CBOE, §1A diff (2015 → 2016)

Item 1A. Risk Factors The risks and uncertainties described below are those that we believe are material at this time relating to our business and relating to the Merger. These risks and uncertainties, however, are not the only risks and uncertainties that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also significantly impact us. Any of these risks and uncertainties may materially and adversely affect our business, financial condition or results of operations, liquidity, cash flows and the Merger. Risks Relating to Our Business Loss of our right to exclusively list and trade certain index options and futures could have a material adverse effect on our financial performance. We hold exclusive licenses to list securities index options on the S&P 500 Index, the S&P 100 Index, the Russell 2000 Index, as well as others, granted to us by the owners of such indexes and based on which we have developed our proprietary VIX methodology. In 2016, approximately 88.2% of our transaction fees were generated by our futures and index options, the overwhelming majority of which were generated by our exclusively-licensed products and products based on the VIX methodology. The bulk of this revenue is attributable to our S&P 500 Index options and VIX Index options and futures. As a result, our operating revenues are dependent in large part on the exclusive licenses we hold for these products and our ability to maintain our exclusive VIX methodology. There is a risk, with respect to each of our current exclusive licenses, that the owner of the index may not renew the license with us on an exclusive basis or at all. In the first event, we would be subject to multiple listing in the trading of what is now an exclusive index product, which could result in a loss of market share and negatively impact our profitability. In the second event, we could lose the right to list the index product entirely. The loss or limited use of any of our exclusive index licenses, especially for the S&P 500 Index, for any reason could have a material adverse effect on our business and profitability. See "Business-Products-Strategic Relationships" for a discussion of these licenses and their expiration dates. In addition to the risks related to our exclusive licenses, if we are unable to retain exclusive proprietary rights in the VIX methodology, our volatility products could be subject to multiple listing, which could have a material adverse effect on us. In addition, the European Parliament has adopted legislation that will require European exchanges to provide non-discriminatory access to benchmarks, like index options, and is considering other legislation that may impact the ability of European banks to trade our products. While similar legislation has not been proposed in the U.S., if it were passed, it could cause us to lose exclusivity in our internally developed and licensed index products. The adopted and proposed European legislation may impact our expansion activities in Europe, and may reduce the volume on our exchanges from international customers. Furthermore, our competitors may succeed in providing a market for the trading of index-based or volatility products that are economically similar to those that we offer. It is also possible that a third party may offer trading in index-based products that are the same as those that are the subject of one of our exclusive licenses, but in a jurisdiction in which the index owner cannot require a license or in a manner otherwise not covered by our exclusive license. The value of our exclusive licenses to list securities index options also depends on the continued ability of index owners to require licenses for the trading of options based on their indexes. Although we and the index owners have prevailed in legal actions challenging our rights to exclusively license indexes, we may be subject to changes in the law or other actions taken in the future that might impede our ability to exclusively offer trading in certain index options. General economic conditions and other factors beyond our control could significantly reduce demand for our products and services and harm our business. The volume of options and futures transactions and the demand for our products and services are directly affected by economic, political and market conditions in the U.S. and elsewhere in the world that are beyond our control, including: • broad trends in business and finance; • concerns over wavering institutional or retail confidence levels; • changes in government fiscal and monetary policy and foreign currency exchange rates; • the availability of short-term and long-term funding and capital; • the availability of alternative investment opportunities; • changes in the level of trading activity in underlying instruments; • changes and volatility in the prices of securities; • the level and volatility of interest rates; • unforeseen market closures or other disruptions in trading; and • concerns about terrorism and war. General economic conditions affect options and futures trading in a variety of ways, from the availability of capital to investor confidence. The economic climate in recent years has been characterized by challenging business, economic and political conditions throughout the world. Adverse changes in the economy may have a negative impact on our revenues by causing a decline in trading volume. Significant declines in trading volumes or demand for market data may have a material adverse effect on our business, financial condition and operating results. We operate in a highly regulated industry and may be subject to censures, fines and other legal proceedings if we fail to comply with legal and regulatory obligations. CBOE and C2 are registered national securities exchanges and SROs, and, as such, are subject to comprehensive regulation by the SEC. CFE is a DCM registered with the CFTC and is subject to comprehensive regulation by the CFTC. In addition to the requirements related to operating our markets imposed by the SEC and the CFTC, we also have certain responsibilities for regulating the TPHs that trade on our exchanges. While we have entered into agreements under which FINRA with respect to our options exchanges, and NFA with respect to our futures exchange, provide certain regulatory services, we retain responsibility for the regulation of our TPHs. See "Business-Regulatory Responsibilities." Our ability to comply with applicable laws and rules is largely dependent on the establishment and maintenance of appropriate systems and procedures, our ability to attract and retain qualified personnel, the ability of FINRA and NFA to perform under the regulatory services agreements and our oversight of the work done by FINRA and NFA. The SEC and CFTC have broad powers to audit, investigate and enforce compliance and to punish noncompliance by SROs and DCMs, respectively, pursuant