Tradeweb Markets Inc. (TW) FY 2021 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the sections titled “Introductory Note” and our audited consolidated financial statements and related notes and other information included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results described in or implied by the forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this Annual Report on Form 10-K.

The following discussion includes a comparison of our Financial Results, Cash Flow Comparisons and Liquidity and Capital Resources for the years ended December 31, 2021 and 2020, respectively. A discussion of changes in our Financial Results, and Cash Flow Comparisons and Liquidity and Capital Resources from the year ended December 31, 2020 to December 31, 2019 may be found in Part II, Item 7. – “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended December 31, 2020.

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Overview

We are a leader in building and operating electronic marketplaces for our global network of clients across the financial ecosystem. Our network is comprised of clients across the institutional, wholesale and retail client sectors, including many of the largest global asset managers, hedge funds, insurance companies, central banks, banks and dealers, proprietary trading firms and retail brokerage and financial advisory firms, as well as regional dealers. Our marketplaces facilitate trading across a range of asset classes, including rates, credit, equities and money markets. We are a global company serving clients in over 65 countries with offices in North America, Europe and Asia. We believe our proprietary technology and culture of collaborative innovation allow us to adapt our offerings to enter new markets, create new platforms and solutions and adjust to regulations quickly and efficiently. We support our clients by providing solutions across the trade lifecycle, including pre-trade, execution, post-trade and data.

Our institutional client sector serves institutional investors in over 45 markets across over 25 currencies, and in over 65 countries around the globe. We connect institutional investors with pools of liquidity using our flexible order and trading systems. Our clients trust the integrity of our markets and recognize the value they get by trading electronically: enhanced transparency, competitive pricing, efficient trade execution and regulatory compliance.

In our wholesale client sector, we provide a broad range of electronic, voice and hybrid platforms to more than 300 dealers and financial institutions with more than 100 actively trading on our electronic or hybrid markets with our Dealerweb platform. This platform was launched in 2008 following the acquisition of inter-dealer broker Hilliard Farber & Co., Inc. In 2011, we acquired the brokerage assets of Rafferty Capital Markets and in June 2021, we acquired Nasdaq’s U.S. fixed income electronic trading platform (formerly known as eSpeed) (the “NFI Acquisition”). Today, Dealerweb actively competes across a range of rates, credit, money markets, derivatives and equity markets.

In our retail client sector, we provide advanced trading solutions for financial advisory firms and traders with our Tradeweb Direct platform. We entered the retail sector in 2006 and launched our Tradeweb Direct platform following the 2013 acquisition of BondDesk Group LLC, which was built to bring innovation and efficiency to the wealth management community. Tradeweb Direct has provided financial advisory firms access to live offerings, accurate pricing in the marketplace and fast execution.

Our markets are large and growing. Electronic trading continues to increase across the markets in which we operate as a result of market demand for greater transparency, higher execution quality, operational efficiency and lower costs, as well as regulatory changes. We believe our deep client relationships, asset class breadth, geographic reach, regulatory knowledge and scalable technology position us to continue to be at the forefront of the evolution of electronic trading. Our platforms provide transparent, efficient, cost-effective and compliant trading solutions across multiple products, regions and regulatory regimes. As market participants seek to trade across multiple asset classes, reduce their costs of trading and increase the effectiveness of their trading, including through the use of data and analytics, we believe the demand for our platforms and electronic trading solutions will continue to grow.

Trends and Other Factors Impacting Our Performance

CFO Transition

On August 30, 2021, our Board of Directors appointed Sara Furber to serve as our new Chief Financial Officer (“CFO”), effective September 7, 2021. Ms. Furber joins us from U.S. equity exchange operator IEX Group, where she was CFO since 2018. She previously spent two decades in senior roles at Morgan Stanley and Bank of America Merrill Lynch. She succeeds Robert Warshaw, our former CFO, who has left the Company following a period of transition ending on January 4, 2022 (the “CFO Transition Period”).

In connection with her employment offer, Ms. Furber was granted 44,589 restricted stock units (“RSUs”) and 4,270 target performance-based restricted share units (“PRSUs”), such RSUs and PRSUs collectively referred to as the “CFO Special Equity Awards,” with grant date fair values totaling $3.9 million. See Note 13 – Stock-Based Compensation Plans to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details of the CFO Special Equity Awards.

As of August 30, 2021, there was approximately $1.8 million in unamortized stock-based compensation expense associated with equity awards previously granted to Mr. Warshaw, which was accelerated and amortized into expense over a revised estimated service period ending on January 4, 2022 (the “Former CFO Accelerated Stock-Based Compensation Expense”).

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As a result of expenses incurred in connection with the RSUs granted as part of the CFO Special Equity Awards, 43% of which will vest on March 31, 2022, the Former CFO Accelerated Stock-Based Compensation Expense and payment of salary and bonus for Ms. Furber and Mr. Warshaw during the CFO Transition Period, we expect to incur higher than average employee compensation and benefits expense during the period from August 30, 2021 through March 31, 2022. During the year ended December 31, 2021, we incurred a total of $1.3 million in GAAP stock-based compensation expense relating to the CFO Special Equity Awards and $1.7 million relating to the Former CFO Accelerated Stock-Based Compensation Expense. The Former CFO Accelerated Stock-Based Compensation Expense will be excluded from our non-GAAP measures of Adjusted EBITDA and Adjusted Net Income. See “—Non-GAAP Financial Measures” below for further details and a reconciliation to the most comparable GAAP measure.

COVID-19

Since the onset of the COVID-19 pandemic, we have been focused on keeping our employees safe, helping our clients stay connected and ensuring our markets operate efficiently through this period of unprecedented market volatility. We have implemented a series of measures to protect the health and safety of our employees. Our successful transition to remote work, nearly two years ago, reflected our commitment to keeping employees safe, helping clients succeed and playing a positive role in markets. Those same priorities guide our approach to our robust and safe return to the office. Beginning in June 2021, many roles within Tradeweb had transitioned to a hybrid approach in our return to the office plans. Our creative and flexible return to the office plans aim to keep driving our business forward and allow safe collaboration and positive team dynamics. We will continue to monitor the impact of COVID-19, including any related variants, and will adjust our plans accordingly.

In light of the market volatility and economic disruption that has arisen in the wake of the pandemic, we have worked closely with our clients to provide flexible, stable, resilient and secure access to our platforms across our multi-asset offerings so they can reliably manage their core cash and derivatives needs in the diverse geographic, product and customer sector markets we serve. Our employees and clients together have adapted to working remotely.

We currently are determined to minimize any future disruptive impact of COVID-19 on our business. Although we have implemented risk management and contingency plans and taken preventive measures and other precautions, our efforts to mitigate the effects of any disruptions may prove to be inadequate. Due to the uncertainty of the duration and severity of COVID-19, the speed with which this pandemic has developed and persists, the spread of various COVID-19 variants, the uncertainty as to what governmental measures may yet be taken in response to the pandemic and the unpredictable effect on our business, our employees and our clients, we are not able to reasonably estimate the extent of any potential impact of COVID-19 on our financial condition or results of operations at this time, but the impact could potentially be material. Even after the COVID-19 outbreak has subsided, we may continue to experience impacts to our business as a result of the virus’ global economic impact and any recession that may occur in the future. Further, as the COVID-19 situation is unprecedented and continuously evolving, COVID-19 may also affect our operating and financial results in a manner that is not presently known to us or in a manner that we currently do not consider to present significant risks to our operations.

As the COVID-19 pandemic continues to evolve, it may also have the effect of heightening many of the risks described in Part I, Item 1A. – “Risk Factors” of our Annual Report on Form 10-K, including, but not limited to, those relating to changes in economic, political, social and market conditions and the impact of these changes on trading volumes; consolidation and concentration in the financial services industry; our dependence on dealer clients; systems failures, interruptions, delays in services, cybersecurity incidents, unforeseen or catastrophic events and any resulting interruptions; our international operations; and our dependence on our senior management team and other qualified personnel.

Economic Environment

Our business is impacted by the overall market activity and, in particular, trading volumes and market volatility. Lower volatility is correlated to lower liquidity, which may result in lower trading volume for our clients and may negatively impact our operating performance and financial condition. Factors that may impact market activity in 2022 include, among other things, economic, political and social conditions, legislative, regulatory or government policy changes, including related to COVID-19. As a result, our business is sensitive to slow trading environments and the continuity of conservative monetary policies of central banks internationally, which tend to lessen volatility.

While our business is impacted by the overall activity of the market and market volatility, our revenues consist of a mix of fixed and variable fees that partially mitigates this impact. More importantly, we are actively engaged in the further electronification of trading activities, which will help mitigate this impact as we believe secular growth trends can partially offset market volatility risk.

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Regulatory Environment

Our business is subject to extensive regulations in the United States and internationally, which may expose us to significant regulatory risk and cause additional legal costs to ensure compliance. See Part I, Item 1. – “Business – Regulation.” The existing legal framework that governs the financial markets is periodically reviewed and amended, resulting in enforcement of new laws and regulations that apply to our business. The current regulatory environment in the United States may be subject to future legislative changes driven by President Biden’s administration and its priorities. The impact of any reform efforts on us and our operations remains uncertain. For example, as a result of the UK’s withdrawal from the EU (“Brexit”), which occurred on January 31, 2020, and the end of the UK-EU transition period, which occurred on December 31, 2020, we are currently subject to two separate and distinct legal regimes in Europe. We have incurred additional costs to establish a new regulated subsidiary in the Netherlands, and over time there may be a divergence of regulatory requirements as between the UK and EU. Compliance with regulations may require us to dedicate additional financial and operational resources, which may adversely affect our profitability. In addition, compliance with regulations may require our clients to dedicate significant financial and operational resources, which may negatively affect their ability to pay our fees and use our platforms and, as a result, our profitability. However, under certain circumstances regulation may increase demand for our platforms and solutions, and we believe we are well positioned to benefit from any potential increased electronification due to regulatory changes as market participants seek platforms that meet regulatory requirements and solutions that help them comply with their regulatory obligations.

