount not to exceed $200 million. In addition to financing the business combination with OMX AB, the acquisition of PHLX and the Nord Pool transaction, we used the debt financing under the senior secured credit facilities in place as of December 31, 2009 to pay fees and expenses incurred in connection with such transactions and repay certain indebtedness of OMX AB. In January 2010, NASDAQ OMX applied the net proceeds from the Notes, the $700 million funded Term Loans and cash on hand to repay all amounts outstanding under our senior secured credit facilities in place as of December 31, 2009 and related fees. As a result, NASDAQ OMX terminated the associated credit agreement. Borrowings under the senior secured credit facilities in place as of December 31, 2009 (other than swingline loans) bore interest at (i) the base rate (the higher of the prime rate announced by the Bank of America, N.A, and the federal funds effective rate plus 0.50%), plus an applicable margin, or (ii) the LIBO rate (set by the British Bankers Association LIBOR Rate), plus an applicable margin. The interest rate on swingline loans made under the senior secured credit facilities in place as of December 31, 2009 was the base rate, plus an applicable margin. NASDAQ OMX’s obligations under the senior secured credit facilities in place as of December 31, 2009 (i) were guaranteed by each of the existing and future direct and indirect material wholly-owned domestic subsidiaries of NASDAQ OMX, subject to certain exceptions, and (ii) were secured, subject to certain exceptions, by all the capital stock of each of our present and future subsidiaries (limited, in the case of foreign subsidiaries, to 65.0% of the voting stock of such subsidiaries) and all of the present and future property and assets (real and personal) of NASDAQ OMX and the guarantors. NASDAQ OMX was permitted to repay borrowings under the senior secured credit facilities in place as of December 31, 2009 at any time in whole or in part, without penalty. Principal Amortization Payment As required under our senior secured credit facilities in place as of December 31, 2009, during 2009, we repaid a principal amount of $225 million on our borrowings under the senior secured credit facilities in place as of December 31, 2009. Interest Rate Swaps Under the provisions of our senior secured credit facilities in place as of December 31, 2009, we were required to maintain approximately 30% of our debt structure on a fixed rate basis for two years from the date of F-46 139443_020_Nasdaq_1-188.p152.pdf QC 166 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) the credit agreement. As such, in August 2008, we entered into interest rate swap agreements that effectively converted $200 million of funds borrowed under our senior secured credit facilities in place as of December 31, 2009, which was floating rate debt, to a fixed rate basis through August 2011. The interest rate swaps were fixed to a base rate of 3.73% plus the current credit spread of 200 basis points as of December 31, 2009. The credit spread (not to exceed 200 basis points) was subject to change based upon the leverage ratio in accordance with the senior secured credit facilities in place as of December 31, 2009. In connection with the repayment of these senior secured credit facilities in place as of December 31, 2009 in January 2010, we terminated our interest rate swaps. See “Cash Flow Hedges,” of Note 15, “Derivative Financial Instruments and Hedging Activities,” for further discussion. Debt Issuance Costs In 2008, in conjunction with our senior secured credit facilities in place as of December 31, 2009, we incurred debt issuance costs of $44 million. These costs, which were capitalized and included in other assets in the Consolidated Balance Sheets, were being amortized over the life of the debt obligation. Amortization expense, which was recorded as additional interest expense for these costs, was $9 million for the year ended December 31, 2009 and $7 million for the year ended December 31, 2008. In January 2010, as a result of the repayment of our senior secured credit facilities in place as of December 31, 2009, we recorded a pre-tax charge of $40 million, which included the write-off of the remaining unamortized balance of debt issuance costs incurred of $28 million, costs to terminate our float-to-fixed interest rate swaps previously designated as a cash flow hedge of $9 million and other costs of $3 million. These charges are included in general, administrative and other expense in the Consolidated Statements of Income for the year ended December 31, 2010. Other Credit Facilities In addition to the $250 million revolving credit commitment discussed above, we have credit facilities related to our clearinghouses in order to meet liquidity and regulatory requirements. These credit facilities, which are available in multiple currencies, primarily Swedish Krona and U.S. dollar, totaled $440 million ($196 million in available liquidity and $244 million to satisfy regulatory requirements), none of which was utilized at December 31, 2010. At December 31, 2009, these facilities totaled $417 million ($185 million in available liquidity which can be pledged as collateral and $232 million to satisfy regulatory requirements), none of which was utilized. Debt Covenants At December 31, 2010, we were in compliance with the covenants of all of our debt obligations. F-47 139443_020_Nasdaq_1-188.p153.pdf QC 167 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) 9. Income Taxes The income tax provision consists of the following amounts: Current income taxes: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2010 2009 2008 (in millions) $116 36 20 172 $ 96 $ 220 49 36 32 10 138 305 Deferred income taxes: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25) (26) 16 (35) (26) 8 8 (10) (61) (14) (32) (107) Total income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $137 $128 $ 198 U.S. federal taxes have not been provided on undistributed earnings of certain non-U.S. subsidiaries to the extent such earnings will be reinvested abroad for an indefinite period of time. At December 31, 2010, the cumulative amount of undistributed earnings in these subsidiaries is approximately $70 million. We have the intent and ability to indefinitely reinvest the undistributed earnings of our non-U.S. subsidiaries. A reconciliation of the income tax provision, based on the U.S. federal statutory rate, to our actual income tax provision for the years ended December 31, 2010, 2009 and 2008 is as follows: Year Ended December 31, 2010 2009 2008 Federal income tax provision at the statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . State income tax provision, net of federal effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign income tax provision at a rate different than the federal rate . . . . . . . . . . . . Foreign asset impairment loss, not deductible for tax purposes . . . . . . . . . . . . . . . . — Earnings from foreign affiliates, not subject to tax . . . . . . . . . . . . . . . . . . . . . . . . . . Nondeductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in deferred taxes due to change in tax rate(1) . . . . . . . . . . . . . . . . . . . . . . . . Excess capital loss carry back(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in millions) 35.0% 35.0% 35.0% 4.2% 4.5% 6.6% (3.2)% (3.6)% (3.3)% 1.9% — (3.5)% (4.8)% — 0.3% (3.0)% — (2.4)% — (1.4)% (3.3)% 2.8% 0.2% — — 0.3% Actual income tax provision(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.0% 32.7% 38.6% (1) The lower effective tax rate in 2010 when compared to 2009 was primarily due to the restructuring of certain NASDAQ OMX subsidiaries. These transactions resulted in one-time reductions in deferred tax liabilities due to a revised effective tax rate and a one-time tax deduction for a capital loss. F-48 139443_020_Nasdaq_1-188.p154.pdf QC 168 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) The temporary differences, which give rise to our deferred tax assets and (liabilities), consisted of the following: Deferred tax assets: Deferred revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. federal net operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign net operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State net operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess capital loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities: Amortization of software development costs and depreciation . . . . . . . . . . . . . . . . . . . Amortization of acquired intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adoption of ASC 470.20, net of accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax liabilities before valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2010 2009 (in millions) $ 28 20 104 1 77 — 155 8 5 64 15 477 (25) (653) (19) (27) (724) (247) (31) $ 31 4 129 4 68 55 253 18 5 — 14 581 (24) (644) (24) (14) (706) (125) (52) Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (278) $ (177) A valuation allowance has been established with regards to the tax benefits associated with certain net operating losses, as it is more likely than not that these losses will not be realized in the future. The U.S. federal net operating loss of $20 million, which includes $14 million related to the acquisition of FTEN in December 2010 and $6 million related to subsidiaries of OMX that are not included in our U.S. federal consolidated income tax return, will expire in years 2022-2030. Of the $104 million foreign net operating loss, $17 million will expire in years 2018-2025 and $87 million has no expiration date. The $1 million state net operating loss will expire in years 2013-2029. The excess capital loss of $64 million will be offset against capital gains realized in 2007. The following represents the domestic and foreign components of income before income tax provision: Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 393 133 Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (in millions) $ 325 66 Income before income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 526 $ 391 $ 448 65 $ 513 Year Ended December 31, 2010 2009 2008 F-49 139443_020_Nasdaq_1-188.p155.pdf QC 169 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) In 2010, 2009 and 2008, we recorded income tax benefits of $2 million, $4 million and $5 million, respectively, primarily related to employee stock option exercises. These amounts were recorded as additional paid-in-capital in the Consolidated Balance Sheets. We are subject to examination by federal, state and local, and foreign tax authorities. We regularly assess the likelihood of additional assessments by each jurisdiction and have established tax reserves that we believe are adequate in relation to the potential for additional assessments. We believe that the resolution of tax matters will not have a material effect on our financial condition but may be material to our operating results for a particular period and upon the effective tax rate for that period. As of December 31, 2010, we had $12 million of unrecognized benefits, of which $8 million would affect our effective tax rate if recognized. As of December 31, 2009, we had $11 million of unrecognized benefits, of which $6 million would affect our effective tax rate if recognized. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions as a result of tax positions taken in prior periods . . . . . . . . . . . . . . . . . . Additions as a result of tax positions taken in the current period . . . . . . . . . . . . . . Reductions due to the settlement from tax authorities . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2010 2009 (in millions) $ $ 11 1 2 (2) 9 1 3 (2) Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12 $ 11 Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. As of December 31, 2010, we had accrued $4 million for interest and penalties, net of tax effect. As of December 31, 2009, we had accrued $2 million for interest and penalties, net of tax effect. NASDAQ OMX and its eligible subsidiaries file a consolidated U.S. federal income tax return and applicable state and local income tax returns and non-U.S. income tax returns. Federal income tax returns for the years 2007 through 2009 are subject to examination by the Internal Revenue Service. Several state tax returns are currently under examination by the respective tax authorities for the years 2000 through 2008 and we are subject to examination for 2009. Non-U.S. tax returns are subject to review by the respective tax authorities for the years 2003 through 2009. In August 2010, we paid the state of California $2 million with respect to audits for the years 1996 through 1998 and the years 2000 through 2006. Since this amount was included in our unrecognized tax benefits as of December 31, 2009, such payment does not affect our 2010 effective tax rate. The outcome of these audits did not have a material impact on our financial position or results of operations. We anticipate that the amount of unrecognized tax benefits at December 31, 2010 will significantly decrease in the next twelve months as we expect to settle certain tax audits. The final outcome of such audits cannot yet be determined. We anticipate that such adjustments will not have a material impact on our consolidated financial position or results of operations. In the fourth quarter of 2010, we received an appeal from the Finnish Tax Authority in which such authority challenges certain interest expense deductions claimed by NASDAQ OMX in Finland for the years 2009 and 2008. NASDAQ OMX’s tax return position with respect to this deduction was previously reviewed and approved by the Finnish Tax Authority. The appeal also demands certain penalties be paid with regards to such tax return F-50 139443_020_Nasdaq_1-188.p156.pdf QC 170 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) filing position. If the Finnish Tax Authority prevails in their challenge, additional tax and penalties for such years would total approximately $10 million. We expect the Finnish Tax Authority to agree with our position once its review is completed and, as such, it is unlikely NASDSAQ OMX will be assessed any additional tax and penalties. Through December 31, 2010, we have recorded the tax benefits associated with such filing position. In June 2009, NASDAQ OMX filed an application for an advance tax ruling with the Swedish Tax Council for Advance Tax Rulings. The application was filed to confirm whether certain interest expense is deductible for Swedish tax purposes under legislation that became effective on January 1, 2009. In June 2010, we received a favorable response from the Swedish Tax Council for Advance Tax Rulings in which all members of the Council agreed that such interest expense is deductible for Swedish tax purposes. The Swedish Tax Agency has recently appealed such ruling to the Swedish Supreme Administrative Court. We expect the Swedish Supreme Administrative Court to agree with the ruling from the Swedish Tax Council for Advance Tax Rulings. For the year ended December 31, 2010, we recorded a tax benefit of $18 million, or $0.09 per diluted share, related to this matter. Since January 1, 2009, we have recorded a tax benefit of $37 million, or $0.18 per diluted share, related to this matter. 