to applicable laws, rules and regulations. If the SEC or CFTC were to find one of our programs of enforcement or compliance to be deficient, CBOE, C2 or CFE could be the subject of SEC or CFTC investigations and enforcement proceedings that may result in substantial sanctions, including revocation of an exchange's registration as a national securities exchange or DCM. Any such investigations or proceedings, whether successful or unsuccessful, could result in substantial costs, the diversion of resources, including management time, and potential harm to our reputation, which could have a material adverse effect on our business, results of operations or financial condition. In addition, CBOE, C2 or CFE may be required to modify or restructure their regulatory functions in response to any changes in the regulatory environment, or they may be required to rely on third parties to perform regulatory and oversight functions, each of which may require us to incur substantial expenses and may harm our reputation if our regulatory services are deemed inadequate. Although CBOE Holdings itself is not an SRO, CBOE Holdings is subject to regulation by the SEC of activities that involve the options exchanges. Specifically, the SEC will exercise oversight over the governance of CBOE Holdings and its relationship with CBOE and C2. See "Business-Regulatory Responsibilities." Our business may be adversely affected by price competition. The business of operating options exchanges is characterized by intense price competition, especially with respect to transaction fees. The pricing model for trade execution for options has changed in response to competitive market conditions and our competitors have adjusted transaction fees and fee structures accordingly, including by opening new exchanges, which allow them to offer multiple pricing models that can appeal to different segments of market participants. These changes have resulted in significant pricing pressures on us, especially on transaction fees and incentives for multiply-listed products. As a result of these pricing pressures, our average rate per multiply-listed options contract may decrease. It is likely that this pressure will continue and even intensify as our competitors continue to seek to increase their share of trading by further reducing their transaction fees or by offering other financial incentives to order providers and liquidity providers to induce them to direct orders to their markets. In addition, one or more competitors may engage in aggressive pricing strategies and significantly decrease or completely eliminate their profit margin for a period of time in order to capture a greater share of trading volume. Some order-providing firms on our exchanges have taken ownership positions in options exchanges that compete with us and such exchanges have given those firms added economic incentives to direct orders to them. With respect to our proprietary products, we compete with futures exchanges and swap execution facilities that offer similar products and other financial market participants that offer over-the-counter derivatives. We also compete on price against certain multiply-listed options products, including SPY, that offer some of the features of our proprietary products. We could lose a substantial percentage of our share of trading if we are unable to price transactions in a competitive manner. Also, our profits could decline if competitive pressures force us to reduce fees. If any of these events occur, our operating results and profitability could be adversely affected. A significant portion of our operating revenues is generated by our transaction-based business. If the amount of trading volume on our exchanges decreases, or the product mix shifts to lower revenue products, our revenues from transaction fees will decrease. In 2016, 2015 and 2014, approximately 70.5%, 71.9% and 70.9% of our operating revenues, respectively, were generated by our transaction-based business. This business is dependent on our ability to attract and maintain order flow, both in absolute terms and relative to other market centers. Our total trading volumes could decline if our market participants reduce their trading activity for any reason, such as: • heightened capital requirements; • regulatory or legislative actions; • reduced access to capital required to fund trading activities; or • significant market disruptions. Over the past few years, a number of legislative actions have been taken, both domestically and internationally, that may cause market participants to be subject to increased capital requirements and additional compliance burdens. These actions, including Basel III, Dodd-Frank and the Collins Amendment to Dodd-Frank, may cause market participants to reduce the number of trades they make on our exchanges. In addition, the transaction fees generated are different based on type of product and other factors, including the type of customer and certain volume discounts. See "Management's Discussion and Analysis-Operating Revenues-Average revenue per contract." If the amount of our trading volume decreases, or the mix traded shifts to our lower revenue per contract products, our revenues from transaction fees will decrease. We can offer no assurance that we would be able to reduce our costs to match the amount of any such decrease. Legislative or regulatory changes affecting the listed options or futures markets could have a material adverse effect on our business. Changes in regulation by the SEC, CFTC, foreign regulators or other government action, including SEC approval of rule filings by other SROs or entities, including OCC, could materially affect our markets. In recent years, the securities and futures industries have been subject to significant regulatory changes as a result of increasing government and public scrutiny of the securities and futures industries. We have also experienced an increase in rulemaking and legislation that could affect our business. In 2010, Congress passed the Dodd-Frank Act and other legislation. While many of its requirements have been implemented or are in the process of being implemented, some of the provisions in Dodd-Frank that impact our markets require additional action by the SEC or the CFTC. Depending on how the SEC and CFTC interpret and implement these laws, exchanges like ours could be subject to increased competition and additional costs. We could also see reduced trading by our customers due to margin or other requirements placed on them. Under the Collins Amendment to the Dodd-Frank Act, starting in 2015, large U.S. banks are required to compute their risk weighted assets, which include exchange-traded options and futures. This, and other rulemaking, may lead to further increases in capital requirements for U.S. bank holding companies, and bank subsidiaries involved in the trading and clearing of derivatives. These increased