Competitive Environment

We and our competitors compete to introduce innovations in market structure and new electronic trading capabilities. While we endeavor to be a leader in innovation, new trading capabilities of our competitors are also adopted by market participants. On the one hand, this increases liquidity and electronification for all participants, but it also puts pressure on us to further invest in our technology and to innovate to ensure the continued growth of our network of clients and continued improvement of liquidity, electronic processing and pricing on our platforms. Our ability to compete is influenced by key factors such as (i) developments in trading platforms and solutions, (ii) the liquidity we provide on transactions, (iii) the transaction costs we incur in providing our solutions, (iv) the efficiency in execution of transactions on our platforms, (v) our ability to hire and retain talent and (vi) our ability to maintain the security of our platforms and solutions. Our competitive position is also influenced by the familiarity and integration of our clients with our electronic, voice and hybrid systems. When either a client wants to trade in a new product or we want to introduce a new product, trading protocol or other solution, we believe we benefit from our clients’ familiarity with our offerings as well as our integration into their order management systems and back offices. See Part I, Item 1. – “Business – Competition” for more detail on our competitors.

Technology and Cybersecurity Environment

Our business and its success are largely impacted by the introduction of increasingly complex and sophisticated technology systems and infrastructures and new business models. Offering specialized trading venues and solutions through the development of new and enhanced platforms is essential to maintaining our level of competitiveness in the market and attracting new clients seeking platforms that provide advanced automation and better liquidity. We believe we will continue to increase demand for our platforms and solutions and the volume of transactions on our platforms, and thereby enhance our client relationships, by responding to new trading and information requirements by utilizing technological advances and emerging industry standards and practices in an effective and efficient way. We plan to continue to focus on and invest in technology infrastructure initiatives and continually improve and expand our platforms and solutions to further enhance our market position. We experience cyber-threats and attempted security breaches. If these were successful, these cybersecurity incidents could impact revenue and operating income and increase costs. We therefore continue to make investments, which may result in increased costs, to strengthen our cybersecurity measures.

Foreign Currency Exchange Rate Environment

We earn revenues, pay expenses, hold assets and incur liabilities in currencies other than the U.S. dollar. Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations from period to period. In particular, fluctuations in exchange rates for non-U.S. dollar currencies may reduce the U.S. dollar value of revenues, earnings and cash flows we receive from non-U.S. markets, increase our operating expenses (as measured in U.S. dollars) in those markets, negatively impact our competitiveness in those markets or otherwise adversely impact our results of operations or financial condition. Future fluctuations of foreign currency exchange rates and their impact on our results of operations and financial condition are inherently uncertain. As we continue to grow the size of our global operations, these fluctuations may be material. See Part II, Item 7A. – “Quantitative and Qualitative Disclosures about Market Risk – Foreign Currency and Derivative Risk” elsewhere in this Annual Report on Form 10-K.

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Recent Developments

Chairman of the Board of Directors

On February 16, 2022, we announced that Mr. Martin Brand, previously the Chairman of our Board of Directors (the “Board”), stepped down as Chairman and resigned from the Board effective February 11, 2022. Mr. Brand’s resignation was not the result of any disagreement with the Company.

In connection with Mr. Brand’s resignation, the Board elected Mr. Lee Olesky, our co-founder and CEO and a member of the Board since March 2019, as Chairman of the Board, effective February 11, 2022. Ms. Paula Madoff, who has also served on the Board since March 2019, was elected Lead Independent Director effective February 11, 2022.

CEO Transition

On February 16, 2022, we announced that Mr. Olesky will retire as CEO of the Company effective December 31, 2022. On February 11, 2022, the Board elected our President, Mr. Billy Hult, to succeed Mr. Olesky as CEO of the Company, effective January 1, 2023. Mr. Olesky will stay on with the Company in the position of Chairman of the Board, and accordingly will continue to serve in his capacity as a director of the Company.

During 2022, we currently expect that approximately $7.7 million in unamortized stock-based compensation associated with equity awards previously granted to Mr. Olesky, or contractually obligated to be granted to Mr. Olesky in 2022, will be accelerated into expense in 2022 (the “CEO Retirement Accelerated Stock-Based Compensation Expense”). While Mr. Olesky will retire as CEO effective December 31, 2022, the CEO Retirement Accelerated Stock-Based Compensation Expense will be amortized over a revised estimated service period ending on August 11, 2022, the date that ends his required six month notice period under our 2019 Omnibus Equity Incentive Plan. The CEO Retirement Accelerated Stock-Based Compensation Expense will be excluded from our non-GAAP measures of Adjusted EBITDA and Adjusted Net Income. See “—Non-GAAP Financial Measures” below for further details.

Taxation

In connection with the Reorganization Transactions, we became the sole manager of TWM LLC. As a result, beginning with the second quarter of 2019, we became subject to U.S. federal, state and local income taxes with respect to our allocable share of any taxable income of TWM LLC and are taxed at prevailing corporate tax rates. Our actual effective tax rate is impacted by our ownership share of TWM LLC, which will increase over time primarily as the Continuing LLC Owners redeem or exchange their LLC Interests for shares of Class A common stock or Class B common stock, as applicable, or as we purchase LLC Interests from the Continuing LLC Owners. Furthermore, in connection with the IPO, we entered into the Tax Receivable Agreement pursuant to which we began to make payments in January 2021, and we expect future payments to be significant. We intend to cause TWM LLC to make distributions in an amount sufficient to allow us to pay our tax obligations, operating expenses, including payments under the Tax Receivable Agreement, and our quarterly cash dividends, as and when declared by our board of directors.

Components of our Results of Operations

Revenues

Our revenue is derived primarily from transaction fees, commissions, subscription fees and market data fees.

Transaction Fees and Commissions

We earn transaction fees from transactions executed on our trading platforms through various fee plans. Transaction fees are generated on both a variable and fixed price basis and vary by geographic region, product type and trade size. For most of our products, clients pay both fixed minimum monthly transaction fees and variable transaction fees on a per transaction basis in excess of the monthly minimum. For certain of our products, clients also pay a subscription fee in addition to the minimum monthly transaction fee. For other products, instead of a minimum monthly transaction fee, clients pay a subscription fee and variable or fixed transaction fees on a per transaction basis. For variable transaction fees, we charge clients fees based on the mix of products traded and the volume of transactions executed.

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Transaction volume is determined by using either a measure of the notional volume of the products traded or a count of the number of trades. We typically charge higher fees for products that are less actively traded. In addition, because transaction fees are sometimes subject to fee plans with tiered pricing based on product mix, volume, monthly minimums and monthly maximum fee caps, average transaction fees per million generated for a client may vary each month depending on the mix of products and volume traded. Furthermore, because transaction fees vary by geographic region, product type and trade size, our revenues may not correlate with volume growth.

We earn commission revenue from our electronic and voice brokerage services on a riskless principal basis. Riskless principal revenues are derived on matched principal transactions where revenues are earned on the spread between the buy and sell price of the transacted product. For TBA-MBS, U.S. treasury and repurchase agreement transactions executed by our wholesale clients, we also generate revenue from fixed commissions that are generally invoiced monthly.

Subscription Fees

We earn subscription fees primarily for granting clients access to our markets for trading and market data. For a limited number of products, we only charge subscription fees and no transaction fees or commissions. Subscription fees are generally generated on a fixed price basis.

For purposes of our discussion of our results of operations, we include Refinitiv (formerly Thomson Reuters) market data fees in subscription fees. We earn fixed license fees from our market data license agreement with Refinitiv. We also earn royalties from Refinitiv for referrals of new Eikon (a Refinitiv data platform) customers based on customer conversion rates. Royalties may fluctuate from period to period depending on the numbers of customer conversions achieved by Refinitiv during the applicable royalty fee earning period, which is typically five years from the date of the initial referral.

Operating Expenses

Employee Compensation and Benefits

Employee compensation and benefits expense consists of wages, employee benefits, bonuses, commissions, stock-based compensation cost and related taxes. Factors that influence employee compensation and benefits expense include revenue and earnings growth, hiring new employees and trading activity which generates broker commissions. We expect employee compensation and benefits expense to increase as we hire additional employees to support our revenue and earnings growth. As a result, employee compensation and benefits can vary from period to period.

Depreciation and Amortization

Depreciation and amortization expense consists of costs relating to the depreciation and amortization of acquired and internally developed software, other intangible assets, leasehold improvements, furniture and equipment.

General and Administrative

General and administrative expense consists of travel and entertainment, marketing, value-added taxes, state use taxes, foreign currency transaction gains and losses, gains and losses on foreign currency forward contracts entered into for foreign exchange risk management purposes, charitable contributions, other administrative expenses and credit loss expense. We expect general and administrative expense to increase as we expand the number of our employees and product offerings and grow our operations.

Technology and Communications

Technology and communications expense consists of costs relating to software and hardware maintenance, our internal network connections, data center costs, clearance and other trading platform related transaction costs and data feeds provided by third-party service providers, including Refinitiv. Factors that influence technology and communications expense include trading volumes and our investments in innovation, data strategy and cybersecurity.