10. Employee Benefits U.S. Defined-Benefit Pension and Supplemental Executive Retirement Plans We maintain non-contributory, defined-benefit pension plans, non-qualified supplemental executive retirement plans, or SERPs, for certain senior executives and post-retirement benefit plans for eligible employees in the U.S., collectively referred to as the NASDAQ OMX Benefit Plans. Our pension plans and SERPs are frozen. Future service and salary for all participants do not count toward an accrual of benefits under the pension plans and SERPs. Components of Net Periodic Benefit Cost The following table sets forth the components of net periodic pension, SERP and post-retirement benefits costs from the NASDAQ OMX Benefit Plans recognized in compensation and benefits expense in the Consolidated Statements of Income: Components of net periodic benefit cost Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recognized net actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlement loss recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Curtailment gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2010 2009 2008(1) (in millions) $ — $ — $ 7 (5) 3 1 7 (4) (2) 1 — — 1 4 (3) — — (1) Benefit cost (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6 $ 2 $ 1 (1) The NASDAQ OMX PHLX benefit costs are from the date of acquisition. F-51 139443_020_Nasdaq_1-188.p157.pdf QC 171 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Benefit Obligations and Funded Status The following table provides a reconciliation of the changes in the benefit obligation, the plan assets and the funded status of the NASDAQ OMX Benefit Plans. 2010 Post- retirement Pension SERP 2009 Post- retirement Total Total Pension SERP (in millions) Change in benefit obligation Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . Actuarial losses (gains) . . . . . . . . . . . . . . — Benefits paid . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . Loss due to change in discount rate . . . . $ 77 4 $ 29 2 — (2) (2) (3) — 7 1 Benefit obligation at end of year . . . . . 83 30 Change in plan assets Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . Company contributions . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . Fair value of plan assets at end of 58 — 4 — 5 (2) (3) — 2 (2) year . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 — $ 9 1 1 — — 1 12 — — — — — — $115 7 1 (4) (3) 9 125 $ 29 2 (3) (2) $ 61 4 1 (1) (3) — 15 3 77 29 $ 10 1 (3) — — 1 9 $100 7 (5) (3) (3) 19 115 58 4 7 (4) (3) 43 — 10 — 9 (1) (3) — 2 (2) 62 58 — — — — — — — 43 10 11 (3) (3) 58 Underfunded status of the plans . . . . . Accumulated benefit obligation . . . . . . (21) $ 83 (30) $ 30 (12) $ 12 (63) $125 (19) $ 77 (29) $ 29 (9) 9 $ (57) $115 The total underfunded status of the NASDAQ OMX Benefit Plans of $63 million at December 31, 2010 and $57 million at December 31, 2009 is included in other liabilities and accrued personnel costs in the Consolidated Balance Sheets. No plan assets are expected to be returned to us during the year ending December 31, 2011. Actuarial Assumptions The following tables provide the weighted-average actuarial assumptions for the NASDAQ OMX Benefit Plans. Weighted-average assumptions used to determine benefit obligations at the end of the fiscal year: 2010 2009 Discount rate: Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SERP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Post-retirement 5.25% 5.75% 5.25% 5.75% 5.25% 5.75% Rate of compensation increase: Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SERP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Post-retirement N/A N/A N/A N/A N/A N/A F-52 139443_020_Nasdaq_1-188.p158.pdf QC 172 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Weighted-average assumptions used to determine net benefit cost for the fiscal year: 2010 2009 2008 Discount rate: Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SERP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Post-retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.75% 7.00% 6.10% 5.75% 7.00% 6.10% 5.75% 7.00% 6.00% Rate of compensation increase: Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SERP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Post-retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A N/A N/A N/A N/A N/A N/A N/A N/A Expected return on plan assets: Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SERP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Post-retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.00% 8.00% 8.40% N/A N/A N/A N/A N/A N/A N/A—Not applicable The assumptions above are used to develop the benefit obligations at fiscal year-end and to develop the net periodic benefit cost for the subsequent fiscal year. Therefore, the assumptions used to determine benefit obligations were established at each year-end while the assumptions used to determine net periodic benefit cost for each year are established at the end of each previous year. The net periodic benefit obligations and the net periodic benefit cost are based on actuarial assumptions that are reviewed on an annual basis. We revise these assumptions based on an annual evaluation of long-term trends, as well as market conditions, which may have an impact on the cost of providing retirement benefits. For 2011, the weighted-average assumed healthcare cost trend rate used for post-retirement measurement purposes for the NASDAQ OMX Benefit Plans is 10% prior to age 65 and 5.5% to 10% after age 65. A one percent increase or decrease in the assumed healthcare cost trend would have an immaterial effect on the post- retirement service and interest cost and post-retirement benefit obligation for both plans. Plan Assets of the NASDAQ OMX Benefit Plans NASDAQ OMX’s Pension and 401(k) Committee has oversight responsibility for the plan assets of the NASDAQ OMX Benefit Plans. The investment policy and strategy of the plan assets, which was adopted by NASDAQ OMX’s Pension and 401(k) Committee, is to provide for preservation of principal, both in nominal and real terms, in order to meet the long-term spending needs of the NASDAQ OMX Benefit Plans. We invest in securities per the target allocations stated below. Target allocations for plan assets as of December 31, 2010 were as follows: Mutual funds(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment strategies and cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75% 10% 15% 100% Target Allocation (1) Securities are held in a broad array of asset classes. F-53 139443_020_Nasdaq_1-188.p159.pdf QC 173 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Asset allocations are reviewed quarterly and adjusted, as appropriate, to remain within target allocations. The investment policy is reviewed on an annual basis, under the advisement of an investment consultant, to determine if the policy or asset allocation targets should be changed. The fair value of the plan assets for the NASDAQ OMX Benefit Plans at December 31, 2010, by asset category and fair value hierarchy, are as follows: Total Benefit Plan Assets as of December 31, 2010 Fair Value Measurements(1) (Level 1) (Level 2) (Level 3) (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mutual funds(2) U.S. equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment strategies and cash(3) Total benefit plan assets . . . . . . . . . . . . . . . . . . . . . . . . $ 47 6 9 $ 62 $ 47 6 3 $ 56 $ — $ — — — — 6 $ 6 $ — (1) (2) (3) See Note 14, “Fair Value of Financial Instruments,” for further discussion of fair value measurements. Securities are held in various classes of domestic, international and emerging market equity and fixed- income securities. Includes cash and multi-strategy hedge funds. Securities held in multi-strategy hedge funds are held in multiple asset classes and include investments in equity and fixed-income securities, arbitrage investments, and futures. The expected rate of return on plan assets for the NASDAQ OMX Benefit Plans represents our long-term assessment of return expectations which may change based on significant shifts in economic and financial market conditions. The long-term rate of return on plan assets is derived from return assumptions determined based on asset classes held and weighted based on the current target allocation for each class. Over the long-term, our investments in bond mutual funds are expected to return between 1% and 6%, investments in equity mutual funds are expected to return between 4% and 10%, investments in U.S. equity securities are expected to return between 5% to 10% and other investment strategies are anticipated to yield between 6% and 7%. While we considered the NASDAQ OMX Benefit Plans recent performance and other economic growth and inflation factors, which are supported by long-term historical data, the return expectations for each of these asset categories represents a long-term prospective return. Based on historical experience, the committee expects that the plans’ asset managers overall will provide a modest (1% per annum) premium to their respective market benchmark indexes. Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (loss), as of December 31, 2010, consisted of the following amounts that have yet to be recognized in net periodic benefit costs for the NASDAQ OMX Benefit Plans: Unrecognized net actuarial gain/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax (expense)/benefit $ (27) 11 Employee benefit plan adjustments, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . $ (16) (in millions) $ (4) 2 $ (2) $ — — $ — $ (31) 13 $ (18) Pension SERP Post- retirement Total F-54 139443_020_Nasdaq_1-188.p160.pdf QC 174 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Estimated Future Benefit Payments We expect to make the following benefit payments to participants in the next ten fiscal years for the NASDAQ OMX Benefit Plans: Fiscal year ended: 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 through 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension SERP Post- retirement Total (in millions) $ 4 3 3 3 3 23 $ 39 $ 2 2 10 2 3 9 $ 28 $ — $ 1 1 1 1 3 7 $ 7 5 14 6 7 35 $ 74 Non—U.S. Benefit Plans Most employees outside the U.S. are covered by local retirement plans or by applicable social laws. Benefits under social laws are generally expensed in the periods in which the costs are incurred. These costs are included in compensation and benefits expense in the Consolidated Statements of Income and were $13 million in 2010, $14 million in 2009 and $16 million in 2008. In 2008, as part of the acquisition of Nord Pool’s derivatives clearing, and consulting subsidiaries, we assumed the obligation for several pension plans providing benefits for their employees. Employees covered under these pension plans are entitled to defined future pension benefits based on the number of years of employment and pay at retirement age. The measurement date of the plan obligations is December 31. The projected benefit obligation was $14 million at December 31, 2010 and $10 million at December 31, 2009. The fair value of the plan assets was $6 million at December 31, 2010 and $5 million at December 31, 2009. The underfunded status of the plans was $8 million at December 31, 2010 and $5 million at December 31, 2009 and was included in other liabilities in the Consolidated Balance Sheets. The benefit cost for these plans was $1 million in 2010, $3 million in 2009 and immaterial in 2008. Defined Contribution Savings Plan We sponsor a voluntary defined contribution savings plan, or 401(k) Plan, for U.S. employees. Employees are immediately eligible to make contributions to the plan and are also eligible for an employer contribution match at an amount equal to 100.0% of the first 4.0% of eligible employee contributions. Savings plan expense included in compensation and benefits expense in the Consolidated Statements of Income was $4 million in 2010, 2009 and 2008. We have a profit-sharing contribution feature to our 401(k) plan which allows eligible U.S. employees to receive employer retirement contributions, or ERCs, when we meet our annual corporate goals. In addition, we have a supplemental ERC for select highly compensated employees whose ERCs are limited by the annual Internal Revenue Service compensation limit. ERC expense recorded in compensation and benefits expense in the Consolidated Statements of Income was $4 million in 2010, 2009 and 2008. F-55 139443_020_Nasdaq_1-188.p161.pdf QC 175 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Employee Stock Purchase Plan We have an ESPP under which approximately 3.9 million shares of our common stock have been reserved for future issuance as of December 31, 2010. Our ESPP allows eligible U.S. and non-U.S. employees to purchase a limited number of shares of our common stock at six-month intervals, called offering periods, at 85.0% of the lower of the fair market value on the first or the last day of each offering period. The 15.0% discount given to our employees is included in compensation and benefits expense in the Consolidated Statements of Income. Under our ESPP, employees may purchase shares having a value not exceeding 10.0% of their annual compensation, subject to applicable annual Internal Revenue Service limitations. During 2010, employees purchased 242,865 shares at a weighted-average price of $15.08, during 2009, employees purchased 201,559 shares at a weighted-average price of $17.68 and during 2008, employees purchased 112,852 shares at a weighted-average price of $22.01 under the ESPP. We recorded compensation expense of $0.8 million for the year ended December 31, 2010, $0.6 million for the year ended December 31, 2009 and $0.4 million for the year ended December 31, 2008 for the 15.0% discount that is given to our employees. 