capital requirements may reduce trading in options and futures due to bank-affiliated clearing members and broker-dealers reducing their own trading, charging their customers more to trade, reducing the type or number of customers or withdrawing from the business of market-maker clearing. In 2016, the SEC approved a plan to create, implement and maintain the CAT, which would serve as a comprehensive audit trail of orders that will allow regulators to efficiently and accurately track all activity in Regulation NMS securities in the U.S. market. In addition to increased regulatory obligations, implementation of the CAT could result in significant additional expenditures, including to implement any new technology to meet any plan's requirements. Under European Union ("EU") regulations, European banks and other European financial institutions become subject to punitive capital charges if they transact options or futures through a non-qualifying clearinghouse. OCC, our clearinghouse for options and futures, is not currently recognized as a qualified clearinghouse by the EU. The current deadline for the EU to qualify foreign clearinghouses as equivalent is June 15, 2017. If the EU does not recognize OCC as a qualified clearinghouse by such date (or by a subsequent date in the event that the current deadline is extended), then European market participants that clear through OCC would become subject to punitive capital charges. As a result, we could experience the loss of a significant number of European market participants and a significant reduction in trading activity on our markets, which could have a material adverse effect on our business. On June 23, 2016, the U.K. held a referendum in which voters approved an exit from the EU, commonly referred to as “Brexit.” As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.’s future relationship with the EU. The Brexit vote resulted in regulatory uncertainty throughout the region and could adversely affect business activity, political stability and economic conditions throughout Europe. It is also possible that there will be additional legislative and regulatory changes or efforts in the environment in which we operate our businesses, although we cannot predict the nature of these changes or their impact on our business at this time. Actions on any of the specific regulatory issues currently under review in the U.S. and other proposals could have a material impact on our business. For a discussion of the regulatory environment in which we operate and proposed regulatory changes, see "Business-Regulatory Environment and Compliance." In addition, Congress, the SEC, foreign regulators and other regulatory authorities could impose legislative or regulatory changes that could adversely impact the ability of our market participants to use our markets, or participate in the options or futures industry at all. Any such changes could result in the loss of a significant number of market participants or a reduction in trading activity on our markets, either of which could have a material adverse effect on our business. Changes or proposed changes in regulation may also result in additional costs of compliance and modification of market participants' trading activity on our exchanges. Intense competition could materially adversely affect our market share and financial performance. We compete with a number of entities on several different fronts, including the cost, quality and speed of our trade execution, functionality and ease of use of our trading platform, range of our products and services, our technological innovation and adaptation and our reputation. We compete with futures exchanges and swap execution facilities that offer comparable products and with the over-the-counter market with respect to our proprietary products. With respect to our multiply-listed products, our principal competitors are the thirteen other U.S. options exchanges. See the risk factor entitled "Our business may be adversely affected by price competition." Most of the equity options and options on ETPs listed and traded on our exchanges are also listed and traded on other U.S. options exchanges. Changes we have implemented in response to competitive pressures may not be successful in maintaining or expanding our market share in those products in the future. Likewise, our future responses to these or other competitive developments may not be successful in maintaining or expanding our market share. In addition, indexes underlying our products, including VIX and SPX, may be licensed for use in similar OTC options. Needs or preferences of investors could change leading to a migration to the market of some trades that today could be entered into on our exchanges. Options on ETFs and ETNs that have such licenses on these indexes are available for trading. As a result, trading in our products could decrease due to competitive pressures from these alternative products. Some of our competitors and potential competitors have greater financial, marketing, technological, personnel and other resources than we do. These factors may enable them to develop similar or more innovative products, to offer lower transaction fees or better execution to their customers or to execute their business strategies more quickly or efficiently than we can. Furthermore, our competitors may: • respond more quickly to competitive pressures; • develop products that compete with our products or are preferred by our customers; • develop and expand their technology and service offerings more efficiently; • provide better, more user-friendly and more reliable technology; • take greater advantage of acquisitions, alliances and other opportunities; • market, promote, bundle and sell their products and services more effectively; • leverage existing relationships with customers and alliance partners more effectively or exploit brand names to market and sell their services; and • exploit regulatory disparities between traditional, regulated exchanges and alternative markets, including over-the-counter markets, that benefit from a reduced regulatory burden and lower-cost business model. The derivatives industry has witnessed both the consolidation of exchange holding companies and the growth in the number of exchanges, with a doubling of the number of options exchanges over the past decade. Consolidation or alliances among our competitors may achieve cost reductions or other increases in efficiency, which may allow them to offer better prices or services than we do. The increase to the number of competitors that we face may result in fragmentation of the market and a reduced market share for our exchanges. If our products, markets, services and technology are not competitive, our financial condition and operating results would be materially harmed. A decline in our transaction fees or any loss of customers would lower our revenues, which would adversely