Professional Fees

Professional fees consist primarily of accounting, tax and legal fees and fees paid to technology and software consultants to maintain our trading platforms and infrastructure, as well as costs related to business acquisition transactions.

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Occupancy

Occupancy expense consists of operating lease rent and related costs for office space and data centers leased in North America, Europe and Asia.

Tax Receivable Agreement Liability Adjustment

The tax receivable agreement liability adjustment reflects changes in the tax receivable agreement liability recorded in our consolidated statement of financial condition as a result of changes in the mix of earnings, tax legislation and tax rates in various jurisdictions which impacted our tax savings.

Net Interest Income (Expense)

Interest income consists of interest earned from our cash deposited with large commercial banks and money market funds. Beginning with the second quarter of 2019, interest expense consists of commitment fees payable on, and, if applicable, interest payable on any borrowings outstanding under, the Revolving Credit Facility.

Income Taxes

Beginning with the second quarter of 2019, we became subject to U.S. federal, state and local income taxes with respect to our taxable income, including our allocable share of any taxable income of TWM LLC, and are taxed at prevailing corporate tax rates. TWM LLC is a multiple member limited liability company taxed as a partnership and accordingly any taxable income generated by TWM LLC is passed through to and included in the taxable income of its members, including to us. Income taxes also include unincorporated business taxes on income earned or losses incurred for conducting business in certain state and local jurisdictions, income taxes on income earned or losses incurred in foreign jurisdictions on certain operations and federal and state income taxes on income earned or losses incurred, both current and deferred, on subsidiaries that are taxed as corporations for U.S. tax purposes.

Net Income Attributable to Non-Controlling Interests

We are the sole manager of TWM LLC. As a result of this control, and because we have a substantial financial interest in TWM LLC, we consolidate the financial results of TWM LLC and report a non-controlling interest in our consolidated financial statements, representing the economic interests of TWM LLC held by the Continuing LLC Owners. Income or loss is attributed to the non-controlling interests based on the relative ownership percentages of LLC Interests held during the period by us and the Continuing LLC Owners.

In connection with the Reorganization Transactions, the TWM LLC Agreement was amended and restated to, among other things, (i) provide for LLC Interests and (ii) exchange all of the then existing membership interests in TWM LLC for LLC Interests. LLC Interests held by the Continuing LLC Owners are redeemable in accordance with the TWM LLC Agreement, at the election of such holders, for newly issued shares of Class A common stock or Class B common stock, as the case may be, on a one-for-one basis. In the event of such election by a Continuing LLC Owner, we may, at our option, effect a direct exchange of Class A common stock or Class B common stock for such LLC Interests of such Continuing LLC Owner in lieu of such redemption. In connection with any redemption or exchange, we will receive a corresponding number of LLC Interests, increasing our total ownership interest in TWM LLC. Following the completion of the Reorganization Transactions and the IPO, we owned 64.3% of TWM LLC and the Continuing LLC Owners owned the remaining 35.7% of TWM LLC. As of December 31, 2021, we owned 86.9% of TWM LLC and the Continuing LLC Owners owned the remaining 13.1% of TWM LLC.

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Results of Operations

For the Years Ended December 31, 2021 and December 31, 2020

The following table sets forth a summary of our statements of income for the years ended December 31, 2021 and 2020:

Revenues

Our revenues for the years ended December 31, 2021 and 2020, and the resulting dollar and percentage changes, were as follows:

(1)Subscription fees for the years ended December 31, 2021 and 2020 include $61.2 million and $59.7 million, respectively, of Refinitiv market data fees.

(2)Constant currency growth, which is a non-GAAP financial measure, is defined as total revenue growth excluding the effects of foreign currency fluctuations. Total revenue excluding the effects of foreign currency fluctuations is calculated by translating the current period and prior period’s total revenue using the annual average exchange rates for 2020. We use constant currency growth as a supplemental metric to evaluate our underlying total revenue performance between periods by removing the impact of foreign currency fluctuations. We believe that providing constant currency growth provides a useful comparison of our total revenue performance and trends between periods.

The primary driver of the $183.8 million increase in revenue is related to a $164.8 million increase in transaction fees and commissions to $846.4 million for the year ended December 31, 2021 from $681.6 million for the year ended December 31, 2020, primarily due to increased volumes and fees for U.S. and European corporate bonds, rates derivatives products and U.S. government bonds.

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Our total revenue by asset class for the years ended December 31, 2021 and 2020, and the resulting dollar and percentage changes, were as follows:

Our variable and fixed revenues by asset class for the years ended December 31, 2021 and 2020, and the resulting dollar and percentage changes, were as follows:

The key drivers of the change in total revenue by asset class are summarized as follows:

Rates. Revenues from our rates asset class increased by $86.6 million or 18.2% to $562.9 million for the year ended December 31, 2021 compared to $476.3 million for the year ended December 31, 2020 primarily due to variable transaction fees and commissions earned on higher trading volumes for rates derivatives products and U.S. and European government bonds.

Credit. Revenues from our credit asset class increased by $79.9 million or 37.6% to $292.4 million for the year ended December 31, 2021 compared to $212.6 million for the year ended December 31, 2020 primarily due to variable transaction fees and commissions on higher trading volumes for U.S. and European corporate bonds.

Equities. Revenues from our equities asset class increased by $9.4 million or 15.2% to $71.1 million for the year ended December 31, 2021 compared to $61.7 million for the year ended December 31, 2020 primarily due to variable transaction fees and commissions on higher trading volumes for U.S. and European ETFs.

Money Markets. Revenues from our money markets asset class increased by $1.7 million or 3.9% to $44.3 million for the year ended December 31, 2021 compared to $42.6 million for the year ended December 31, 2020 primarily due to variable transaction fees and commissions on higher trading volumes for repurchase agreements, partially offset by lower revenues from certificates of deposit.

Market Data. Revenues from our market data asset class increased by $5.6 million or 7.3% to $82.1 million for the year ended December 31, 2021 compared to $76.5 million for the year ended December 31, 2020. The increase was derived from increased third party market data fees, Refinitiv market data fees and revenue from our APA reporting service.

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Other. Revenues from our other asset class increased by $0.7 million or 3.0%, to $23.6 million for the year ended December 31, 2021 compared to $22.9 million for the year ended December 31, 2020 primarily due to increased fees from retail client fee minimums.

We generate revenue from a diverse portfolio of client sectors. Our total revenue by client sector for the years ended December 31, 2021 and 2020, and the resulting dollar and percentage changes, were as follows:

Institutional. Revenues from our institutional client sector increased by $114.5 million or 20.7% to $668.8 million for the year ended December 31, 2021 from $554.3 million for the year ended December 31, 2020. The increase was derived primarily from increased volumes for rates derivatives products, U.S. and European corporate bonds, U.S. and European government bonds and ETFs.

Wholesale. Revenues from our wholesale client sector increased by $69.5 million or 37.5% to $254.9 million for the year ended December 31, 2021 from $185.5 million for the year ended December 31, 2020. The increase was derived primarily from increased volumes for U.S. and European corporate bonds and U.S. government bonds.

Retail. Revenues from our retail client sector decreased by $5.8 million or 7.6% to $70.6 million for the year ended December 31, 2021 from $76.4 million for the year ended December 31, 2020. The decrease was derived primarily from lower revenues from certificates of deposit and U.S. corporate bonds, partially offset by increased fees from structured products.

Market Data. Revenues from our market data client sector increased by $5.6 million or 7.3% to $82.1 million for the year ended December 31, 2021 from $76.5 million for the year ended December 31, 2020. The increase was derived from increased third party market data fees, Refinitiv market data fees and revenue from our APA reporting service.

Our revenues and client base are also diversified by geography. Our total revenue by geography (based on client location) for the years ended December 31, 2021 and 2020, and the resulting dollar and percentage changes, were as follows:

U.S. Revenues from U.S. clients increased by $103.2 million or 18.1% to $673.2 million for the year ended December 31, 2021 from $570.1 million for the year ended December 31, 2020 primarily due to higher revenues for U.S. corporate bonds and U.S. government bonds.

International. Revenues from International clients increased by $80.6 million or 25.0% to $403.2 million for the year ended December 31, 2021 from $322.6 million for the year ended December 31, 2020 primarily due to higher revenues for rates derivatives products, European corporate bonds and ETFs. Fluctuations in foreign currency rates for the year ended December 31, 2021 increased our International total revenue by $11.4 million.

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Operating Expenses

Our expenses for the years ended December 31, 2021 and 2020 were as follows:

Employee Compensation and Benefits. Expenses related to employee compensation and benefits increased by $57.6 million or 16.5% to $407.3 million for the year ended December 31, 2021 from $349.7 million for the year ended December 31, 2020. The increase was primarily due to increases in incentive compensation and commissions tied to operating performance and salaries and benefits as a result of increased employee headcount.

Depreciation and Amortization. Expenses related to depreciation and amortization increased by $17.5 million or 11.4% to $171.3 million for the year ended December 31, 2021 from $153.8 million for the year ended December 31, 2020. The increase in depreciation and amortization expense was primarily the result of the longer estimated useful lives of computer software and the adjusted fair value of the assets that were established in connection with pushdown accounting on October 1, 2018 (see Note 2 – Significant Accounting Policies — Pushdown Accounting, to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K). Assets which may have been fully depreciated or amortized prior to the application of pushdown accounting are still being depreciated or amortized in these periods. Also contributing to the change was an increase in depreciation and amortization expense relating to the assets acquired in connection with the June 25, 2021 NFI Acquisition.