11. Share-Based Compensation We have a share-based compensation program that provides our board of directors broad discretion in creating employee equity incentives. Share-based awards, or equity awards, include employee stock options, restricted stock (which includes awards and units) and PSUs. Grants of equity awards are designed to reward employees for their long-term contributions and provide incentives for them to remain with us. For accounting purposes, we consider PSUs to be a form of restricted stock. Restricted stock is generally time-based and vests over two to five-year periods beginning on the date of the grant. Stock options are also generally time-based and expire ten years from the grant date. Stock option awards granted prior to January 1, 2005 generally vested 33% on each annual anniversary of the grant date over three years. Stock option and restricted stock awards granted after January 1, 2005 generally include performance-based accelerated vesting features based on achievement of specific levels of corporate performance. If NASDAQ OMX exceeds the applicable performance parameters, the grants vest on the third anniversary of the grant date, if NASDAQ OMX meets the applicable performance parameters, the grants vest on the fourth anniversary of the grant date, and if NASDAQ OMX does not meet the applicable performance parameters, the grants vest on the fifth anniversary of the grant date. PSUs are based on performance measures that impact the amount of shares that each recipient will receive upon vesting. PSUs are granted at the fair market value of our stock on the grant date and compensation cost is recognized over the performance period and, in certain cases, an additional vesting period. For each grant of PSUs, an employee may receive from 0% to 150% of the target amount granted, depending on the achievement of performance measures. We report the target number of PSUs granted, unless we have determined that it is more likely than not, based on the actual achievement of performance measures, that an employee will receive a different amount of shares underlying the PSUs, in which case we report the amount of shares the employee is likely to receive. Stock Option Exchange Program In May 2010, NASDAQ OMX shareholders approved a proposal to allow for a one-time voluntary stock option exchange program, designed to provide eligible employees an opportunity to exchange some or all of their eligible underwater stock options for a lesser amount of replacement stock options to be granted with a lower exercise price and a longer vesting period. Participants in the program were entitled to receive one replacement F-56 139443_020_Nasdaq_1-188.p162.pdf QC 176 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) option for each 1.4 eligible options exchanged. Stock options eligible for the exchange were granted on or after January 1, 2006 and on or before June 30, 2008 with an exercise price greater than $30.00. The program commenced on July 7, 2010 and expired on August 3, 2010. A total of 0.8 million eligible stock options were tendered by employees, representing 90% of the total stock options eligible for exchange. On August 3, 2010, we granted 0.6 million new replacement stock options with an exercise price of $20.04, which was equal to the closing price of our common stock on that date. The replacement options are subject to a new vesting schedule and will vest in three equal annual installments on August 3, 2011, August 3, 2012 and August 3, 2013 and have a term of seven years. No incremental stock option expense was recognized for the replacement options as the fair value of the replacement options did not exceed the fair value of the exchanged options. Summary of 2010 Equity Awards In March 2010, we granted non-qualified stock options and/or restricted stock to most active employees. Both the stock options and restricted stock granted included a performance-based accelerated vesting feature based on achievement of specific levels of corporate performance, as described above. In 2010, we achieved the applicable performance parameters, and therefore, we will continue to expense the grant over the four-year vesting period. In 2010, certain executive officers received grants of 629,743 PSUs. Of these PSUs granted, 80,000 units are subject to a three year performance period and vest at the end of the period. The remaining 549,743 units are subject to a one year performance period and generally will vest ratably on an annual basis on December 31, 2011 through December 31, 2013. During 2010, certain grants exceeded the applicable performance parameters for the one year performance PSUs. As a result, an additional 19,142 units were considered granted in February 2011. See “Summary of Stock Option Activity” and “Summary of Restricted Stock and PSU Activity” below for further discussion. Summary of 2009 Equity Awards In 2009, certain executive officers received grants of 105,641 PSUs. Of these PSUs granted, 80,000 units are subject to a three year performance period and vest at the end of the period. The remaining 25,641 units were subject to a one year performance period and will vest ratably on an annual basis on December 31, 2010 through December 31, 2012. During 2009, we exceeded the applicable performance parameters for the one year performance PSUs. As a result, an additional 12,308 units were considered granted in February 2010. Also in 2009, certain executive officers received grants of 972,319 non-qualified stock options that expire ten years from the grant date. Of these options granted, 900,000 will vest 50% on December 31, 2011 and 50% on December 31, 2012 and are not subject to any performance measures. The remaining 72,319 options granted will vest 100% on the fourth anniversary of the grant date and include a performance based accelerated vesting feature based on us achieving specific levels of performance, as described above. In 2009, we achieved the applicable performance parameters, and therefore, we will continue to expense the grant over the four-year vesting period. Additionally, certain executive officers received grants of restricted stock of 725,000 in 2009. Of these grants, 675,000 will vest 30% on the second anniversary of the grant date and 70% on the third anniversary of the grant date. The remaining 50,000 grants of restricted stock will vest on March 31, 2012. F-57 139443_020_Nasdaq_1-188.p163.pdf QC 177 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Summary of 2008 Equity Awards In December 2008, we granted non-qualified stock options and/or restricted stock to most active employees. Both the stock options and restricted stock granted included a performance based accelerated vesting feature based on us achieving specific levels of performance, as described above. In 2009, we achieved the applicable performance parameters, and therefore, we will continue to expense the grant over the four-year vesting period. In December 2008, certain executive officers and a select group of non-officer employees also received grants of 244,034 PSUs. These PSUs were subject to a one year performance period and will vest three years after the end of the performance period. During 2009, we exceeded the applicable performance parameters and as a result, an additional 72,277 units were considered granted in February 2010. Also in 2008, certain executive officers received grants of 120,896 PSUs. Of these PSUs granted, 80,000 units are subject to a three year performance period and vest at the end of the period. The remaining 40,896 units were subject to a one year performance period and vest three years after the end of the performance period. During 2008, we exceeded the applicable performance parameters for the one year performance PSUs and determined that it would be more likely than not that the target performance levels will be exceeded for the three year performance PSUs. As a result, an additional 60,449 units were considered granted. However, in February 2011, it was determined that we did not exceed the applicable performance parameters for the three year performance PSUs and therefore only 53,333 PSUs were considered granted and ultimately vested. Common Shares Available Under Our Equity Incentive Plan As of December 31, 2010, we had approximately 8.4 million shares of common stock authorized for future issuance under our equity incentive plan. Summary of Share-Based Compensation Expense The following table shows the total share-based compensation expense resulting from equity awards and the 15.0% discount for the ESPP for the years ended December 31, 2010, 2009 and 2008 in the Consolidated Statements of Income: Share-based compensation expense before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33 (13) (in millions) $ 35 (14) Total share-based compensation expense after income taxes . . . . . . . . . . . . . . . . . . . . . . $ 20 $ 21 $ 26 (10) $ 16 Year Ended December 31, 2010 2009 2008 We estimated the fair value of stock option awards using the Black-Scholes valuation model with the following weighted-average assumptions: Year Ended December 31, 2010 2009 2008 Expected life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average risk free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average fair value at grant date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-58 5 5 5 2.03% 2.52% 1.63% 32.0% 36.0% 35.5% — $ 6.30 — $ 9.17 — $ 7.40 139443_020_Nasdaq_1-188.p164.pdf QC 178 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Our computation of expected life is based on historical exercise patterns. The interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. Our computation of expected volatility is based on a combination of historical and market-based implied volatility. Our credit facilities limit our ability to pay dividends. Before our credit facilities were in place, it was not our policy to declare or pay cash dividends on our common stock. Summary of Stock Option Activity A summary of stock option activity for the years ended December 31, 2010, 2009 and 2008 is as follows: Stock Options Outstanding Outstanding at January 1, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeitures or expirations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeitures or expirations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Grants(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeitures or expirations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock option exchange program(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number Outstanding 9,998,114 1,686,839 (712,860) (245,188) 10,726,905 1,018,155 (814,575) (723,614) 10,206,871 1,855,979 (708,731) (395,148) (846,129) Outstanding at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,112,842 Weighted- Average Exercise Price Per Share $16.25 27.48 8.96 31.43 $18.08 21.13 7.93 32.32 $18.18 19.87 9.23 29.87 38.96 $16.92 (1) Primarily reflects our company wide equity grant issued in March 2010, which included a performance- based accelerated vesting feature based on achievement of specific levels of corporate performance, as described above, and issuance of replacement stock options resulting from our stock option exchange program. See “Stock Option Exchange Program” above for further discussion. (2) Represents stock options tendered in our stock option exchange program. See “Stock Option Exchange Program” above for further discussion. We received net cash proceeds of $7 million from the exercise of approximately 0.7 million stock options for the year ended December 31, 2010, received net cash proceeds of $6 million from the exercise of approximately 0.8 million stock options for the year ended December 31, 2009, and received net cash proceeds of $7 million from the exercise of approximately 0.7 million stock options for the year ended December 31, 2008. We present excess tax benefits from the exercise of stock options, if any, as financing cash flows. F-59 139443_020_Nasdaq_1-188.p165.pdf QC 179 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) The following table summarizes significant ranges of outstanding and exercisable stock options as of December 31, 2010: Weighted- Average Remaining Contractual Life- Outstanding (in years) Weighted- Average Exercise Price Per Share Aggregate Intrinsic Value (in millions) Range of Exercise Prices Number Outstanding $ 5.28 - $ 7.34 . . . . . 