affect our profitability. For a discussion of the competitive environment in which we operate, see "Business-Competition." We depend on third party service providers for certain services that are important to our business. An interruption or cessation of such service by any third party could have a material adverse effect on our business. We depend on a number of service providers, including clearing organizations such as OCC and its member clearing firms; securities information processors such as the CTA and OPRA; regulatory service providers such as FINRA and NFA; the host of our data center; and various vendors of communications and networking products and services. More specifically: • OCC is the sole provider of clearing on all of our exchanges. If it were unable to perform clearing services, or its clearing members were unable or unwilling to clear through OCC, transactions would likely not occur on our markets or there may be delays. • OPRA, UTP Securities Information Processor and the CTA consolidate market information such as last sale reports and quotations. If any of them were unable to provide this information for a sustained period of time, we may be unable to offer trading on our options markets. • We are heavily dependent on technology for our markets, including our data center, which is housed by a third party, and certain communications and networking products and services. If this technology is unavailable, and cannot be replaced in a short time period, we may be unable to operate our markets. • FINRA and NFA provide regulatory services for our options and futures exchanges, respectively, while we retain regulatory responsibilities for such services. If FINRA or NFA stopped providing services, or provided inadequate services, we may be subject to action by the SEC or CFTC, or may have limitations placed upon our markets. We cannot provide assurance that any of these providers will be able to continue to provide these services in an efficient manner or that they will be able to adequately expand their services to meet our needs. An interruption or malfunction in or the cessation of an important service by a third party could cause us to halt trading in some or all of our products or our services, or make us unable to conduct other aspects of our business. In addition, our inability to make alternative arrangements in a timely manner, or at all, could have a material adverse impact on our business, financial condition and operating results. If one or more of the index providers from which we have licenses or service providers with respect to proprietary products fails to maintain the quality and integrity of their indexes or fails to perform under our agreements with them or if customer preferences change, revenues we generate from trading in these proprietary products may suffer. We are a party to an increasing number of license agreements pursuant to which we may list for trading securities options on various indexes including license agreements that we have with S&P, for the S&P 500 Index and S&P 100 Index, S&P Dow Jones Indices, LLC, for the Dow Jones Industrial Average, LSEG, for more than two dozen FTSE Russell indexes, including the Russell 2000 Index, and MSCI Inc., for six MSCI indexes, including the MSCI EAFE Index and MSCI Emerging Markets Index. These license agreements provide, among other things, that we are authorized to list options on their indexes, and some of the resulting index options are among the most actively traded products at CBOE. The quality and integrity of each of these indexes are dependent on the ability of the index providers to maintain the index, including by means of the calculation and rebalancing of the index, and we are dependent on the index providers for a number of things, including the provision of index data to us. We also rely on index providers to enforce intellectual property rights against unlicensed uses of the indexes and uses of the indexes that infringe on our licenses, as further discussed in risk factor "We may not be able to protect our intellectual property rights." Furthermore, some of our agreements concerning our proprietary products provide for the parties to those agreements to provide important services to us. If any of our index providers are unable to maintain the quality and integrity of their indexes, or if any of the index providers or service providers fail to perform their obligations under the agreements, trading in these products, and therefore transaction fees we receive, may be adversely affected or we may not receive the financial benefits of the agreements that we negotiated. If we are unable to fulfill our obligations under the Consent Order, it may have a significant adverse impact on our business. In addition to entering into the Consent Order and agreeing to complete certain undertakings, we may be subject to additional investigations or proceedings by the SEC if the SEC were to find that we did not fulfill our obligations under the Consent Order. See "Business-Regulatory Environment and Compliance-Compliance-Consent Order." Any investigations or proceedings, whether successful or unsuccessful, could result in substantial costs, the diversion of resources, including management time, and potential harm to our reputation, which could have a material adverse effect on our business results of operations or financial condition. We and our licensors may not be able to protect our respective intellectual property rights. We rely on patent, trade secret, copyright and trademark laws, the law of the doctrine of misappropriation and contractual protections to protect our proprietary technology, proprietary index and futures products, index methodologies and other proprietary rights. In addition, we rely on the intellectual property rights of our licensors in connection with our listing of exclusively-licensed index and futures products. We and our licensors may not be able to prevent third parties from copying, or otherwise obtaining and using, our intellectual property without authorization, listing our proprietary or exclusively-licensed index products without licenses or otherwise infringing on our rights. We and our licensors may have to rely on litigation to enforce our intellectual property rights, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. We and our licensors may not be successful in this regard. Such litigation, whether successful or unsuccessful, could result in substantial costs to us, diversion of our resources or a reduction in our revenues, any of which could materially adversely affect our business. Any infringement by us on patent rights of others could result in litigation and could have a material adverse effect on our operations. Our competitors, as well as others, have obtained, or may obtain, patents that are related to our technology or the types of products and services we offer or plan to offer. We