Technology and Communications. Expenses related to technology and communications increased by $8.7 million or 18.3% to $56.2 million for the year ended December 31, 2021 from $47.5 million for the year ended December 31, 2020. The increase was primarily due to increased clearance, data and client service fees driven primarily by higher trading volumes period over period and increased investment in our data strategy and cybersecurity.

General and Administrative. Expenses related to general and administrative costs decreased by $2.7 million or 7.7% to $32.2 million for the year ended December 31, 2021 from $34.8 million for the year ended December 31, 2020. The decrease was primarily due to foreign exchange. Realized and unrealized foreign currency gains totaled $5.0 million during the year ended December 31, 2021 as compared to $5.0 million in losses during the year ended December 31, 2020. The change was primarily driven by an increase in fair value of our foreign currency forward contracts used in connections with our foreign currency risk management program, which was partially offset by an increase in foreign currency re-measurement losses on transactions in nonfunctional currencies. The decrease was primarily offset by higher travel and entertainment expenses, as COVID-19 contributed to a reduction in expenses during 2020 and early 2021.

Professional Fees. Expenses related to professional fees increased by $7.3 million or 25.3% to $36.2 million for the year ended December 31, 2021 from $28.9 million for the year ended December 31, 2020. The increase was primarily due to acquisition transaction costs related to the NFI Acquisition and higher consulting fees.

Occupancy. Expenses related to occupancy costs remained relatively flat at $14.5 million for the year ended December 31, 2021 as compared to $14.7 million for the year ended December 31, 2020.

Tax Receivable Agreement Liability Adjustment

The tax receivable agreement liability adjustment increased by $1.3 million to $12.7 million for the year ended December 31, 2021 from $11.4 million for the year ended December 31, 2020, due to changes in the tax receivable agreement liability recorded in our consolidated statement of financial condition as a result of changes in the mix of earnings, tax legislation and tax rates in various jurisdictions which impacted our tax savings.

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Net Interest Income (Expense)

Net interest expense increased by $1.3 million to $1.6 million for the year ended December 31, 2021 from $0.3 million for the year ended December 31, 2020 due to a decrease in annual interest rates.

Income Taxes

Income tax expense increased by $40.8 million to $96.9 million for the year ended December 31, 2021 from $56.1 million for the year ended December 31, 2020. The provision for income taxes includes U.S. federal, state, local, and foreign taxes. The effective tax rate for the year ended December 31, 2021 was approximately 26.2%, compared with 20.4% for the year ended December 31, 2020. The effective tax rate for the year ended December 31, 2021 differed from the U.S. federal statutory rate of 21.0% primarily due to state and local taxes including the tax impact of state apportionment rate changes on total tax expense as a result of the remeasurement of the Company’s net deferred asset, partially offset by the effect of non-controlling interests and the tax impact of the exercise of equity compensation. The effective tax rate for the year ended December 31, 2020 differed from the U.S. federal statutory rate of 21.0% primarily due to the effect of non-controlling interests and the tax impact of the exercise of equity compensation, partially offset by state, local and foreign taxes.

Effects of Inflation

While inflation may impact our revenues and operating expenses, we believe the effects of inflation, if any, on our results of operations and financial condition have not been significant. However, there can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future.

Liquidity and Capital Resources

Overview

Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs to meet operating expenses, debt service, acquisitions, other commitments and contractual obligations. We consider liquidity in terms of cash on hand, cash flows from operations and availability under the Revolving Credit Facility and their sufficiency to fund our operating and investing activities.

Historically, we have generated significant cash flows from operations and have funded our business operations through cash on hand and cash flows from operations.

Our primary cash needs are for day to day operations, working capital requirements, clearing margin requirements, capital expenditures primarily for software and equipment, our expected dividend payments and our share repurchase program. In addition, we are obligated to make payments under the Tax Receivable Agreement.

We expect to fund our short and long-term liquidity requirements through cash and cash equivalents and cash flows from operations. While historically we have generated significant and adequate cash flows from operations, in the case of an unexpected event in the future or otherwise, we may fund our liquidity requirements through borrowings under the Revolving Credit Facility.

We believe that our projected cash position, cash flows from operations and, if necessary, borrowings under the Revolving Credit Facility, will be sufficient to fund our liquidity requirements for at least the next 12 months. However, our future liquidity requirements could be higher than we currently expect as a result of various factors. For example, any future investments, acquisitions, joint ventures or other similar transactions, which we consider from time to time, may reduce our cash balance or require additional capital. In addition, our ability to continue to meet our future liquidity requirements will depend on, among other things, our ability to achieve anticipated levels of revenues and cash flows from operations and our ability to manage costs and working capital successfully, all of which are subject to general economic, financial, competitive and other factors beyond our control. In the event we require any additional capital, it will take the form of equity or debt financing, or both, and there can be no assurance that we will be able to raise any such financing on terms acceptable to us or at all.

As of December 31, 2021 and 2020, we had cash and cash equivalents of approximately $972.0 million and $791.3 million, respectively. All cash and cash equivalents were held in accounts with banks or money market funds such that the funds are immediately available or in fixed term deposits with a maximum maturity of three months.

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Factors Influencing Our Liquidity and Capital Resources

Dividend Policy

Subject to legally available funds, we intend to continue to pay quarterly cash dividends on our Class A common stock and Class B common stock equal to $0.08 per share. As discussed below, our ability to pay these quarterly cash dividends on our Class A common stock and Class B common stock will depend on distributions to us from TWM LLC.

The declaration, amount and payment of any dividends will be at the sole discretion of our board of directors and will depend on our and our subsidiaries’ results of operations, capital requirements, financial condition, business prospects, contractual restrictions, restrictions imposed by applicable laws and other factors that our board of directors deem relevant. Because we are a holding company and all of our business is conducted through our subsidiaries, we expect to pay dividends, if any, only from funds we receive from our subsidiaries. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from our subsidiaries. As the sole manager of TWM LLC, we intend to cause, and will rely on, TWM LLC to make distributions in respect of LLC Interests to fund our dividends. If TWM LLC is unable to cause these subsidiaries to make distributions, it may have inadequate funds to distribute to us and we may be unable to fund our dividends. In addition, when TWM LLC makes distributions to us, the other holders of LLC Interests will be entitled to receive proportionate distributions based on their economic interests in TWM LLC at the time of such distributions.

Our board of directors will periodically review the cash generated from our business and the capital expenditures required to finance our growth plans and determine whether to modify the amount of regular dividends and/or declare any periodic special dividends. Any future determination to change the amount of dividends and/or declare special dividends will be at the discretion of our board of directors and will be dependent upon then-existing conditions and other factors that our board of directors considers relevant. See “Risk Factors — Risks Relating to our Organizational Structure and Governance — Our principal asset is our equity interest in TWM LLC, and, accordingly, we depend on distributions from TWM LLC to pay our taxes and expenses, including payments under the Tax Receivable Agreement” and “Risk Factors — Risks Relating to Ownership of our Class A Common Stock — We intend to continue to pay regular dividends on our Class A common stock and Class B common stock, but our ability to do so may be limited.”

Cash Dividends

On February 2, 2022, the board of directors of Tradeweb Markets Inc. declared a cash dividend of $0.08 per share of Class A common stock and Class B common stock for the first quarter of 2022. This dividend will be payable on March 15, 2022 to stockholders of record as of March 1, 2022.

During 2021, Tradeweb Markets Inc. paid quarterly cash dividends of $0.08 per share to holders of Class A common stock and Class B common stock, in an aggregate amount totaling $64.6 million.

Cash Distributions

On February 1, 2022, Tradeweb Markets Inc., as the sole manager, approved a distribution by TWM LLC to its equityholders, including Tradeweb Markets Inc., in an aggregate amount of $16.7 million, as adjusted by required state and local tax withholdings as well as increases in Tradeweb Markets Inc. shares, that will be determined prior to the record date of March 1, 2022, payable on March 11, 2022.

During 2021, TWM LLC made a quarterly cash distribution to its equityholders in an aggregate amount totaling $84.8 million, including distributions to Tradeweb Markets Inc. totaling $73.7 million and distributions to non-controlling interests totaling $11.1 million. The proceeds of the cash distributions were used by Tradeweb Markets Inc. to fund dividend payments, taxes and expenses.

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Share Repurchase Program

On February 4, 2021, we announced that our board of directors authorized a new share repurchase program (the “Share Repurchase Program”), primarily to offset annual dilution from stock-based compensation plans. The Share Repurchase Program authorizes the purchase of up to $150.0 million of our Class A common stock at the Company’s discretion through the end of fiscal year 2023. The Share Repurchase Program will be effected primarily through regular open-market purchases (which may include repurchase plans designed to comply with Rule 10b5-1). The amounts and timing of the repurchases will be subject to general market conditions and the prevailing price and trading volumes of our Class A common stock. The Share Repurchase Program does not require the Company to acquire a specific number of shares and may be suspended, amended or discontinued at any time. The Company began purchasing shares pursuant to the Share Repurchase Program during the second quarter of 2021. During the year ended December 31, 2021, the Company acquired a total of 901,968 shares of Class A common stock, at an average price of $83.90, for purchases totaling $75.7 million.

Other Share Repurchases

In addition to the Share Repurchase Program discussed above, we may also withhold shares to cover the payroll tax withholding obligations upon the exercise of stock options and vesting of PRSUs and RSUs.