1,911,250 $ 7.35 - $ 8.34 . . . . . 1,758,869 910,306 $ 8.35 - $10.24 . . . . 249,918 $10.25 - $14.49 . . . . $14.50 - $19.69 . . . . 125,834 $19.70 - $25.01 . . . . 2,744,005 $25.02 - $30.09 . . . . 1,022,494 $30.10 - $35.91 . . . . 12,561 $35.92 - $38.99 . . . . 1,185,178 55,556 $39.00 - $42.28 . . . . 136,871 $42.29 - $48.81 . . . . Total . . . . . . . . . . . . 10,112,842 2.3 4.1 3.1 0.7 8.4 9.0 8.0 6.3 6.1 6.5 7.1 5.7 $ 5.92 $ 7.36 $ 8.84 $13.00 $19.12 $20.38 $25.22 $31.74 $35.93 $40.83 $45.38 $16.92 Weighted- Average Remaining Contractual Life- Exercisable (in years) Weighted- Average Exercise Price Per Share Aggregate Intrinsic Value (in millions) 2.3 4.1 3.1 0.7 5.3 3.6 6.5 6.1 6.1 5.3 7.1 3.7 $ 5.92 $ 7.36 $ 8.84 $13.00 $17.80 $20.84 $26.88 $31.64 $35.94 $41.40 $45.38 $13.19 $ 34 29 13 3 — — — — — — — $ 79 Number Exercisable 1,911,250 1,758,869 910,240 249,918 17,448 67,263 62,080 9,781 945,178 23,294 136,806 $ 34 29 13 3 1 9 — — — — — $ 89 6,092,127 The aggregate intrinsic value in the above table represents the total pre-tax intrinsic value (i.e., the difference between our closing stock price on December 31, 2010 of $23.73 and the exercise price, times the number of shares) based on stock options with an exercise price less than NASDAQ OMX’s closing price of $23.73 as of December 31, 2010, which would have been received by the option holders had the option holders exercised their stock options on that date. This amount changes based on the fair market value of our common stock. The total number of in-the-money stock options exercisable as of December 31, 2010 was 4.9 million. As of December 31, 2009, 6.8 million outstanding stock options were exercisable and the weighted-average exercise price was $12.56. Total fair value of stock options vested was $5 million for the year ended December 31, 2010 and $12 million for the year ended December 31, 2009. The total pre-tax intrinsic value of stock options exercised was $8 million during 2010, $10 million during 2009 and $16 million during 2008. At December 31, 2010, $14 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 1.7 years. F-60 139443_020_Nasdaq_1-188.p166.pdf QC 180 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Summary of Restricted Stock and PSU Activity The following table summarizes our restricted stock and PSU activity for the years ended December 31, 2010, 2009 and 2008: Unvested balances at January 1, 2008 . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unvested balances at December 31, 2008 . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unvested balances at December 31, 2009 . . . . . . . . Granted(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted Stock 994,723 1,158,875 (164,507) (104,619) 1,884,472 861,919 (260,721) (276,922) 2,208,748 1,223,921 (459,759) (213,819) Unvested balances at December 31, 2010 . . . . . . . . 2,759,091 Weighted Average Grant Date Fair Value $37.23 27.36 23.75 38.70 $32.23 20.79 34.27 32.53 $27.48 19.80 39.89 26.87 $22.00 PSUs 181,152 455,955(1) — (5,139) 631,968 105,641 — (184,927) 552,682 714,328 (120,000) (48,381) 1,098,629 Weighted Average Grant Date Fair Value $37.31 32.60 — 41.36 $33.87 22.77 — 34.37 $31.59 20.31 33.19 27.79 $24.25 (1) This amount includes 91,025 additional PSUs for which we determined that performance measures will more likely than not be achieved. (2) Restricted stock grants in 2010 primarily reflect our company wide grant issued in March 2010, which included a performance- based accelerated vesting feature based on achievement of specific levels of corporate performance, as described above. At December 31, 2010, $38 million of total unrecognized compensation cost related to restricted stock and PSUs is expected to be recognized over a weighted-average period of 1.7 years. 12. NASDAQ OMX Stockholders’ Equity Common Stock At December 31, 2010, 300,000,000 shares of our common stock were authorized, 213,370,086 shares were issued and 175,782,683 shares were outstanding. The holders of common stock are entitled to one vote per share, except that our certificate of incorporation limits the ability of any person to vote in excess of 5.0% of the then- outstanding shares of NASDAQ OMX common stock. This limitation does not apply to persons exempted from this limitation by our board of directors prior to the time such person owns more than 5.0% of the then- outstanding shares of NASDAQ OMX common stock. In 2008, we issued 60,561,515 shares of common stock to Borse Dubai and a trust for Borse Dubai’s economic benefit in connection with the OMX AB business combination. In December 2010, we purchased 22,781,000 shares of our stock from Borse Dubai. See “Share Repurchase from Borse Dubai” below for further discussion. In addition, Borse Dubai agreed to sell in a private transaction 8,000,000 shares of our stock to Nomura International plc. Nomura International plc agreed, under a forward sale agreement, to sell these 8,000,000 shares to Investor AB. As a result of the settlement of this forward sale agreement, Investor AB’s ownership in NASDAQ OMX increased to 17,004,142 shares. As of December 31, 2010, Borse Dubai and a trust F-61 139443_020_Nasdaq_1-188.p167.pdf QC 181 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) for Borse Dubai’s economic benefit held 29,780,515 shares of our common stock. In addition, as of December 31, 2010, SLP held 10,539,614 shares of our common stock, and subsequently sold these shares in February 2011. Investor AB purchased 1,000,000 of the shares sold by SLP and currently owns 18,004,142 shares of our common stock. Common Stock in Treasury, at Cost We account for the purchase of treasury stock under the cost method with the shares of stock repurchased reflected as a reduction to NASDAQ OMX stockholders’ equity and included in common stock in treasury, at cost in the Consolidated Balance Sheets. When treasury shares are reissued, they are recorded at the average cost of the treasury shares acquired. As of December 31, 2010, we held 37,587,403 shares of common stock in treasury and held 327,722 shares as of December 31, 2009. The increase during the year ended December 31, 2010 was primarily due to our share repurchase program. See “Share Repurchase Program” below for further discussion. Share Repurchase from Borse Dubai In December 2010, we purchased 22,781,000 shares of common stock from Borse Dubai for $21.82 per share for an aggregate purchase price of approximately $497 million. We entered into a $400 million senior unsecured bridge facility, of which proceeds of $370 million were utilized to partially finance the purchase of common stock from Borse Dubai. See “Bridge Facility,” of Note 8, “Debt Obligations,” for further discussion. This transaction expanded, accelerated and completed the purchase of our shares pursuant to our previously announced share repurchase program. See “Share Repurchase Program” below for further discussion of our share repurchase program. Share Repurchase Program On March 2, 2010, we announced that our board of directors had approved a share repurchase program authorizing NASDAQ OMX to repurchase in the aggregate up to $300 million of our outstanding common stock. In July 2010, our board of directors authorized a repurchase of up to an additional $100 million of our outstanding common stock under the share repurchase program and in October 2010 authorized a repurchase of up to an additional $150 million shares bringing the total authorized amount to $550 million of our outstanding common stock. Prior to our share repurchase from Borse Dubai, discussed above, we had repurchased 15,050,647 shares of our common stock at an average price of $19.95, with an aggregate purchase price of $300 million. The share repurchase from Borse Dubai expanded, accelerated and completed this share repurchase program. The shares repurchased under the share repurchase program and from Borse Dubai are available for general corporate purposes. Purchases by NASDAQ OMX under this program were made from time to time at prevailing market prices in open market purchases, privately-negotiated transactions, block purchase techniques or otherwise, as determined by our management. These purchases were funded from existing cash balances. The share repurchase program did not obligate us to acquire any particular amount of common stock. The timing, frequency and amount of repurchase activity depended on a variety of factors, such as levels of cash generation from operations, cash requirements for investments in our businesses, current stock price, market conditions and other factors. Other Repurchases of Common Stock For the year ended December 31, 2010, we repurchased 194,655 shares of our common stock in settlement of employee tax withholding obligations due upon the vesting of restricted stock. F-62 139443_020_Nasdaq_1-188.p168.pdf QC 182 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Preferred Stock Our certificate of incorporation authorizes the issuance of 30,000,000 shares of preferred stock, par value $0.01 per share, issuable from time to time in one or more series. At December 31, 2010, 1,600,000 shares of series A convertible preferred stock were issued and none were outstanding. At December 31, 2009, 1,600,000 shares of series A convertible preferred stock were issued and outstanding, and were classified as temporary equity in the Consolidated Balance Sheets. In 2009, as an inducement for the conversion of our 3.75% convertible notes, we agreed to pay the Holders and certain of their affiliates an aggregate amount of $9 million in cash and to issue to the Holders 1,600,000 shares of our series A convertible preferred stock, with an aggregate initial liquidation preference amount of $16 million. Conversion of the series A convertible preferred stock was contingent upon shareholder approval and did not represent an unconditional obligation to transfer assets. In accordance with U.S. GAAP, if the conversion and subsequent issuance of equity shares is not solely in the control of the issuer and the instrument does not represent an unconditional obligation to transfer assets, permanent equity classification is not permitted. Therefore, we recorded the fair value of the series A convertible preferred stock of $15 million as temporary equity in the Consolidated Balance Sheets as of December 31, 2009. The series A convertible preferred stock was accreted through retained earnings, through the date of shareholder approval, up to the aggregate liquidation preference amount of $16 million. At our annual shareholders’ meeting in May 2010, the shareholders approved the conversion of the series A convertible preferred stock into common stock. The series A convertible preferred stock automatically converted into 845,646 shares of common stock determined by dividing the initial liquidation preference amount of $16 million by $18.92, which represents the average daily volume weighted-average price, or VWAP, of NASDAQ OMX’s common stock during the 10 day period immediately preceding the date on which the results of the shareholder vote was calculated. At the time of conversion, the VWAP was subject to a floor price of 80% of the price of NASDAQ OMX’s common stock as of the initial issuance date, and a ceiling price of 120% of the price of NASDAQ OMX’s common stock as of the initial issuance date. The changes in our series A convertible preferred stock during the year ended December 31, 2010 are as follows: Balance as of December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion for the year ended December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . Conversion into common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance as of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15 1 (16) $ — Series A Convertible Preferred Stock (in millions) Accumulated Other Comprehensive Loss Accumulated other comprehensive loss is composed of unrealized holding gains and losses on available-for-sale securities, foreign currency translation adjustments, unrealized gains and losses on derivative financial instruments that qualify as cash flow hedges and employee benefit plan adjustments. F-63 139443_020_Nasdaq_1-188.p169.pdf QC 183 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) The following table outlines the components of accumulated other comprehensive loss: Unrealized Holding Gains(Losses) on Available-For-Sale Securities(1) Foreign Currency Translation Adjustments(2) Unrealized Gains(Losses) on Cash Flow Hedges(3) Employee Benefit Plan Adjustments(4) Accumulated Other Comprehensive Loss Gross balance, December 31, 2009 Income taxes . . . . . . . . . . . . . . . . . Net balance, December 31, 2009 . . Gross balance, December 31, 2010 Income taxes . . . . . . . . . . . . . . . . . Net balance, December 31, 2010 . . $ — — $ — $ $ (3) 1 (2) $ (638) 253 $ (385) $ (407) 155 $ (252) $ $ (9) 3 (6) $ — — $ — $ (26) 11 $ (15) $ (31) 13 $ (18) $ (673) 267 $ (406) $ (441) 169 $ (272) (1) Amount includes cumulative gains and losses on our available-for-sale investment in DFM. See Note 5, “Investments,” for further discussion. (2) Amounts include cumulative gains and losses on foreign currency translation adjustments from non-U.S. subsidiaries for which the functional currency is other than the U.S. dollar. (3) Cash flow hedges were entered into to effectively convert a portion of our floating rate debt to a fixed rate basis. We recorded an unrealized pre-tax loss in accumulated other comprehensive loss of $9 million ($6 million after tax) as of December 31, 2009 as a result of the fair value measurement of these swaps. The fair value of these swaps is included in other liabilities in the Consolidated Balance Sheet as of December 31, 2009. In January 2010, in connection with the repayment of our senior secured credit facilities in place as of December 31, 2009, we terminated our interest rate swaps and reclassified into earnings the unrealized loss of $9 million ($6 million after tax) relating to these interest rate swaps. See “Senior Secured Credit Facilities in Place as of December 31, 2009,” of Note 8, “Debt Obligations,” for further discussion. (4) Amounts primarily represent unrecognized net actuarial gains (losses) related to the NASDAQ OMX Benefit Plans. F-64 139443_020_Nasdaq_1-188.p170.pdf QC 184 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) 13. Earnings Per Common Share The following table sets forth the computation of basic and diluted earnings per share: Numerator: Net income attributable to NASDAQ OMX . . . . . . . . . . . . . . . . . Accretion on series A convertible preferred stock . . . . . . . . . . . . Net income for basic earnings per share . . . . . . . . . . . . . . . . . . . . Interest impact of 3.75% convertible notes, net of tax . . . . . . . . . Net income for diluted earnings per share . . . . . . . . . . . . . . . . . . $ $ $ Denominator: Weighted-average common shares outstanding for basic Year Ended December 31, 2010 2009 2008 (in millions, except share and per share amounts) 395 (1) 394 — 394 $ $ $ 266 — 266 2 268 $ $ $ 314 — 314 3 317 earnings per share(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202,975,623 204,698,277 190,362,605 Weighted-average effect of dilutive securities: Employee equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.75% convertible notes assumed converted into common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,504,550 3,772,645 5,061,943 34,482 — 6,066,985 — 8,281,167 809,147 Denominator for diluted earnings per share . . . . . . . . . . . . . . . . . 