may not be aware of all patents containing claims that may pose a risk of infringement by our products, services or technologies. In addition, some patent applications in the U.S. are confidential until a patent is issued, and therefore we cannot evaluate the extent to which our products and services may be covered or asserted to be covered in pending patent applications. Thus, we cannot be sure that our products and services do not infringe on the rights of others or that others will not make claims of infringement against us. Claims of infringement are not uncommon in our industry. If one or more of our products, services or technologies were determined to infringe a patent held by another party, we may be required to pay damages, stop using, developing or marketing those products, services or technologies, obtain a license from the holders of the patents or redesign those products, services or technologies to avoid infringing the patent. If we were required to stop using, developing or marketing certain products, our business, results of operations and financial condition could be materially harmed. Moreover, if we were unable to obtain required licenses, we may not be able to redesign our products, services or technologies to avoid infringement, which could materially adversely affect our business, results of operations or financial condition. Computer and communications systems failures and capacity constraints could harm our reputation and our business. We operate, monitor and maintain our computer systems and networks, including the systems that comprise CBOE Command, the platform for trading on our exchanges and CBOE Vector, the platform that we are developing that is expected to replace CBOE Command. If we are unable to operate, monitor or maintain these systems and networks, program them so that they operate correctly and maintain the integrity of their data, or successfully transition from the CBOE Command platform to the new CBOE Vector trading platform, it could have a material adverse effect on our ability to conduct our business. Although we have a back-up of trading and key corporate systems, the back-up systems or disaster recovery plans may prove to be inadequate in the event of a systems failure or cyber-security breach. There can be no guarantees that we will be able to open an efficient, transparent and liquid marketplace, if we can open at all. With extended trading hours, we have to operate our systems longer and have fewer non-trading hours to address any potential concerns with the systems on which we rely. Our systems may fail, in whole or in part, or may operate slowly, causing one or more of the following: • unanticipated disruption in service to our participants; • failures or delays during peak trading times or times of unusual market volatility; • slower response times and delays in trade execution and processing; • incomplete or inaccurate accounting, recording or processing of trades; and • distribution of inaccurate or untimely market data to participants who rely on this data in their trading activity. Any of these events may cause: • a loss in transaction or other fees due to the inability to provide services for a time; • requests by market participants or others that we reimburse them for financial loss, either within the constraints of the limited liability provisions of our exchanges' rules or in excess of those amounts; • trading to diminish on our exchanges due to dissatisfaction with the platform; and • one or more of our regulators to investigate or take enforcement action against us. As a consequence of any of these events, our business, financial condition and results of operations could suffer materially. In addition to other measures, we test our systems to confirm whether they will be able to handle anticipated present and future peak trading activity or times of unusual market volatility. However, we cannot assure you that our estimates of future trading volume will be accurate or that our systems will always be able to accommodate actual trading volume without failure or degradation of performance. We anticipate that we will need to continue to make significant investments in hardware, software and telecommunications infrastructure to accommodate the increases in traffic. If we cannot increase the capacity and capabilities of our systems to accommodate increasing trading activity and to execute our business strategy, our ability to maintain or expand our businesses would be adversely affected. The computer systems and communication networks upon which we rely may be vulnerable to security risks and other disruptions. The secure and reliable operation of our computer systems, our communications networks and the systems of our service providers and market participants, is a critical element of our operations. These systems and communications networks may be vulnerable to unauthorized access, including the improper access or disclosure of personally identifiable information, malware and other security problems, as well as to acts of terrorism, natural disasters and other events that are beyond our control. If our security measures are inadequate or if there are interruptions or malfunctions in our systems or communications networks, our business, financial condition and operating results could be materially impacted. We may be required to expend significant resources in the event of any real or threatened breaches in security or system failures, including to protect against threatened breaches and to alleviate harm caused by an actual breach, and may suffer harm to our reputation and litigation. Measures we implement for security and otherwise to provide for the confidentiality, integrity and reliability of our systems may prove to be inadequate in preventing system failures or delays in our systems or communications networks, which could lower trading volume and have an adverse effect on our business, financial condition and operating results. We may not be able to maintain operating revenues generated by making trading permits available in exchange for a fee. The right to trade on our exchanges is made available through trading permits for which the user pays a fee. These fees accounted for 8.0% of our operating revenues in 2016. CBOE charges the highest relative trading permit rates in the options industry. We may face pressure from our customers to lower these rates or may see larger firms electing to use fewer permits to access our exchanges. If the demand for trading permits to our exchanges is less than historic levels or if we are unable to maintain permit rates, our ability to generate operating revenues through the granting of permits for trading access would be negatively impacted, which could adversely affect our profitability. Potential conflicts of interest between our for-profit status and our regulatory responsibilities may adversely affect our business. As