During the years ended December 31, 2021 and 2020, the Company withheld 983,072 and 1,509,321 shares, respectively, of common stock from employee stock option, PRSU and RSU awards, at an average price per share of $72.25 and $50.47, respectively, and an aggregate value of $71.0 million and $76.2 million, respectively, based on the price of the Class A common stock on the date the relevant withholding occurred.

Tax Receivable Agreement

We are obligated to make payments under the Tax Receivable Agreement. See Note 10 – Tax Receivable Agreement to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional details regarding the requirements for these payments. Although the actual timing and amount of any payments that may be made under the Tax Receivable Agreement will vary, we expect the payments required will be significant. Any payments made by us under the Tax Receivable Agreement will generally reduce the amount of overall cash flows that might have otherwise been available to us or to TWM LLC. These payments will offset some of the tax benefits that we expect to realize as a result of the ownership structure of TWM LLC. To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid by us. As of December 31, 2021, total amounts due to the Continuing LLC Owners under the Tax Receivable Agreement were $412.4 million, substantially all due to be paid over 15 years. The first payment of the Tax Receivable Agreement was made in January 2021.

Liabilities under the Tax Receivable Agreement include amounts to be paid to Continuing LLC Owners, assuming we will have sufficient taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits. In determining the estimated timing of payments, the current year’s taxable income is used to extrapolate an estimate of future taxable income. As of December 31, 2021, we had the following obligations expected to be paid pursuant to the Tax Receivable Agreement:

In addition to the above, our tax receivable agreement liability and future payments thereunder are expected to increase as we realize (or are deemed to realize) an increase in tax basis of TWM LLC’s assets resulting from any future purchases, redemptions or exchanges of LLC Interests from Continuing LLC Owners. We currently expect to fund these future tax receivable agreement liability payments from some of the realized cash tax savings as a result of this increase in tax basis.

Indebtedness

As of December 31, 2021 and 2020, we had no outstanding indebtedness.

On April 8, 2019, TWM LLC entered into the Revolving Credit Facility with a syndicate of banks. The Revolving Credit Facility was subsequently amended on November 7, 2019. The Revolving Credit Facility provides borrowing capacity to be used to fund our ongoing working capital needs, letters of credit and for general corporate purposes, including potential future acquisitions and expansions.

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The Revolving Credit Facility permits borrowings of up to $500.0 million by TWM LLC. Subject to the satisfaction of certain conditions, we will be able to increase the Revolving Credit Facility by $250.0 million with the consent of lenders participating in the increase. The Revolving Credit Facility provides for the issuance of up to $5.0 million of letters of credit as well as borrowings on same-day notice, referred to as swingline loans, in an amount of up to $30.0 million. The Revolving Credit Facility will mature on April 8, 2024.

As of December 31, 2021, there were $0.5 million in letters of credit issued under the Revolving Credit Facility and no borrowings outstanding. As of December 31, 2021, we had availability of $499.5 million.

Under the terms of the credit agreement that governs the Revolving Credit Facility, borrowings under the Revolving Credit Facility bear interest at a rate equal to, at our option, either (a) a base rate equal to the greatest of (i) the administrative agent’s prime rate, (ii) the federal funds effective rate plus ½ of 1.0% and (iii) one month LIBOR plus 1.0%, in each case plus 0.75%, or (b) LIBOR plus 1.75%, subject to a 0.00% floor. The credit agreement also requires that we pay a commitment fee of 0.25% for available but unborrowed amounts.  We are also required to pay customary letter of credit fees and agency fees.

We have the option to voluntarily repay outstanding loans at any time without premium or penalty other than customary “breakage” costs with respect to LIBOR loans.

There will be no scheduled amortization under the Revolving Credit Facility. The principal amount outstanding will be due and payable in full at maturity.

Obligations under the Revolving Credit Facility are guaranteed by our existing and future direct and indirect material wholly-owned domestic subsidiaries, subject to certain exceptions. The Revolving Credit Facility is secured by a first-priority security interest in substantially all of the assets of TWM LLC and the guarantors under the facility, subject to certain exceptions.

The credit agreement that governs the Revolving Credit Facility contains a number of covenants that, among other things and subject to certain exceptions, restrict the ability of TWM LLC and the ability of its restricted subsidiaries to:

•incur additional indebtedness and guarantee indebtedness;

•create or incur liens;

•pay dividends and distributions or repurchase capital stock;

•make investments, loans and advances; and

•enter into certain transactions with affiliates.

The Revolving Credit Facility contains a financial covenant requiring compliance with a (i) maximum total net leverage ratio tested on the last day of each fiscal quarter not to exceed 3.5 to 1.0 (increasing to 4.0 to 1.0 for the four-quarter period following a material acquisition and the fiscal quarter in which such material acquisition is consummated) and (ii) minimum cash interest coverage ratio tested on the last day of each fiscal quarter not less than 3.0 to 1.0.

The credit agreement that governs the Revolving Credit Facility also contains certain affirmative covenants and events of default customary for facilities of this type, including relating to a change of control. If an event of default occurs, the lenders under the Revolving Credit Facility will be entitled to take various actions, including the acceleration of amounts due under the Revolving Credit Facility and all actions permitted to be taken by secured creditors under applicable law.

As of December 31, 2021, we were in compliance with all the covenants set forth in the Revolving Credit Facility.

Operating Lease Obligations

We have operating leases for corporate offices and data centers with initial lease terms ranging from one to 10 years. Our operating lease obligations are primarily related to rental payments under lease agreements for office space in the United States and the United Kingdom through December 2027. The lease for our New York headquarters expires in December 2022 and a new lease has not yet been finalized. As of December 31, 2021, our operating lease liabilities totaled $24.3 million, with payments pursuant to these obligations due within the next twelve months and thereafter totaling $8.1 million and $17.8 million, respectively.

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Other Cash and Liquidity Requirements

Certain of our U.S. subsidiaries are registered as broker-dealers, SEFs or introducing brokers and are subject to the applicable rules and regulations of the SEC and CFTC. These rules contain minimum net capital or other financial resource requirements, as defined in the applicable regulations. These rules may also require a significant part of the registrants’ assets be kept in relatively liquid form. Certain of our foreign subsidiaries are regulated by the FCA in the UK, the Nederlandsche Bank in the Netherlands, the Japanese Financial Services Agency, the Japanese Securities Dealers Association and other foreign regulators, and must maintain financial resources, as defined in the applicable regulations, in excess of the applicable financial resources requirement. As of December 31, 2021 and 2020, each of our regulated subsidiaries had maintained sufficient net capital or financial resources to at least satisfy their minimum requirements, which in aggregate were $66.7 million and $65.1 million, respectively. We maintain capital balances in these subsidiaries in excess of our minimum requirements in order to satisfy working capital needs and to ensure that we have enough cash on hand to satisfy margin requirements and credit risk, including the excess capital expectations of our clients. The FICC and some of our clearing brokers require us to post collateral on unsettled positions, included within deposits with clearing organizations in our consolidated statements of financial condition. Collateral amounts are marked to market on a daily basis, requiring us to pay or receive margin amounts as part of the daily funds settlement. Margin call requirements can vary significantly across periods based on daily market changes and may represent a significant and unpredictable use of our liquidity.

At times, transactions executed on our wholesale platform fail to settle due to the inability of a transaction party to deliver or receive the transacted security. Until the failed transaction settles, we will recognize a receivable from (and a matching payable to) brokers and dealers and clearing organizations for the proceeds from the unsettled transaction. The impact on our liquidity and capital resources is minimal as receivables and payables for failed transactions are usually recognized simultaneously and predominantly offset.  However, from time to time, we enter into repurchase and/or reverse repurchase agreements to facilitate the clearance of securities relating to fails to deliver or receive. Credit exposure related to these agreements to repurchase, including the risk related to a decline in market value of collateral (pledged or received), is managed by entering into agreements to repurchase with overnight or short-term maturity dates and only entering into repurchase transactions with netting members of the FICC. The FICC operates a continuous net settlement system, whereby as trades are submitted and compared, the FICC becomes the counterparty.

Our business also requires continued investment in our technology for product innovation, proprietary technology architecture, operational reliability and cybersecurity. We expect total capital expenditures and software development costs for fiscal 2022 to be between $62.0 million and $68.0 million, compared to expenditures of $51.0 million in fiscal 2021, with the increase primarily driven by technology investments. We expect approximately 20% of our 2022 capital expenditures to be non-recurring.

Working Capital

Working capital is defined as current assets minus current liabilities. Current assets consist of cash and cash equivalents, restricted cash, receivable from brokers and dealers and clearing organizations, deposits with clearing organizations, accounts receivable and receivable from affiliates. Current liabilities consist of payable to brokers and dealers and clearing organizations, accrued compensation, deferred revenue, accounts payable, accrued expenses and other liabilities, employee equity compensation payable, lease liability, payable to affiliates and tax receivable agreement liability. Changes in working capital, which impact our cash flows provided by operating activities, can vary depending on factors such as delays in the collection of receivables, changes in our operating performance, changes in trading patterns, changes in client billing terms and other changes in the demand for our platforms and solutions.

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Our working capital as of December 31, 2021 and 2020 was as follows:

Current Assets

Current assets increased to $1.1 billion as of December 31, 2021 from $909.7 million as of December 31, 2020 primarily due to an increase in cash and cash equivalents (see “—Cash Flows” below) and accounts receivable as a result of increased revenues and earnings.