206,514,655 214,537,907 204,514,862 Basic and diluted earnings per share: Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 1.94 1.91 $ $ 1.30 1.25 $ $ 1.65 1.55 (1) For the year ended December 31, 2008, amounts include 60,561,515 shares of common stock issued to Borse Dubai and a trust for Borse Dubai’s economic benefit in conjunction with the business combination with OMX AB on a weighted-average basis from the closing date of the business combination. For the year ended December 31, 2010, the weighted-average common shares outstanding for basic earnings per share include the weighted-average impact of our share repurchase program and our share repurchase from Borse Dubai. For the year ended December 31, 2010, we repurchased 15,050,647 shares of our common stock through our share repurchase program and 22,781,000 shares of our common stock through the share repurchase from Borse Dubai. In addition, for the year ended December 31, 2010, the weighted-average common shares outstanding for basic earnings per share include the weighted-average impact of 845,646 shares of our common stock that were issued in connection with the conversion of our series A convertible preferred stock in the second quarter of 2010. See “Share Repurchase from Borse Dubai,” “Share Repurchase Program,” and “Preferred Stock,” of Note 12, “NASDAQ OMX Stockholders’ Equity,” for further discussion. Stock options to purchase 10,112,842 shares of common stock, 3,857,720 shares of restricted stock and PSUs, and convertible notes convertible into 34,482 shares of common stock were outstanding at December 31, 2010. For the year ended December 31, 2010, we included 4,873,543 of the outstanding stock options and 1,086,998 shares of restricted stock and PSUs in the computation of diluted earnings per share, on a weighted- average basis, as their inclusion was dilutive. The remaining stock options and shares of restricted stock and PSUs are antidilutive, and as such, they were properly excluded. F-65 139443_020_Nasdaq_1-188.p171.pdf QC 185 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) In September 2009, most of the holders of our outstanding 3.75% convertible notes converted their remaining outstanding notes into common stock in accordance with the terms of the notes, which resulted in the issuance of an aggregate of 8,246,680 shares of our common stock. The 3.75% convertible notes were accounted for under the if-converted method, as we settled the convertible notes in shares of our common stock. For the year ended December 31, 2010, all of the shares underlying the outstanding 3.75% convertible notes were included in the computation of diluted earnings per share, on a weighted-average basis, as their inclusion was dilutive. The 2.50% convertible senior notes are accounted for under the treasury stock method as it is our intent and policy to settle the principal amount of the notes in cash. Based on the settlement structure of the 2.50% convertible senior notes, which permits the principal amount to be settled in cash and the conversion premium to be settled in shares of our common stock or cash, we will reflect the impact of the convertible spread portion of the convertible notes in the diluted calculation using the treasury stock method. For the years ended December 31, 2010 and 2009, the conversion spread of our 2.50% convertible senior notes was out of the money, and as such, they were properly excluded from the computation of diluted earnings per share. Stock options to purchase 10,206,871 shares of common stock, 2,761,430 shares of restricted stock and PSUs, and convertible notes convertible into 34,482 shares of common stock were outstanding at December 31, 2009. For the year ended December 31, 2009, we included 5,601,324 of the outstanding stock options and 1,134,138 shares of restricted stock and PSUs in the computation of diluted earnings per share, on a weighted- average basis, as their inclusion was dilutive. The remaining stock options and shares of restricted stock and PSUs are antidilutive, and as such, they were properly excluded. Stock options to purchase 10,726,905 shares of common stock and 2,516,440 shares of restricted stock and PSUs, and convertible notes convertible into 8,281,162 shares of common stock were outstanding at December 31, 2008. For the year ended December 31, 2008, we included 6,654,784 of the stock options outstanding, 2,000,424 shares of restricted stock and PSUs, all of the shares underlying the 3.75% convertible notes, which includes all outstanding 3.75% convertible notes and 3.75% convertible notes converted into 2,000 shares of common stock during 2008 and warrants exercised into 1,539,489 shares of common stock, up to the time of exercise in the computation of diluted earnings per share, on a weighted-average basis, as their inclusion was dilutive. The remaining stock options and shares of restricted stock and PSUs are antidilutive and the conversion spread of our 2.50% convertible senior notes was out of the money, and as such, they were properly excluded. 14. Fair Value of Financial Instruments Fair Value Measurement—Definition and Hierarchy Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, or the exit price, in an orderly transaction between market participants at the measurement date. Fair value measurement establishes a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect NASDAQ OMX’s market assumptions. These two types of inputs create the following fair value hierarchy: • • • Level 1—Quoted prices for identical instruments in active markets. Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Level 3—Instruments whose significant value drivers are unobservable. F-66 139443_020_Nasdaq_1-188.p172.pdf QC 186 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) This hierarchy requires the use of observable market data when available. The following table presents for each of the above hierarchy levels, our financial assets and liabilities that are measured at fair value on a recurring basis at December 31, 2010. Balance as of December 31, 2010 Fair Value Measurements (Level 1) (Level 2) (Level 3) (in millions) Financial Assets Measured at Fair Value on a Recurring Basis Derivative positions, at fair value(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial investments, at fair value(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,037 253 $ — $ 4,037 — 253 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,290 $ 253 $ 4,037 Financial Liabilities Measured at Fair Value on a Recurring Basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative positions, at fair value(1) $ 4,037 $ — $ 4,037 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,037 $ — $ 4,037 $ — — $ — $ — $ — (1) Represents net amounts associated with our clearing operations in the derivative markets of NASDAQ (2) OMX Commodities and NASDAQ OMX Stockholm. Receivables and payables attributable to outstanding derivative positions have been netted to the extent that such a legal offset right exists and, at the same time, if it is our intention to settle these items. See “Derivative Positions, at Fair Value” below for further discussion. Primarily comprised of Swedish government debt securities of $220 million. These securities are classified as trading securities and $190 million are restricted assets to meet regulatory capital requirements for NASDAQ OMX Stockholm’s clearing operations. Also includes our 1% available-for-sale investment in DFM of $33 million that is classified as an available-for-sale security. See Note 5, “Investments,” for further discussion of our trading investment securities and available-for-sale investment security. The following table presents for each of the above hierarchy levels, our financial assets and liabilities that are measured at fair value on a recurring basis at December 31, 2009: Balance as of December 31, 2009 Fair Value Measurements (Level 1) (Level 2) (Level 3) (in millions) Financial Assets Measured at Fair Value on a Recurring Basis Derivative positions, at fair value(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial investments, at fair value(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities Measured at Fair Value on a Recurring Basis Derivative positions, at fair value(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities(3) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,054 308 $ 2,362 $ 2,054 10 $ 2,064 F-67 $ — $ 2,054 $ — — 308 — $ 308 $ 2,054 $ — $ — $ 2,054 $ — 10 — — $ — $ 2,064 $ — 139443_020_Nasdaq_1-188.p173.pdf QC 187 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) (1) Represents net amounts associated with our clearing operations in the derivative markets of NASDAQ (2) (3) OMX Commodities and NASDAQ OMX Stockholm. Receivables and payables attributable to outstanding derivative positions have been netted to the extent that such a legal offset right exists and, at the same time, if it is our intention to settle these items. See “Derivative Positions, at Fair Value,” below for further discussion. Primarily comprised of Swedish government debt securities. These securities are classified as trading securities and $183 million are restricted assets to meet regulatory capital requirements for NASDAQ OMX Stockholm’s clearing operations. Primarily includes our interest rate swaps of $9 million included in other liabilities in the Consolidated Balance Sheets. We determine the fair value of our interest rate swap contracts using standard valuation models that are based on market-based observable inputs including forward and spot exchange rates and interest rate curves. See “Cash Flow Hedges,” of Note 15, “Derivative Financial Instruments and Hedging Activities,” for further discussion. Open Clearing Contracts at NASDAQ OMX Commodities and NASDAQ OMX Stockholm Derivative Positions, at Fair Value Through our clearing operations in the derivative markets with NASDAQ OMX Commodities and NASDAQ OMX Stockholm, we are the legal counterparty for each derivative position traded and thereby guarantee the fulfillment of each contract. We also act as the counterparty for certain trades on OTC derivative contracts. The derivatives are not used by NASDAQ OMX Commodities or NASDAQ OMX Stockholm for the purpose of trading on their own behalf. As the legal counterparty of each transaction, NASDAQ OMX Commodities and NASDAQ OMX Stockholm bear the counterparty risk between the purchaser and seller in the contract. The counterparty risks are measured using models that are agreed to with the Financial Supervisory Authority of the applicable country, which requires us to provide minimum guarantees and maintain certain levels of regulatory capital. The structure and operations of NASDAQ OMX Commodities and NASDAQ OMX Stockholm differ from other clearinghouses. NASDAQ OMX Commodities and NASDAQ OMX Stockholm are not member-owned organizations, do not maintain a guarantee fund to which members contribute and do not enforce loss sharing assessments amongst members. In addition, unlike other clearinghouses, they do not record any margin deposits and guarantee funds in the Consolidated Balance Sheets, as all risks and rewards of collateral ownership, including interest, belongs to the counterparty. Market participants must provide collateral to cover the daily margin call as needed, which is in addition to the initial collateral placed when entering into the transaction. Acceptable collateral is cash and eligible securities in a pledged bank account and/or an on-demand guarantee. All collateral is maintained at a third-party custodian bank for the benefit of the clearing members and is accessible by NASDAQ OMX in the event of default. In addition, market participants must meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations. For