a for-profit business with regulatory responsibilities, we are responsible for disciplining TPHs for violating our rules, including by imposing fines and sanctions. This may create a conflict of interest between our business interests and our regulatory responsibilities. Any failure by us to fulfill our regulatory obligations could significantly harm our reputation, increase regulatory scrutiny or cause the SEC or CFTC to take action against us, all of which could adversely affect our business, results of operations or financial condition. Our compliance methods might not be effective and may result in outcomes that could adversely affect our financial condition and operating results. As the parent company for SROs, we are responsible for maintaining exchanges that comply with securities and futures laws, SEC and CFTC regulations and the rules of the respective exchanges. Our ability to comply with applicable laws and rules is largely dependent on our policies and procedures designed to meet those compliance responsibilities, as well as our ability to attract and retain qualified personnel throughout the company. Our policies and procedures to identify, monitor and manage compliance risks may not be fully effective. Management of legal and regulatory risk requires policies and procedures to properly monitor, record and verify a large number of transactions and events. We cannot provide assurance that our policies and procedures will always be effective or that we will always be successful in monitoring or evaluating the compliance risks to which we are or may be exposed, or that our compliance and internal audit functions would be able to identify any such ineffectiveness. If these policies and procedures are not effective, we may be subject to monetary or other penalties by our regulators. If our risk management methods are not effective, our business, reputation and financial results may be adversely affected. We have methods to identify, monitor and manage our risks. If our methods are not effective or we are not successful in monitoring or evaluating the risks to which we are or may be exposed, our business, reputation, financial condition and operating results could be materially adversely affected. In addition, our insurance policies may not provide adequate coverage. Misconduct by our TPHs or others could harm us. We run the risk that our TPHs, other persons who use our markets or our employees may engage in fraud, market manipulation or other misconduct, which could result in regulatory sanctions and serious harm to our reputation, especially because we are the parent company of SROs. It is not always possible to deter misconduct or market manipulation, and the precautions we take to prevent and detect this activity may not be effective in all cases. In addition, misconduct or market manipulation by, or failures of, participants on our exchanges may discourage trading on our exchanges, which could reduce revenues. If we fail to attract or retain highly skilled management and other employees, our business may be harmed. Our future success depends in large part on our management team, which possesses extensive knowledge and managerial skill with respect to the critical aspects of our business. The failure to retain members of our management team could adversely affect our ability to manage our business effectively and execute our business strategy. Additionally, effective succession planning is also important to our long-term success. Failure to ensure effective transfer of knowledge and smooth transitions involving our management team and key employees could hinder our strategic planning and execution. Our business is also dependent on highly skilled employees, especially those who provide specialized services to our clients and oversee our technology functions. Many of these employees have extensive knowledge and experience in highly technical and complex areas of the options trading industry. Because of the complexity and risks associated with our business and the specialized knowledge required to conduct this business effectively, and because the growth in our industry has increased demand for qualified personnel, many of our employees could find employment at other firms if they chose to do so, particularly if we fail to continue to provide competitive levels of compensation. If we fail to retain our current employees, it would be difficult and costly to identify, recruit and train replacements needed to continue to conduct and expand our business. In particular, failure to retain and attract qualified systems personnel could result in systems errors. Consequently, our reputation may be harmed, we may incur additional costs and our profitability could decline. We may not effectively manage our growth, which could materially harm our business. Over the past five years, we have experienced significantly increased volume on our futures exchange, extended trading hours on our futures exchange and in SPX and VIX options and developed several proprietary products. We expect that our business will continue to grow, which may place a significant strain on our management, personnel, systems and resources. We must continually improve our operational, financial and regulatory systems and managerial controls and procedures, and may need to continue to expand, train and manage our workforce. We must also maintain close coordination among our technology, legal, accounting, finance, marketing, sales, regulatory and compliance functions. We cannot assure you that we will manage our growth effectively. If we fail to do so, our business could be materially harmed. Our continued growth will require increased investment by us in technology, facilities, personnel, and financial and management systems and controls. It also will require expansion of our procedures for monitoring and assuring our compliance with applicable regulations, and we will need to integrate, train and manage a growing employee base. The expansion of our existing businesses, any expansion into new businesses and the resulting growth of our employee base will increase our need for internal audit and monitoring processes, which may be more extensive and broader in scope than those we have historically required. We may not be successful in identifying or implementing all of the processes that are necessary. Further, unless our growth results in an increase in our revenues that is proportionally greater than or equal to the increase in our costs associated with this growth, our operating margins will be adversely affected. Our ability to implement or amend rules could be limited or delayed because of regulation, which could negatively affect our ability to implement needed changes. Our options exchanges registered with the SEC must submit proposed rule changes to the SEC for its review and, in many cases, its approval. Even where a proposed rule change may be