Current Liabilities

Current liabilities increased to $239.4 million as of December 31, 2021 from $229.5 million as of December 31, 2020 primarily due to an increase in accrued compensation.

See “—Other Cash and Liquidity Requirements” above for a discussion on how capital requirements can impact our working capital.

Cash Flows

Our cash flows for the years ended December 31, 2021, 2020 and 2019 were as follows:

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Operating Activities

Operating activities consist primarily of net income adjusted for noncash items that primarily include depreciation and amortization and stock-based compensation expense. Cash flows from operating activities can fluctuate significantly from period-to-period as working capital needs and the timing of payments for accrued compensation (primarily in the first quarter) and other items impact reported cash flows.

Net cash provided by operating activities for the year ended December 31, 2021 was $578.0 million, and was primarily driven by an increase in revenue.

Net cash provided by operating activities for the year ended December 31, 2020 was $443.2 million, and was primarily driven by an increase in revenue and a decrease in cash taxes.

Net cash provided by operating activities for the year ended December 31, 2019 was $311.0 million, and was primarily driven by an increase in revenue.

Investing Activities

Investing activities consist primarily of software development costs, investments in technology hardware, purchases of equipment and other tangible assets, business acquisitions and investments.

Net cash used in investing activities was $259.1 million for the year ended December 31, 2021, which consisted of $207.8 million in total net cash paid related to the NFI Acquisition (net of cash acquired), $34.5 million of capitalized software development costs and $16.9 million of purchases of furniture, equipment, purchased software and leasehold improvements.

Net cash used in investing activities was $62.5 million for the year ended December 31, 2020, which consisted of $31.0 million of capitalized software development costs, a $20.0 million purchase of an equity investment and $11.5 million of purchases of furniture, equipment, purchased software and leasehold improvements.

Net cash used in investing activities was $44.5 million for the year ended December 31, 2019, which consisted of $28.7 million of capitalized software development costs and $15.8 million of purchases of furniture, equipment, purchased software and leasehold improvements.

Financing Activities

Financing activities consist primarily of repurchases of our Class A stock, purchases of LLC Interests and cash dividends to our Class A common stockholders and Class B common stockholders.

Net cash used in financing activities for the year ended December 31, 2021 was $136.1 million, and was primarily driven by $75.7 million in share repurchases pursuant to the Share Repurchase Program and $64.6 million in cash dividends to our Class A and Class B common stockholders, partially offset by $22.1 million in net proceeds from stock-based compensation option exercises, net of related stock-based compensation payroll tax payments for options, PRSUs and RSUs.

Net cash used in financing activities for the year ended December 31, 2020 was $52.7 million, and was primarily driven by $626.3 million in purchases of LLC Interests and shares of Class A common stock from certain Bank Stockholders and members of management using the net proceeds from the April 2020 follow-on offering, $58.1 million in cash dividends to our Class A and Class B common stockholders, and $16.8 million in capital distributions to non-controlling interests, partially offset by $24.7 million in net proceeds from stock-based compensation option exercises, net of related stock-based compensation payroll tax payments for options, PRSUs and RSUs.

Net cash used in financing activities for the year ended December 31, 2019 was $218.1 million, and was primarily driven by $1,971.2 million in purchases of LLC Interests and shares of Class A common stock from certain Bank Stockholders and members of management using the net proceeds from the IPO and the October 2019 follow-on offering, $120.0 million in pre-IPO capital distributions which includes a one-time distribution of $100.0 million paid to the Original LLC Owners in connection with the IPO, $38.3 million in capital distributions to non-controlling interests and $35.9 million in cash dividends to our Class A and Class B common stockholders.

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Non-GAAP Financial Measures

Free Cash Flow

In addition to cash flow from operating activities presented in accordance with GAAP, we use Free Cash Flow, a non-GAAP measure, to measure liquidity. Free Cash Flow is defined as cash flow from operating activities less non-acquisition related expenditures for capitalized software development costs and furniture, equipment and leasehold improvements.

We present Free Cash Flow because we believe it is a useful indicator of liquidity that provides information to management and investors about the amount of cash generated from our core operations after non-acquisition related expenditures for capitalized software development costs and furniture, equipment and leasehold improvements.

Free Cash Flow has limitations as an analytical tool, and you should not consider Free Cash Flow in isolation or as an alternative to cash flow from operating activities or any other liquidity measure determined in accordance with GAAP. You are encouraged to evaluate each adjustment. In addition, in evaluating Free Cash Flow, you should be aware that in the future, we may incur expenditures similar to the adjustments in the presentation of Free Cash Flow. In addition, Free Cash Flow may not be comparable to similarly titled measures used by other companies in our industry or across different industries.

The table set forth below presents a reconciliation of our cash flow from operating activities to Free Cash Flow for the years ended December 31, 2021, 2020 and 2019:

Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS

In addition to net income and net income attributable to Tradeweb Markets Inc., each presented in accordance with GAAP, we present Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT and Adjusted EBIT margin as non-GAAP measures of our operating performance and Adjusted Net Income and Adjusted Net Income per diluted share (“Adjusted Diluted EPS”) as non-GAAP measures of our profitability.

Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT and Adjusted EBIT margin

Adjusted EBITDA is defined as net income before net interest income/expense, provision for income taxes and depreciation and amortization, adjusted for the impact of certain other items, including transaction and other costs related to the NFI Acquisition, certain stock-based compensation expense and related payroll taxes, tax receivable agreement liability adjustments, unrealized gains and losses from outstanding foreign currency forward contracts and gains and losses from the revaluation of foreign denominated cash.

Adjusted EBIT is defined as net income before net interest income/expense and provision for income taxes, adjusted for the impact of certain other items, including transaction and other costs related to the NFI Acquisition, certain stock-based compensation expense and related payroll taxes, tax receivable agreement liability adjustments, depreciation and amortization related to acquisitions and the Refinitiv Transaction, unrealized gains and losses from outstanding foreign currency forward contracts and gains and losses from the revaluation of foreign denominated cash.

Adjusted EBITDA margin and Adjusted EBIT margin are defined as Adjusted EBITDA and Adjusted EBIT, respectively, divided by revenue for the applicable period.

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We present Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT and Adjusted EBIT margin because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance.  For example, we exclude non-cash stock-based compensation expense associated with the Special Option Award and options awarded to management and other employees following the IPO during 2019 as well as payroll taxes associated with exercises of such options during the applicable period. We believe it is useful to exclude this stock-based compensation expense and associated payroll taxes because the amount of expense associated with the Special Option Award and the post-IPO option awards in 2019 may not directly correlate to the underlying performance of our business and will vary across periods. We did not exclude any non-cash stock-based compensation expense associated with options that may be awarded to management and other employees during 2021. Beginning on August 30, 2021, we also exclude the non-cash Former CFO Accelerated Stock-Based Compensation Expense discussed above under “— Trends and Other Factors Impacting Our Performance — CFO Transition,” and related payroll taxes, as we do not consider this expense indicative of our core ongoing operating performance. The Former CFO Accelerated Stock-Based Compensation Expense was fully amortized by January 4, 2022. In addition, we exclude the tax receivable agreement liability adjustments discussed below under “— Critical Accounting Policies and Estimates — Tax Receivable Agreement.” We believe it is useful to exclude the tax receivable agreement liability adjustment because the recognition of income during a period due to changes in the tax receivable agreement liability recorded in our consolidated statement of financial condition as a result of changes in the mix of earnings, tax legislation and tax rates in various jurisdictions, or other factors that may impact our tax savings, may not directly correlate to the underlying performance of our business and will vary across periods. We also believe it is useful to exclude the transaction and other costs related to the NFI Acquisition as costs related to the acquisition are not indicative of our core operating performance. With respect to Adjusted EBIT and Adjusted EBIT margin, we believe it is useful to exclude the depreciation and amortization of tangible and intangible assets resulting from acquisitions and the application of pushdown accounting to the Refinitiv Transaction in order to facilitate a period-over-period comparison of our financial performance.

Management and our board of directors use Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT and Adjusted EBIT margin to assess our financial performance and believe it is helpful in highlighting trends in our core operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. Further, our executive incentive compensation is based in part on components of Adjusted EBITDA and Adjusted EBITDA margin.

Adjusted Net Income and Adjusted Diluted EPS

We present Adjusted Net Income and Adjusted Diluted EPS for Tradeweb Markets Inc. for post-IPO periods and Tradeweb Markets LLC for pre-IPO periods.  As discussed below, because Adjusted Net Income and Adjusted Diluted EPS give effect to certain tax related adjustments to reflect an assumed effective tax rate for all periods presented and, for post-IPO periods, assumes all LLC Interests held by non-controlling interests are exchanged for shares of Class A or Class B common stock, we believe that Adjusted Net Income and Adjusted Diluted EPS for Tradeweb Markets Inc. and Tradeweb Markets LLC are comparable.