NASDAQ Commodities, trading on the contracts can take place up until the delivery period which can occur over a period of several years. For NASDAQ OMX Stockholm, following the completion of a transaction, settlement primarily takes place between parties by net cash settlement or with the exchange of securities and funds. For those transactions where there is an exchange of securities and funds, the transfer of ownership is registered and the securities are stored on the owner’s behalf. The fair value of these derivative contracts with NASDAQ OMX Commodities and NASDAQ OMX Stockholm is reported gross in the Consolidated Balance Sheets as a receivable pertaining to the purchasing party and a payable pertaining to the selling party. Such receivables and payables attributable to outstanding derivative positions have been netted to the extent that such a legal offset right exists and, at the same time, that it is our F-68 139443_020_Nasdaq_1-188.p174.pdf QC 188 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) intention to settle these items. At December 31, 2010, our derivative positions, at fair value in the Consolidated Balance Sheets were $4.0 billion. See “Collateral Received for Clearing Operations, Guarantees Issued and Credit Facilities Available,” of Note 17, “Commitments, Contingencies and Guarantees,” for further discussion of our guarantees on the fulfillment of these contracts and collateral received. The following table presents the fair value of our outstanding derivative positions at December 31, 2010 and 2009 prior to netting: December 31, 2010 December 31, 2009 Asset Liability Asset Liability . . . . . . . . . . . . . . . . . . . Commodity forwards and options(1) (2) Fixed-income options and futures(2) (3) . . . . . . . . . . . . . . . . . . . Stock options and futures(2) (3) . . . . . . . . . . . . . . . . . . . . . . . . . . Index options and futures(2) (3) . . . . . . . . . . . . . . . . . . . . . . . . . . $3,437 578 237 208 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,460 (in millions) $3,437 578 237 208 $4,460 $1,642 131 194 235 $2,202 $1,642 131 194 235 $2,202 (1) We determine the fair value of our forward contracts using standard valuation models that are based on market-based observable inputs including LIBOR rates and the spot price of the underlying instrument. (2) We determine the fair value of our option contracts using standard valuation models that are based on market-based observable inputs including implied volatility, interest rates and the spot price of the underlying instrument. (3) We determine the fair value of our future contracts based upon quoted market prices and average quoted market yields. Resale and Repurchase Agreements, at Contract Value Through our clearing operations in the resale and repurchase markets with NASDAQ OMX Stockholm, we are the legal counterparty for each resale and repurchase contract traded and thereby guarantee the fulfillment of each contract. We only clear these transactions once a bilateral contract between members has been entered into whereby the two members have agreed on all terms in the transaction. The resale and repurchase agreements are not used for financing purposes by NASDAQ OMX. As the legal counterparty of each transaction, NASDAQ OMX Stockholm bears the counterparty risk between the purchaser and seller in the resale and repurchase agreement. The structure and operations for the resale and repurchase market is similar to the derivative markets for NASDAQ OMX Commodities and NASDAQ OMX Stockholm. As discussed above in “Derivative Positions, at Fair Value,” NASDAQ OMX Commodities and NASDAQ OMX Stockholm are not member-owned organizations, do not maintain a guarantee fund to which members contribute and do not enforce loss sharing assessments amongst members. In addition, unlike other clearinghouses, they do not record any margin deposits and guarantee funds in the Consolidated Balance Sheets, as all risks and rewards of collateral ownership, including interest, belongs to the counterparty. For resale and repurchase agreements, collateral is not held by NASDAQ OMX Stockholm. All resale and repurchase clearing activities are transacted under our clearing member agreements that give us the right, in the event of default, to liquidate collateral pledged between the clearing members and to offset receivables and payables with the same counterparty. Pledged collateral, which is transferred through NASDAQ OMX Stockholm at initiation of the bilateral contract between the two clearing member counterparties, primarily consists of Swedish government debt F-69 139443_020_Nasdaq_1-188.p175.pdf QC 189 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) securities. Market participants must meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations. In the event that one of the participants cannot fulfill its obligation to deliver or receive the underlying security at the agreed upon price, NASDAQ OMX Stockholm is required to buy or sell the security in the open market to fulfill its obligation. In order to protect itself against a price movement in the value of the underlying security, or price risk, NASDAQ OMX Stockholm requires all participants to provide additional margin as needed, which is valued on a daily basis and is maintained at a third-party custodian bank for the benefit of the clearing members and is accessible by NASDAQ OMX Stockholm in the event of default. We record resale and repurchase agreements at contract value plus interest gross in the Consolidated Balance Sheets as a receivable pertaining to the purchasing party and a payable pertaining to the selling party. Such receivables and liabilities attributable to outstanding resale and repurchase agreements have been netted to the extent that such a legal offset right exists and, at the same time, that it is our intention to settle these items. At December 31, 2010, our resale and repurchase agreements, at contract value in the Consolidated Balance Sheets was $3.4 billion. The resale and repurchase agreements are recorded at their contractual amounts plus interest which approximates fair value, as the fair value of these items are not materially sensitive to shifts in market interest rates because of the short-term nature of these instruments and/or variable interest rates or to credit risk because the resale and repurchase agreements are fully collateralized. The resale and repurchase agreements generally mature in less than 30 days. See “Collateral Received for Clearing Operations, Guarantees Issued and Credit Facilities Available,” of Note 17, “Commitments, Contingencies and Guarantees,” for further discussion of our guarantees on the fulfillment of these contracts and collateral received. Financial Instruments Not Measured at Fair Value on a Recurring Basis Some of our financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature. Such financial assets and financial liabilities include: cash and cash equivalents, restricted cash, receivables, net, certain other current assets, non-current restricted cash, accounts payable and accrued expenses, Section 31 fees payable to SEC, accrued personnel costs, and certain other current liabilities. We also consider our debt obligations to be financial instruments. The fair value of our debt obligations was estimated using discounted cash flow analyses based on our assumed incremental borrowing rates for similar types of borrowing arrangements and a Black-Scholes valuation technique that is utilized to calculate the convertible option value for the 3.75% convertible notes and the 2.50% convertible senior notes. At December 31, 2010, the carrying value of our debt obligations, before the $40 million unamortized debt discount on the 2.50% convertible senior notes, was approximately $17 million less than fair value. The difference primarily relates to an increase in the fair value of the 2.50% convertible senior notes as a result of changes in current market interest rates during the period, partially offset by a decrease in fair value on the 2.50% convertible senior notes due to the convertible option feature which is equivalent to a conversion price of approximately $55.13 as compared to the closing price of $23.73 at December 31, 2010. At December 31, 2009, the carrying value of our debt obligations, before the $54 million unamortized debt discount on the 2.50% convertible senior notes, was approximately $20 million more than fair value, primarily due to a decrease in fair value on the 2.50% convertible senior notes due to the convertible option feature which is equivalent to a conversion price of approximately $55.13 as compared to the closing price of $19.82 at December 31, 2009. For further discussion of our debt obligations, see Note 8, “Debt Obligations.” F-70 139443_020_Nasdaq_1-188.p176.pdf QC 190 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) 15. Derivative Financial Instruments and Hedging Activities In the ordinary course of business, we may enter into various types of derivative transactions. These derivative transactions include: • • • Futures and foreign currency forward contracts which are commitments to buy or sell at a future date a financial instrument, commodity or currency at a contracted price and may be settled in cash or through delivery. Interest rate swap contracts which are agreements between two parties to exchange one stream of future interest payments for another based on a specified principal amount over a set period of time. Foreign currency option contracts which give the purchaser, for a fee, the right, but not the obligation, to buy or sell within a limited time a financial instrument or currency at a contracted price that may also be settled in cash, based on differentials between specified indices or prices. NASDAQ OMX may use these derivative financial instruments to manage exposure to various market risks, primarily foreign currency exchange rate fluctuations and changes in interest rates on our variable rate debt. Such instruments are an integral component of our market risk and related asset/liability management strategy and processes. Fair Value Hedges Depending on market conditions, we may use foreign currency future, forward and option contracts to limit our exposure to foreign currency exchange rate fluctuations on contracted revenue streams (hedged item) relating to our Market Technology sales. When the contracted revenue streams meet the definition of a firm commitment, these derivative contracts may be designated as fair value hedges if the applicable hedge criteria are met. Changes in fair value on the derivatives and the related hedged items are recognized in the Consolidated Statements of Income. As of December 31, 2010 and 2009, there were no outstanding fair value hedges. Cash Flow Hedges In the third quarter of 2008, we entered into interest rate swap agreements that effectively converted $200 million of our senior secured credit facilities in place as of December 31, 2009, which was floating rate debt, to a fixed rate basis through August 2011, thus reducing the impact of interest rate changes on future interest expense. As of December 31, 2009, these interest rate swaps were in a net liability position of $9 million and were recorded in other liabilities in the Consolidated Balance Sheets. In the first quarter of 2010, in connection with the repayment of our senior secured credit facilities in place as of December 31, 2009, we terminated our interest rate swaps and reclassified into earnings the unrealized loss of $9 million which was included in accumulated other comprehensive loss in the Consolidated Balance Sheets at December 31, 2009. This loss is included in general, administrative and other expense in the Consolidated Statements of Income for the year ended December 31, 2010. See “Senior Unsecured Notes, Credit Facility and Repayment of Our Senior Secured Credit Facilities in Place as of December 31, 2009,” of Note 8, “Debt Obligations,” for further discussion. All derivative contracts used to manage interest rate risk are measured at fair value and are recorded in assets or liabilities as appropriate with the offset in accumulated other comprehensive loss within NASDAQ OMX stockholders’ equity in the Consolidated Balance Sheets. Any ineffectiveness would impact earnings through interest expense. There was no material ineffectiveness recorded in earnings for the years ended December 31, 2010, 2009 and 2008. As of December 31, 2010, there were no outstanding cash flow hedges. F-71 139443_020_Nasdaq_1-188.p177.pdf QC 191 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Net Investment Hedges Net assets of our foreign subsidiaries are exposed to volatility in foreign currency exchange rates. We may utilize net investment hedges to offset the translation adjustment arising from remeasuring our investment in foreign subsidiaries. As of December 31, 2010 and 2009, there were no outstanding net investment hedges. Derivatives Not Designated as Hedges NASDAQ OMX may also enter into economic hedges that either do not qualify or are not designated for hedge accounting treatment. This type of hedge is undertaken when hedge accounting requirements cannot be achieved or management decides not to apply hedge accounting. In order to economically hedge the foreign currency exposure on our business combination with OMX AB, we entered into foreign currency option and forward contracts beginning at the time of the announcement of the proposed combination. A derivative used to hedge exposure related to an anticipated business combination does not qualify for specialized hedge accounting, and as such, was marked to market through the income statement in gain (loss) on foreign