effective upon filing with the SEC, the SEC retains the right to suspend and disapprove such rule changes. Also, the CFTC may stay or disapprove rules that we file with it for CFE, our futures exchange. The rule review process can be lengthy and can significantly delay the implementation of proposed rule changes that we believe are necessary to the operation of our markets. If the SEC or CFTC delays or does not allow one of our exchanges to implement a rule change, this could negatively affect our ability to make needed changes or implement business activities. Similarly, the SEC must approve amendments to our options exchange subsidiaries' certificates of incorporation and bylaws as well as certain amendments to the certificate of incorporation and bylaws of CBOE Holdings. The SEC may decide not to approve a proposed amendment or may delay such approval in a manner that could negatively affect our ability to make a desired change, which could prevent or delay us from improving the operations of our markets or recognize income from new products. As one of the largest options exchanges in the world and the largest options exchange in the U.S., we may be at a greater risk for a cyber attack and other cyber security risks. The frequency of cyber attacks is increasing in general, and a variety of threat actors have specifically targeted the financial services industry. At the date of this filing, we have no evidence of any material cases of data theft, corruption or destruction of data or compromised customer data. Security breaches may, among other consequences, lead to increased scrutiny by our regulators and have significant costs in terms of cash outlays, business disruption, revenue losses, internal labor, overhead and other expenses. Measures we implement to monitor the environment and protect our infrastructure against security breaches and misappropriation of our intellectual property assets may prove insufficient, which could cause us to lose market participants, experience lower trading volume, incur significant liabilities or have a negative impact on our competitive advantage. Changes in the tax laws and regulations affecting us and our market participants could have a material adverse effect on our business. Legislation may be proposed, both domestically and internationally, that could change the way that our market participants are taxed on the products they trade on our markets. If such proposals were to become law, they could have a negative impact on the options and futures industry and on us by making transactions more costly to market participants, which may reduce trading. In 2015, the Internal Revenue Service issued final and temporary regulations under Section 871(m) that require dividend tax withholding for certain transactions completed by foreign persons that could result in a reduction in trading by such foreign persons, either by their choice or as a result of brokers refusing to execute certain option trades for such persons. In addition to proposed tax changes that could affect our market participants, like other corporations, we are subject to taxes at the federal, state and local levels, as well as in non-U.S. jurisdictions. Changes in tax laws, regulations or policies could result in us having to pay higher taxes, which would in turn reduce our net income. There has been a trend toward states changing income tax laws to increase the apportionment factors on which state income taxes are based and becoming more aggressive asserting nexus over corporations that are not domiciled in the state. If state income tax laws change, or if states are successful asserting nexus against us, we may become subject to income taxes in additional states or at a higher rate in the states where income tax filing requirements exists. If this occurs, we may experience a higher effective state tax rate. We selectively explore acquisition opportunities or strategic alliances relating to other businesses, products or technologies. We may not be successful in integrating other businesses, products or technologies with our business. Any such transaction also may not produce the results we anticipate, which could adversely affect us. We selectively explore and pursue acquisition and other opportunities to strengthen our business and grow our company. We may enter into business combination transactions, make acquisitions or enter into strategic partnerships, joint ventures or alliances, any of which may be material. The market for acquisition targets and strategic alliances is highly competitive, which could make it more difficult to find appropriate merger or acquisition opportunities. If we are required to raise capital by incurring debt or issuing additional equity for any reason in connection with a strategic acquisition or investment, financing may not be available or the terms of such financing may not be favorable to us and our stockholders, whose interests may be diluted by the issuance of additional stock. See “Risk Factors - Risks Relating to the Merger” for additional discussion of our risks related to the Merger. In 2016, we made a majority investment in CBOE Vest, an investment manager focused on Target Outcome Investment strategies, a minority investment in CurveGlobal, a new interest rate derivatives venture of the LSEG and a number of major dealer banks, and made a minority equity investment in Eris, a U.S. - based futures exchange group offering swap futures as a capital-efficient alternative to over-the-counter swaps. See also “Business-Strategic Partnership” for additional information regarding our strategic partnerships. The process of integration may produce unforeseen regulatory issues and operating difficulties and expenditures and may divert the attention of management from the ongoing operation of our business and harm the reputation of the companies. We may not successfully achieve the integration objectives, and we may not realize the anticipated cost savings, revenue growth and synergies in full or at all, or it may take longer to realize them than expected, any of which could negatively impact our results of operations, financial condition or the market price of our common stock. Any decision to pay dividends on our common stock is at the discretion of our board of directors and depends upon the earnings of our operating subsidiaries. Accordingly, there can be no guarantee that we will pay dividends to our stockholders. We have paid quarterly dividends since the restructuring transaction and initial public offering and intend to continue paying regular quarterly dividends to our stockholders. However, any decision to pay dividends on our common stock will be at the discretion of the board of directors, which may determine not to declare dividends at all or at a reduced amount. The board's determination to declare dividends will depend upon our profitability and financial condition, contractual