Adjusted Net Income is defined as net income attributable to Tradeweb Markets Inc. assuming the full exchange of all outstanding LLC Interests held by non-controlling interests for shares of Class A common stock or Class B common stock of Tradeweb Markets Inc. (for post-IPO periods) and net income (for pre-IPO periods), each adjusted for certain stock-based compensation expense and related payroll taxes, tax receivable agreement liability adjustments, transaction and other costs related to the NFI Acquisition, depreciation and amortization related to acquisitions and the Refinitiv Transaction, unrealized gains and losses from outstanding foreign currency forward contracts and gains and losses from the revaluation of foreign denominated cash. Adjusted Net Income also gives effect to certain tax related adjustments to reflect an assumed effective tax rate and, for pre-IPO periods, assumes TWM LLC was subject to a corporate tax rate for the periods presented. Adjusted Diluted EPS is defined as Adjusted Net Income divided by the diluted weighted average number of shares of Class A common stock and Class B common stock outstanding for the applicable period (including the effect of potentially dilutive securities determined using the treasury stock method), assuming the full exchange of all outstanding LLC Interests held by non-controlling interests for shares of Class A common stock or Class B common stock, for post-IPO periods, and the diluted weighted average number of shares of TWM LLC outstanding for the applicable period (including the effect of potentially dilutive securities determined using the treasury stock method), for pre-IPO periods.

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We use Adjusted Net Income and Adjusted Diluted EPS as supplemental metrics to evaluate our business performance in a way that also considers our ability to generate profit without the impact of certain items. We exclude stock-based compensation expense associated with the Special Option Award and the post-IPO option awards in 2019 and payroll taxes associated with exercises of such options, the Former CFO Accelerated Stock-Based Compensation Expense and related payroll taxes, tax receivable agreement liability adjustments, acquisition-related costs and acquisition and Refinitiv Transaction-related depreciation and amortization for the reasons described above. Each of the normal recurring adjustments and other adjustments described in the definition of Adjusted Net Income helps to provide management with a measure of our operating performance over time by removing items that are not related to day-to-day operations or are non-cash expenses. In addition to excluding items that are non-recurring or may not be indicative of our ongoing operating performance, by assuming the full exchange of all outstanding LLC Interests held by non-controlling interests, we believe that Adjusted Net Income and Adjusted Diluted EPS for Tradeweb Markets Inc. facilitate comparisons with other companies that have different organizational and tax structures, as well as comparisons period over period, because it eliminates the effect of any changes in net income attributable to Tradeweb Markets Inc. driven by increases in our ownership of TWM LLC, which are unrelated to our operating performance.

Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS have limitations as analytical tools, and you should not consider these non-GAAP financial measures in isolation or as alternatives to net income attributable to Tradeweb Markets Inc., net income, operating income, gross margin, earnings per share or any other financial measure derived in accordance with GAAP. You are encouraged to evaluate each adjustment and, as applicable, the reasons we consider it appropriate for supplemental analysis. In addition, in evaluating Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS you should be aware that in the future, we may incur expenses similar to the adjustments in the presentation of these non-GAAP financial measures. Our presentation of Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In addition, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS may not be comparable to similarly titled measures used by other companies in our industry or across different industries.

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The table set forth below presents a reconciliation of net income to Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT and Adjusted EBIT margin for the years ended December 31, 2021, 2020 and 2019:

(1)Represents transaction and other costs related to the NFI Acquisition, which closed in June 2021. Acquisition-related costs primarily include legal, consulting and advisory fees and severance costs incurred that relate to the acquisition transaction.

(2)Represents non-cash stock-based compensation expense associated with the Special Option Award and post-IPO options awarded in 2019 and payroll taxes associated with exercises of such options during the applicable period. Beginning on August 30, 2021, this adjustment also includes the non-cash Former CFO Accelerated Stock-Based Compensation Expense, and related payroll taxes, which totaled $1.7 million during the year ended December 31, 2021.

(3)Represents unrealized gain or loss recognized on foreign currency forward contracts and foreign exchange gain or loss from the revaluation of cash denominated in a different currency than the entity’s functional currency.

(4)Represents income recognized during the applicable period due to changes in the tax receivable agreement liability recorded in the statement of financial condition as a result of changes in the mix of earnings, tax legislation and tax rates in various jurisdictions which impacted our tax savings.

(5)Represents intangible asset and acquired software amortization resulting from the NFI Acquisition and intangible asset amortization and increased tangible asset and capitalized software depreciation and amortization resulting from the application of pushdown accounting to the Refinitiv Transaction (where all assets were marked to fair value as of the closing date of the Refinitiv Transaction).

(6)For the year ended December 31, 2021, Adjusted EBITDA margin increased compared to the prior year period by 192 basis points, or 211 basis points on a constant currency basis. For the year ended December 31, 2021, Adjusted EBIT margin increased compared to the prior year period by 247 basis points, or 263 basis points on a constant currency basis. The changes in Adjusted EBITDA margin and Adjusted EBIT margin on a constant currency basis, which are non-GAAP financial measures, are defined as the changes in Adjusted EBITDA margin and Adjusted EBIT margin excluding the effects of foreign currency fluctuations. Adjusted EBITDA margin and Adjusted EBIT margin excluding the effects of foreign currency fluctuations are calculated by translating the current period and prior period’s results using the annual average exchange rates for the prior period. We use the changes in Adjusted EBITDA margin and Adjusted EBIT margin on a constant currency basis as supplemental metrics to evaluate our underlying margin performance between periods by removing the impact of foreign currency fluctuations. We believe that providing changes in Adjusted EBITDA margin and Adjusted EBIT margin on a constant currency basis provide useful comparisons of our Adjusted EBITDA margin and Adjusted EBIT margin and trends between periods.

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The table set forth below presents a reconciliation of net income attributable to Tradeweb Markets Inc. and net income, as applicable, to Adjusted Net Income and Adjusted Diluted EPS for the years ended December 31, 2021, 2020 and 2019:

(1)In April 2019, we completed the Reorganization Transactions and the IPO.  Therefore, certain earnings information is being presented separately for Tradeweb Markets LLC and Tradeweb Markets Inc.

(a)Presents information for Tradeweb Markets Inc. (post-IPO period).

(b)Presents information for Tradeweb Markets LLC (pre-IPO period).

See “Introductory Note – Basis of Presentation” and Note 18 – Earnings Per Share to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

(2)For post-IPO periods, represents the reallocation of net income attributable to non-controlling interests from the assumed exchange of all outstanding LLC Interests held by non-controlling interests for shares of Class A or Class B common stock.

(3)Represents transaction and other costs related to the NFI Acquisition, which closed in June 2021. Acquisition-related costs primarily include legal, consulting and advisory fees and severance costs incurred that relate to the acquisition transaction.

(4)Represents intangible asset and acquired software amortization resulting from the NFI Acquisition and intangible asset amortization and increased tangible asset and capitalized software depreciation and amortization resulting from the application of pushdown accounting to the Refinitiv Transaction (where all assets were marked to fair value as of the closing date of the Refinitiv Transaction).

(5)Represents non-cash stock-based compensation expense associated with the Special Option Award and post-IPO options awarded in 2019 and payroll taxes associated with exercises of such options during the applicable period. Beginning on August 30, 2021, this adjustment also includes the non-cash Former CFO Accelerated Stock-Based Compensation Expense, and related payroll taxes, which totaled $1.7 million during the year ended December 31, 2021.

(6)Represents unrealized gain or loss recognized on foreign currency forward contracts and foreign exchange gain or loss from the revaluation of cash denominated in a different currency than the entity’s functional currency.

(7)Represents income recognized during the applicable period due to changes in the tax receivable agreement liability recorded in the statement of financial condition as a result of changes in the mix of earnings, tax legislation and tax rates in various jurisdictions which impacted our tax savings.

(8)Represents corporate income taxes at an assumed effective tax rate of 22.0% applied to Adjusted Net Income before income taxes for the years ended December 31, 2021 and 2020 and 26.4% applied to Adjusted Net Income before income taxes for the year ended December 31, 2019. For pre-IPO periods, this adjustment assumes Tradeweb Markets LLC was subject to a corporate tax rate for the periods presented.

(9)For a summary of the calculation of Adjusted Diluted EPS, see “Reconciliation of Diluted Weighted Average Shares Outstanding to Adjusted Diluted Weighted Average Shares Outstanding” below.

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The following table summarizes the calculation of Adjusted Diluted EPS for the periods presented:

(1)Due to the Reorganization Transactions and the IPO completed in April 2019, shares outstanding during the year ended December 31, 2019 represent shares of TWM LLC (pre-IPO period) and shares of Class A and Class B common stock of Tradeweb Markets Inc. (post-IPO period). Shares outstanding during the years ended December 31, 2021 and 2020 represent shares of Class A and Class B Common Stock of Tradeweb Markets Inc. (post-IPO period).

(2)Assumes the full exchange of the weighted average of all outstanding LLC Interests held by non-controlling interests for shares of Class A or Class B common stock, resulting in the elimination of the non-controlling interests and recognition of the net income attributable to non-controlling interests.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. GAAP which requires us to make estimates and assumptions about future events that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Management evaluates its accounting policies, estimates and judgments on an on-going basis.

Management evaluated the development and selection of its critical accounting policies and estimates and believes that the following policies are most critical to the portrayal of our financial condition and results of operations, and that require our most difficult, subjective or complex judgments in estimating the effect of inherent uncertainties. With respect to critical accounting policies and estimates, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. More information on all of our significant accounting policies can be found in Note 2 – Significant Accounting Policies to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in our consolidated financial statements and accompanying notes. These estimates and assumptions are based on judgment and the best available information at the time. Management bases its estimates on historical experience, observance of trends in particular areas, information available from outside sources and various other assumptions that are believed to be reasonable under the circumstances. Information from these sources form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. Therefore, actual results could differ materially from those estimates. Such estimates include business combination purchase price allocations, intangible assets, goodwill, software development costs, revenue recognition, stock-based compensation, current and deferred income taxes and the tax receivable agreement liability.