currency contracts each reporting period. In the first quarter of 2008, we entered into a forward contract for the Nord Pool transaction. See below for further discussion of these contracts. For additional discussion of the business combination with OMX AB and the Nord Pool transaction, see “Combination with OMX AB and Strategic Partnership with Borse Dubai Limited,” and “Acquisition of Certain Businesses from Nord Pool,” of Note 3, “Acquisitions and Strategic Initiatives.” In 2008, we also entered into foreign currency contracts, primarily foreign currency option and forward contracts, to partially or fully economically hedge foreign currency transactions and non-U.S. dollar cash flow exposures on our Market Technology contracts. These hedges generally matured within one year and changes in fair value of these derivatives were recognized in gain (loss) on foreign currency contracts, net in the Consolidated Statements of Income. We did not enter into any material economic hedges that did not qualify or were not designated for hedge accounting during the years ended December 31, 2010 and 2009. The following table presents the realized and unrealized gain/(loss) recognized in the Consolidated Statements of Income for the year ended December 31, 2008 related to our foreign currency forward contracts. For the cumulative realized gain (loss) related to our foreign currency option contracts, see below. Realized Gain (Loss) Unrealized Loss Total Gain/ (Loss) for the Year Ended December 31, 2008 SEK 2008 Forward Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NOK 2008 Forward Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34 (72) (4) (in millions) $ — — (9) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (42) $ (9) $ 34 (72) (13) $ (51) (1) Primarily represents market technology forward currency contracts used to limit our exposure to foreign currency exchange rate fluctuations on contracted revenue streams which do not qualify for hedge accounting. F-72 139443_020_Nasdaq_1-188.p178.pdf QC 192 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) In the first quarter of 2008, we entered into forward contracts to hedge the SEK cash payment made in connection with the business combination with OMX AB. We recorded a gain of $34 million upon the closing of the business acquisition in the first quarter of 2008 relating to the cash payments for the SEK forward contracts. Also in the first quarter of 2008, we entered into a forward contract to hedge the NOK cash payment for the Nord Pool transaction of approximately $320 million. We entered into a forward contract to buy NOK and sell U.S. dollars at an exchange rate of 5.2129. Upon the closing of the Nord Pool transaction on October 21, 2008, we closed out the NOK forward contract, resulting in a realized loss of approximately $72 million. The following table presents the cumulative realized gain/(loss) on each option contract and the total loss recognized in the Consolidated Statements of Income for year ended December 31, 2008 related to our foreign currency option contracts. Purchase Sale/ Expiration Cumulative Realized Gain (Loss) Change in Unrealized Loss Total Gain/(Loss) for the Year Ended December 31, 2008 SEK 2007 Option Contract(1) SEK 2008 Option Contract(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39 13 $ 52 $ 67 — $ 67 (in millions) $ 28 (13) $ 15 $ (22) — $ (22) $ 6 (13) $ (7) (1) This contract, which was originally purchased in October 2007 to economically hedge the foreign currency exposure on our business combination with OMX AB, had a fair value at December 31, 2007 of $61 million. On January 7, 2008, we sold the SEK 2007 option contract for $67 million and recorded a gain of $6 million. (2) On January 7, 2008, we purchased a new contract for $13 million, which expired out-of-the-money in February 2008 and we recorded a loss for the purchase amount of $13 million. As shown in the above two tables, for the year ended December 31, 2008, we recognized a loss of $7 million related to option contracts and also recognized a loss of $51 million related to forward contracts for a total loss of $58 million. As of December 31, 2010, the fair value amounts of our derivative instruments was immaterial. The following table presents the fair value amounts and balance sheet location of our derivative instruments prior to netting as of December 31, 2009. December 31, 2009 Fair Value Asset Liability (in millions) Derivatives Designated as Hedging Instruments Cash flow hedges Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 9 (1) Derivatives Not Designated as Hedging Instruments Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total derivatives not designated as hedging instruments . . . . . . . . . . . . . . . . . . . . . . — — 1 (2) 1 Total derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $10 F-73 139443_020_Nasdaq_1-188.p179.pdf QC 193 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) (1) (2) Included in other liabilities in the Consolidated Balance Sheets. Included in other current liabilities in the Consolidated Balance Sheets. 16. Leases We lease office space and equipment under non-cancelable operating leases with third parties. Some of our leases contain renewal options and escalation clauses based on increases in property taxes and building operating costs. As of December 31, 2010, future minimum lease payments under non-cancelable operating leases (net of sublease income) are as follows: Gross Lease Commitments Sublease Income Net Lease Commitments (in millions) Year ending December 31: 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total future minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 88 78 71 68 50 203 $ 558 $ 7 6 6 6 4 14 $ 43 $ 81 72 65 62 46 189 $ 515 Rent expense for operating leases (net of sublease income of $5 million in 2010, $3 million in 2009 and $7 million in 2008) was $78 million in 2010, $72 million in 2009 and $57 million in 2008. 17. Commitments, Contingencies and Guarantees Collateral Received for Clearing Operations, Guarantees Issued and Credit Facilities Available Collateral Received for Clearing Operations Through our clearing operations in the derivative markets with NASDAQ OMX Commodities, NASDAQ OMX Stockholm and IDCG, as well as riskless principal trading at NOCC and the resale and repurchase market with NASDAQ OMX Stockholm, we are the legal counterparty for each position traded and thereby guarantee the fulfillment of each contract. The derivatives are not used by the above entities for the purpose of trading on their own behalf and the resale and repurchase agreements are not used for financing purposes by NASDAQ OMX Stockholm. The structure and operations of NASDAQ OMX Commodities and NASDAQ OMX Stockholm differ from other clearinghouses. See “Derivative Positions, at Fair Value,” and “Resale and Repurchase Agreements, at Contract Value,” of Note 14, “Fair Value of Financial Investments,” for further discussion. We require market participants at NASDAQ OMX Commodities and NASDAQ OMX Stockholm to provide collateral and meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations. Total customer pledged collateral with NASDAQ OMX Commodities and NASDAQ OMX Stockholm was $8.7 billion at December 31, 2010 and $6.1 billion at December 31, 2009. This pledged collateral is held by a third-party custodian bank for the benefit of the clearing members and is accessible by F-74 139443_020_Nasdaq_1-188.p180.pdf QC 194 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) NASDAQ OMX in the event of default. NASDAQ OMX Commodities and NASDAQ OMX Stockholm does not receive any interest on these funds as the risks and rewards of collateral ownership, including interest, belongs to the counterparty. We also require market participants at IDCG and NOCC to meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations and to provide collateral to cover the daily margin call as needed. Customer pledged cash collateral held by IDCG and NOCC, which was $15 million at December 31, 2010, is included in restricted cash with an offsetting liability included in other current liabilities in the Consolidated Balance Sheets, as the risks and rewards of collateral ownership, including interest income, belongs to IDCG and NOCC. Clearing member pledged cash collateral, included in IDCG’s guaranty fund, was $8 million at December 31, 2010. This cash is included in non-current restricted cash with an offsetting liability included in other liabilities in the Consolidated Balance Sheets, as the risks and rewards of collateral ownership, including interest income, belongs to IDCG. Guarantees Issued and Credit Facilities Available In addition to the collateral pledged by market participants discussed above, we have obtained financial guarantees and credit facilities which are guaranteed by us through counter indemnities, to provide further liquidity and default protection related to our clearing businesses. At December 31, 2010, financial guarantees issued to us totaled $5 million. Credit facilities, which are available in multiple currencies, primarily Swedish Krona and U.S. dollar, totaled $440 million ($196 million in available liquidity and $244 million to satisfy regulatory requirements), none of which was utilized at December 31, 2010. At December 31, 2009, these facilities totaled $417 million ($185 million in available liquidity and $232 million to satisfy regulatory requirements), none of which was utilized. We believe that the potential for us to be required to make payments under these arrangements is mitigated through the pledged collateral and our risk management policies. Accordingly, no contingent liability is recorded in the Consolidated Balance Sheets for these arrangements. Leases We lease some of our office space and equipment under non-cancelable operating leases with third parties and sublease office space to third parties. Some of our leases contain renewal options and escalation clauses based on increases in property taxes and building operating costs. Other Guarantees We have provided other guarantees as of December 31, 2010 of $18 million, primarily related to obligations for our rental and leasing contracts. In addition, for certain Market Technology contracts, we have provided performance guarantees of $6 million related to the delivery of software technology and support services. We have received financial guarantees from various financial institutions to support the above guarantees. At December 31, 2009, the total of these guarantees was $35 million. We have also provided a $25 million guarantee to our wholly-owned subsidiary NOCC to cover losses associated with customer defaults, net of any collateral posted against such losses. We believe that the potential for us to be required to make payments under these arrangements is unlikely. Accordingly, no contingent liability is recorded in the Consolidated Balance Sheets for the above guarantees. F-75 139443_020_Nasdaq_1-188.p181.pdf QC 195 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Escrow Agreements In connection with our acquisitions of FTEN and SMARTS, we entered into escrow agreements to secure the payments of post-closing adjustments and other closing conditions. At December 31, 2010, these escrow agreements provide for future payments of $3 million in 2011 and $22 million in 2012. Brokerage Activities Nasdaq Execution Services and NASDAQ Options Services provide guarantees to securities clearinghouses and exchanges under their standard membership agreements, which require members to guarantee the performance of other members. If a member becomes unable to satisfy its obligations to a clearinghouses or exchange, other members would be required to meet its shortfalls. To mitigate these performance risks, the exchanges and clearinghouses often require members to post collateral as well as meet certain minimum financial standards. Nasdaq Execution Services’ and NASDAQ Options Services’ maximum potential liability under these arrangements cannot be quantified. However, we believe that the potential for Nasdaq Execution Services and NASDAQ Options Services to be required to make payments under these arrangements is unlikely. Accordingly, no contingent liability is recorded in the Consolidated Balance Sheets for these arrangements. Litigation We may be subject to claims arising out of the conduct of our business. We are not currently a party to any litigation that we believe could have a material adverse effect on our business, financial condition, or operating results. However, from time to time, we have been threatened with, or named as a defendant in, lawsuits or involved in regulatory proceedings. 18. Segments We manage, operate and provide our products and services in three business segments: our Market Services segment, our Issuer Services segment and our Market Technology segment. Our Market Services segment includes our U.S. and European Transaction Services businesses and our Market Data business, which are interrelated because the Transaction Services businesses generate the quote and trade information that we sell to market participants and data distributors. Market Services also includes our Broker Services business, which offers technology and customized securities administration solutions to financial participants in the Nordic markets. Our Issuer Services segment includes our Global Listing Services and Global Index Group businesses. The companies listed on The NASDAQ Stock Market, our Nordic and Baltic exchanges and NASDAQ OMX First North represent a diverse array of industries. This diversity of companies listed on NASDAQ OMX markets allows us to develop and license NASDAQ OMX branded indexes, associated derivatives and financial products as part of our Global Index Group. The Global Listing Services business also includes our Corporate Solutions business, which generates revenues through our shareholder, directors, newswire and other services. Our Market Technology segment delivers technology and services to marketplaces, brokers and regulators throughout the world. Market Technology provides technology solutions for trading, clearing, settlement, and information dissemination, and also offers facility management integration, surveillance solutions and advisory services. Our management allocates resources, assesses performance and manages these businesses as three separate segments. We evaluate the performance of our segments based on several factors, of which the primary financial F-76 139443_020_Nasdaq_1-188.p182.pdf QC 196 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) measure is income before income taxes. Results of individual businesses are presented based on our management accounting practices and our management structure. Certain amounts are allocated to corporate items in our management reports based on the decision that those activities should not be used to evaluate the segment’s operating performance. These amounts include, but are not limited to, amounts related to mergers, strategic initiatives and financing activities. See below for further discussion. The following table presents certain information regarding these operating segments for the years ended December 31, 2010, 2009 and 2008. Market Services Issuer Services Market Technology Corporate Items and Eliminations Consolidated (in millions) 2010 Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,700 $344 (1,675) — $152 — $ — Revenues less transaction rebates, brokerage, clearance and exchange fees . . . . . . . . . . . . . . 1,025 Depreciation and amortization . . . . . . . . . . . . . . Net interest expense . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes . . . . . . . . . . . Total assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of property and equipment . . . . . . . . . 77 63 450 14,331 29 344 17 21 119 714 4 152 5 9 11 415 7 2009 Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . Revenues less transaction rebates, brokerage, clearance and exchange fees . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . Net interest expense . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes . . . . . . . . . . . Total assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of property and equipment . . . . . . . . . $ 2,934 $330 (1,958) — $145 — 976 84 59 408 8,453 46 330 11 20 110 692 4 145 6 9 14 260 9 1 1 4 — (54)(2) 747 2 $ — 2 2 3 1 (141)(3) 1,317 — $ 3,197 (1,675) 1,522 103 93 526 16,207 42 $ 3,411 (1,958) 1,453 104 89 391 10,722 59 2008 Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,176 $343 (2,190) — $119 — $ 12 — $ 3,650 (2,190) Revenues less transaction rebates, brokerage, clearance and exchange fees . . . . . . . . . . . . . . 986 Depreciation and amortization . . . . . . . . . . . . . . Net interest expense . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes . . . . . . . . . . . Total assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of property and equipment . . . . . . . . . 63 43 496 10,412 31 343 14 14 77 698 10 119 10 5 (22) 259 13 12 6 — (38)(4) 1,383 1 1,460 93 62 513 12,752 55 (1) Total assets increased $5.5 billion at December 31, 2010 as compared to December 31, 2009 primarily due to an increase in open clearing contracts reflecting increases in derivative positions, at fair value as well as F-77 139443_020_Nasdaq_1-188.p183.pdf QC 197 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) increases in resale agreements, at contract value within our Market Services segment. The increase in derivative positions, at fair value primarily reflects increased activity and higher price levels on derivative positions in the energy market. The increase for resale agreements, at contract value reflects our new clearing business launched in 2010. Total assets decreased $2.0 billion at December 31, 2009 as compared to December 31, 2008 primarily due to a decrease in our derivative positions, at fair value held within our Market Services segment. The decrease was primarily due to the high volatility in market prices that existed at December 31, 2008 due to the global financial and economic crisis, which created large unrealized positions. As of December 31, 2009, the global economic market had shown signs of recovery from 2008 levels and the outstanding positions that contributed to the large unrealized positions as of December 31, 2008 either expired or were settled. The 2010 corporate items and eliminations primarily include: (2) • • charges of $40 million related to the repayment of our senior secured credit facilities in place as of December 31, 2009. See “Senior Unsecured Notes, Credit Facility and Repayment of Our Senior Secured Credit Facilities in Place as of December 31, 2009,” of Note 8, “Debt Obligations,” for further discussion; and $11 million related to loss on divestiture of businesses as a result of our decision to close the businesses of both NEURO ($6 million) and Agora-X ($5 million). (3) The 2009 corporate items and eliminations primarily include: • • • loss from unconsolidated investees, net of $107 million which is mainly comprised of $87 million related to impairment charges recorded on our equity method investments in NASDAQ Dubai ($82 million) and Agora-X ($5 million) and a loss of $19 million on the sale of our 25.25% share capital in Orc. See “Investment in NASDAQ Dubai,” and “Impairment of Agora-X,” as well as “Investment in Orc Software,” of Note 5, “Investments,” for further discussion; debt conversion expense of $25 million related to an inducement for the conversion of our 3.75% convertible notes. See “3.75% Convertible Notes,” of Note 8, “Debt Obligations,” for further discussion; and loss of $5 million on the sale of an available-for-sale investment security in Oslo, which was acquired as part of our business combination with OMX AB. See “Investment in Oslo,” of Note 5, “Investments” for further discussion. (4) The 2008 corporate items and eliminations primarily include: • • • a net loss on foreign currency contracts of $45 million, primarily related to our Nord Pool transaction ($72 million), partially offset by a $27 million gain related to our business combination with OMX AB. See Note 15, “Derivative Financial Instruments and Hedging Activities,” for further discussion; income from unconsolidated investees, net of $27 million, primarily related to our gain on the non-monetary contribution of the Nasdaq trade name to obtain an equity interest in NASDAQ Dubai; and an other-than-temporary impairment on a long-term available-for-sale investment security of $35 million. See “Investment in Oslo” of Note 5, “Investments,” for further discussion. For further discussion of our segments’ results, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment Operating Results.” F-78 139443_020_Nasdaq_1-188.p184.pdf QC 198 Black 04-07 19:41 The NASDAQ OMX Group, Inc. Notes to Consolidated Financial Statements—(Continued) Geographic Data The following table presents revenues and property and equipment, net by geographic area for 2010, 2009 and 2008. Revenues are classified based upon the location of the customer. Property and equipment information is based on the physical location of the assets. Total Revenues Property and Equipment, Net (in millions) 2010: United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,564 633 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,197 2009: United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,744 667 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,411 2008: United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,093 557 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,650 $ 99 65 $ 164 $ 102 62 $ 164 $ 109 74 $ 183 No single customer accounted for 10.0% or more of our revenues in 2010, 2009 and 2008. F-79 139443_020_Nasdaq_1-188.p185.pdf QC 199 Black 04-07 19:41 Schedule II—Valuation and Qualifying Accounts Three Years Ended December 31, 2010 (in millions) Reserve for Bad Debts 2008 2009 2010 Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions: $ 3 $ Charges to income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recoveries of amounts previously written-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 5 1 9 1 2 — $ 3 4 1 3 Deductions: Charges for which reserves were provided . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) (9) (2) Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3 $ 3 $ 9 (1) Relates to the business combination with OMX AB and the acquisition of PHLX in 2008. 1 139443_020_Nasdaq_1-188.p186.pdf QC 200 Black 04-07 19:41 [THIS PAGE INTENTIONALLY LEFT BLANK] 139443_020_Nasdaq_1-188.p187.pdf QC 201 Black 04-07 19:41 [THIS PAGE INTENTIONALLY LEFT BLANK] 139443_020_Nasdaq_1-188.p188.pdf QC 202 Black 04-07 19:41 Non-GAAP Information In addition to disclosing results determined in accordance with GAAP, NASDAQ OMX also discloses certain non-GAAP and pro forma non-GAAP results of operations that make certain adjustments or exclude certain charges and gains that are described in the reconciliation table of GAAP to non-GAAP and pro forma non-GAAP information provided below. Management believes that this non-GAAP and pro forma non-GAAP information provides investors with additional information to assess NASDAQ OMX’s operating performance by making certain adjustments or excluding costs or gains and assists investors in comparing our operating performance to prior periods. Management uses this non-GAAP and pro forma non-GAAP information, along with GAAP information, in evaluating its historical operating performance. The non-GAAP information is not prepared in accordance with GAAP and may not be comparable to non-GAAP information used by other companies. The non-GAAP and pro forma non-GAAP information should not be viewed as a substitute for, or superior to, other data prepared in accordance with GAAP. The following table represents reconciliations between GAAP net income for diluted earnings per share and diluted earnings per share and pro forma non-GAAP net income for diluted earnings per share and pro forma non-GAAP diluted earnings per share: (in millions, except per share amounts) Three Months Ended December 31, 2010 (unaudited) Three Months Ended March 31, 2007 (unaudited) Net Income for Diluted Earnings Per Share Diluted Earnings Per Share Net Income for Diluted Earnings Per Share Diluted Earnings Per Share GAAP net income for diluted earnings per share $137 $0.69 pro forma adjustments to GAAp net income for diluted earnings per share (1) Adjustment to pro forma GAAp diluted earnings per share (2) Pro forma GAAP net income for diluted earnings per share Non-GAAP adjustments: Asset retirements sublease reserves Workforce reductions Clearing contract pension plan and serp freeze Merger and strategic initiatives other Total non-GAAP adjustments Adjustment to the income tax provision to reflect non-GAAp adjustments (3) non-recurring tax items, net Total non-GAAP adjustments, net of tax Pro forma non-GAAP net income for diluted earnings per share Denominator for GAAP diluted earnings per share Adjustment to include 60,561,515 shares of common stock issued to Borse Dubai and a trust for Borse Dubai’s economic benefit Denominator for pro forma non-GAAP diluted earnings per share - - 137 2 1 2 - - 3 1 9 (3) (33) (27) $110 - - 0.69 0.01 0.01 0.01 - - 0.02 - 0.05 (0.02) (0.17) (0.14) $0.55 199.7 - 199.7 $21 46 - 67 - - 1 11 (6) - - 6 (3) - 3 $70 $0.14 0.22 (0.04) 0.32 - - - 0.05 (0.03) - - 0.02 (0.01) - 0.01 $0.33 151.8 60.6 212.4 (1) For the three months ended March 31, 2007, the pro forma adjustments relate to the business combination of The Nasdaq Stock Market, Inc. with OMX AB and the acquisition of a 33 1/3 % interest in the Dubai International Financial Exchange as well as the PHLX acquisition as if they had been completed on January 1, 2007. (2) The adjustment to pro forma GAAP diluted earnings per share for the three months ended March 31, 2007 is calculated based on the difference between GAAP EPS of $0.14 less the pro forma adjusted calculation of $0.10 ($21 million net income / 212.4 denominator for pro forma diluted earnings per share), which takes into account the issuance of common shares to Borse Dubai and a trust for Borse Dubai’s economic benefit . (3) We determine the tax effect of each item based on the tax rules in the respective jurisdiction where the transaction occurred. Cautionary note regarding forward-looking statements The matters described herein may contain forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The NASDAQ OMX Group, Inc. (“NASDAQ OMX”) cautions that these statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements. Such forward-looking statements include, but are not limited to, projections about our future financial results and statements about our strategic initiatives and other statements that are not historical facts. Forward-looking statements involve a number of risks, uncertainties or other factors beyond NASDAQ OMX control. These factors include, but are not limited to, NASDAQ OMX’s ability to implement its strategic initiatives, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, U.S. and global competition, and other factors detailed in NASDAQ OMX’s Annual Report on Form 10-K, and other periodic reports filed with the U.S. Securities and Exchange Commission. We undertake no obligation to release any revisions to any forward-looking statements. ©Copyright 2011, The NASDAQ OMX Group, Inc. All Rights Reserved. 4/11 Q11-0127 www.nasdaqomx.com 

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