Business Combinations

Business combinations are accounted for under the purchase method of accounting pursuant to Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”). The total cost of an acquisition is allocated to the underlying net assets based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. The fair value of assets acquired and liabilities assumed is determined based on assumptions that reasonable market participants would use in the principal (or most advantageous) market for the asset or liability. Determining the fair value of certain assets acquired and liabilities assumed is judgmental in nature and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates, growth rates, customer attrition rates and asset lives.

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The most significant accounting estimate associated with the June 2021 NFI Acquisition was the valuation of the acquired definite-lived intangible customer relationship asset (the “Customer Relationships”), which was valued at approximately $101.3 million, as adjusted based on the final purchase price allocation. The majority of the residual total purchase price of $190.0 million, net of cash acquired, net of deposits with clearing organizations acquired and prior to working capital adjustments, was primarily allocated to goodwill, which was valued at approximately $85.5 million, as adjusted based on the final purchase price allocation. We utilized the assistance of a third-party valuation specialist to determine the fair value of the assets acquired and liabilities assumed at the date of acquisition. Management is responsible for these valuations and appraisals.

The valuation of the Customer Relationships primarily included significant unobservable inputs (Level 3), creating a significant level of estimation uncertainty. Customer Relationships were valued using the income approach, specifically a multi-period excess earnings method. The excess earnings method examines the economic returns contributed by the identified tangible and intangible assets of a company, and then examines the excess return that is attributable to the intangible asset being valued. The discount rate used reflects the amount of risk associated with the hypothetical cash flows for the Customer Relationships relative to the overall business. In developing a discount rate for the Customer Relationships, the Company estimated a weighted-average cost of capital for the overall business and employed an intangible asset risk premium to this rate when discounting the excess earnings related to Customer Relationships. The resulting discounted cash flows were then tax-affected at the applicable statutory rate. A discounted tax amortization benefit was also added to the fair value of the assets under the assumption that the Customer Relationships would be amortized for tax purposes over a period of 15 years. For GAAP purposes, the Customer Relationships will be amortized over a useful life of 13 years. Any changes in the discount rate used for valuing the Customer Relationships or the estimated useful life used for amortization purposes could have a material impact on our consolidated statements of financial condition and consolidated statement of income. Any increases or decreases in the allocation of purchase price to Customer Relationships, which is an amortizable asset, would be offset by a corresponding decrease or increase in goodwill, which is an indefinite-lived asset, not subject to amortization and as a result would impact the asset balances recorded on our consolidated statements of financial condition as well as the amortization expense recorded on our consolidated statement of income over the life of the asset. Any changes in the estimated useful life of the Customer Relationships would also impact timing of the reduction of the net balance of intangible assets, net of accumulated amortization on our consolidated statements of financial condition and the timing of the recognition of amortization expense on our consolidated statement of income. During the fourth quarter of 2021, the Company recorded final working capital and purchase price adjustments which resulted in a $0.1 million decrease in accounts receivable, $2.0 million increase in Customer Relationships, $0.9 million decrease in other assets, $0.4 million decrease in accounts payable, accrued expenses and other liabilities, and a $2.5 million decrease in goodwill. The final purchase price allocation as described above and in Note 4 – Acquisitions to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K reflects these final adjustments.

Revenue Recognition

We enter into contracts with our clients to provide a stand-ready connection to our electronic marketplaces, which facilitates the execution of trades by our clients. The access to our electronic marketplaces including market data and continuous pricing data refreshes and the processing of trades thereon are highly interrelated and are considered a single performance obligation satisfied over time as the client simultaneously receives and consumes the benefit from our performance. This performance obligation constitutes a series of services that are substantially the same in nature and are provided over time using the same measure of progress. For our services, we earn subscription fees for granting access to our electronic marketplaces.

We earn transaction fees and/or commissions from transactions executed on our trading platforms, including commission revenue from electronic and voice brokerage transacted on a riskless principal basis. Riskless principal revenues are derived on matched principal transactions where revenues are earned on the spread between the buy and sell price of the transacted product. Fixed monthly transaction fees or commissions or monthly transaction fee or commission minimums are generally earned on a monthly basis in the period the stand-ready trading services are provided. Variable transaction fee or commission revenue is recognized and recorded on a trade-date basis when the individual trade occurs. Variable discounts or rebates on transaction fees or commissions are generally earned and applied monthly or quarterly, are resolved within the same reporting period and are recorded as a reduction to revenue in the period the relevant trades occur.

We earn fees from Refinitiv relating to the sale of market data to Refinitiv, which redistributes that data. Included in these fees are real-time market data fees which are recognized monthly on a straight-line basis as Refinitiv receives and consumes the benefit evenly, over the contact period, as the data is provided, and fees for historical data sets which are recognized when the historical data set is provided to Refinitiv.

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We are required to make significant judgements for the Refinitiv market data fees. Significant judgements used in accounting for this contract include the following determinations:

•The provision of real-time market data feeds and annual historical data sets are distinct performance obligations.

•The performance obligations under this contract are recognized over time from the initial delivery of the data feeds or each historical data set until the end of the contract term.

•Determining the transaction price for the performance obligations by using a market assessment analysis. Inputs in this analysis include a consultant study which determined the overall value of our market data and pricing information for historical data sets provided by other companies.

During the years ended December 31, 2021, 2020 and 2019, there were no material changes in the assumptions used to determine the Refinitiv market data fees.

Income Taxes

Tradeweb Markets Inc. is subject to U.S. federal, state and local income taxes with respect to its taxable income, including its allocable share of any taxable income of TWM LLC, and is taxed at prevailing corporate tax rates. TWM LLC is a multiple member limited liability company taxed as a partnership and accordingly any taxable income generated by TWM LLC is passed through to and included in the taxable income of its members, including to us. TWM LLC records taxes for conducting business in certain state, local and foreign jurisdictions and records U.S. federal taxes for subsidiaries that are taxed as corporations for U.S. tax purposes. We currently record deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and measure the deferred taxes using the enacted tax rates and laws that will be in effect when such temporary differences are expected to reverse. The measurement of deferred taxes often involves the exercise of significant judgment related to the realization of tax basis. Our deferred tax assets and liabilities reflect our assessment that tax positions taken in filed tax returns and the resulting tax basis are more likely than not to be sustained if they are audited by taxing authorities. Assessing tax rates that we expect to apply and determining the years when the temporary differences are expected to affect taxable income requires judgment about the future apportionment of our income among the jurisdictions in which we operate. Any changes in our practices or judgments involved in the measurement of deferred tax assets and liabilities could materially impact our financial condition or results of operations.

In connection with recording deferred tax assets and liabilities, we record valuation allowances when we believe that it is more likely than not that the Company will not be able to realize its deferred tax assets in the future. We evaluate our deferred tax assets quarterly to determine whether adjustments to our valuation allowance are appropriate in light of changes in facts or circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law. In making this evaluation, we rely on our recent history of pre-tax earnings, our forecasts of future earnings and the nature and timing of future deductions and benefits represented by the deferred tax assets, all of which involve the exercise of significant judgment. As of December 31, 2021 and 2020, we established a valuation allowance of $0.7 million and $0.1 million on gross deferred tax assets totaling $625.4 million and $585.1 million, respectively. If forecasts of future earnings and the nature and estimated timing of future deductions and benefits change in the future, we may determine that existing valuation allowances must be revised or new valuation allowances created, any of which could materially impact our financial condition or results of operations. See Note 9 – Income Taxes to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

We recognize interest and penalties related to unrecognized tax benefits within the provision for income taxes in our consolidated statements of income. Accrued interest and penalties are included within accounts payable, accrued expenses and other liabilities in our consolidated statements of financial condition. A U.S. shareholder of a controlled foreign corporation (“CFC”) is required to include in income, as a deemed dividend, the global intangible low-taxed income (“GILTI”) of the CFC. We have elected to treat taxes due on future U.S. inclusions in taxable income of GILTI as a current period expense when incurred.

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Tax Receivable Agreement

Tradeweb Markets Inc. entered into a Tax Receivable Agreement with TWM LLC and the Continuing LLC Owners which provides for the payment by Tradeweb Markets Inc. to a Continuing LLC Owner of 50% of the amount of U.S. federal, state and local income or franchise tax savings, if any, that Tradeweb Markets Inc. actually realizes (or in some circumstances is deemed to realize) as a result of (i) increases in the tax basis of TWM LLC’s assets resulting from (a) the purchase of LLC Interests from such Continuing LLC Owner, including with the net proceeds from the IPO, the October 2019 and April 2020 follow-on offerings and any future offering or (b) redemptions or exchanges by such Continuing LLC Owner of LLC Interests for shares of Class A common stock or Class B common stock or for cash, as applicable, and (ii) certain other tax benefits related to Tradeweb Markets Inc. making payments under the Tax Receivable Agreement. Substantially all payments due under the Tax Receivable Agreement are payable over the fifteen years following the purchase of LLC Interests from Continuing LLC Owners or redemption or exchanges by Continuing LLC Owners of LLC Interests. The timing of the payments over the fifteen year period is dependent upon our annual taxable income over the same period. In determining the estimated timing of payments, the current year’s taxable income is used to extrapolate an estimate of future taxable income. This requires significant judgment relating to projecting future earnings, the geographic mix of those earnings and the timing of deferred taxes becoming current.

The impact of any changes in the total projected obligations recorded under the Tax Receivable Agreement as a result of actual changes in the geographic mix of our earnings, changes in tax legislation and tax rates or other factors that may impact our actual tax savings realized will be reflected in income before taxes in the period in which the change occurs.