restrictions, restrictions imposed by applicable law and the SEC and other factors that the board deems relevant. As a holding company with no significant business operations of its own, CBOE Holdings depends entirely on distributions, if any, it may receive from its subsidiaries to meet its obligations and pay dividends to its stockholders. If these subsidiaries are not profitable, or even if they are and they determine to retain their profits for use in their businesses, we will be unable to pay dividends to our stockholders. Certain provisions in our organizational documents could enable the board of directors to prevent or delay a change of control. Our organizational documents contain provisions that could block actions that stockholders might find favorable, including discouraging, delaying or preventing a change of control or and unsolicited acquisition proposals for us. These include provisions: • prohibiting stockholders from acting by written consent; • requiring advance notice of director nominations and of business to be brought before a meeting of stockholders; and • limiting the persons who may call special stockholders' meetings. In addition, our organizational documents include provisions that: • restrict any person from voting or causing the voting of shares of stock representing more than 20% of our outstanding voting capital stock; and • restrict any person from beneficially owning shares of stock representing more than 20% of the outstanding shares of our capital stock. Furthermore, our board of directors has the authority to issue shares of preferred stock in one or more series and to fix the rights and preferences of these shares without stockholder approval. Any series of our preferred stock is likely to be senior to our common stock with respect to dividends, liquidation rights and, possibly, voting rights. The ability of the board of directors to issue preferred stock also could have the effect of discouraging unsolicited acquisition proposals, thus adversely affecting the market price of our common stock. Delaware law makes it difficult for stockholders that have recently acquired a large interest in a corporation to cause the merger or acquisition of the corporation against the directors' wishes. Under Section 203 of the Delaware General Corporation Law, a Delaware corporation may not engage in any merger or other business combination with an interested stockholder for a period of three years following the date that the stockholder became an interested stockholder except in limited circumstances, including by approval of the corporation's board of directors. Risks Relating to the Merger Failure to complete the proposed Merger within the expected timeframe or at all could have a material adverse impact on our business, financial condition and results of operations. There can be no assurance that the Merger will occur. The closing of the Merger is subject to certain conditions, including, among others, (i) the adoption of the Merger Agreement by the holders of at least a majority of the outstanding shares of Bats common stock entitled to vote thereon, (ii) approval of the issuance of shares of our common stock in the Merger by the holders of at least a majority of the shares of our common stock entitled to vote thereon and present in person or represented by proxy at the meeting of our stockholders called for such purpose, (iii) the expiration or earlier termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and regulatory approval by the SEC, Financial Industry Regulatory Authority and the U.K. Financial Conduct Authority, (iv) no court order or other legal restraint or prohibition preventing the consummation of the Merger or the Subsequent Merger or imposing a “burdensome effect” (as defined in the Merger Agreement) upon the consummation thereof, (v) the absence of any pending action commenced by a governmental or regulatory body wherein a judgment would reasonably be expected to prevent the consummation of the Merger or the Subsequent Merger or impose a burdensome effect upon the consummation thereof, (vi) receipt of tax opinions from counsel to each of us and Bats with respect to the treatment of the Merger and Subsequent Merger from a tax perspective, (vii) in the case of our obligation to effect the Merger, no exercise of appraisal rights by Bats stockholders holding more than 20% of the outstanding shares of Bats common stock, (viii) in the case of each party’s obligation to effect the Merger, the absence of a material adverse effect with respect to the other party since the date of the Merger Agreement and (ix) subject to materiality exceptions, the accuracy of the representations and warranties made by us, Merger Sub and Merger LLC, on the one hand, and Bats, on the other hand, and compliance by us, Merger Sub, Merger LLC and Bats in all material respects with our and their respective obligations under the Merger Agreement. Although certain of these conditions have been satisfied, there can be no assurance that the remaining conditions to the closing of the Merger will be satisfied in a timely matter or at all. In particular, before the proposed transactions contemplated by the Merger Agreement, including the Merger, may be completed, various clearances and approvals must be obtained from certain regulatory and governmental authorities. These regulatory and governmental entities may impose conditions on the granting of such approvals. Such conditions and the process of obtaining regulatory approvals could have the effect of delaying completion of the Merger or of imposing additional costs or limitations on the combined company following the Merger. The regulatory approvals may not be received at all, may not be received in a timely fashion and may contain conditions on the completion of the Merger. However, if any such conditions impose a “burdensome effect” as defined in the Merger Agreement, the parties may not be obligated to complete the Merger, and either Bats or we may have the right to terminate the Merger Agreement. In addition, our and Bats’ obligations to complete the Merger are conditioned on the receipt of certain regulatory approvals or waiver by the other party of such condition. Failure to complete the Merger could negatively impact our stock price and future businesses and financial results. If the Merger is not completed, our ongoing business may be adversely affected, and we will be subject to several risks and consequences, including the following: • we may be required, under certain circumstances, to pay Bats a termination fee of $110 million or reimburse Bats’ expenses up to $10 million under the Merger Agreement; • we will be required to pay certain costs relating to the Merger, whether or not the Merger is completed, such as legal, accounting, financial advisory and printing fees; • under the Merger Agreement, we are subject to certain restrictions on the conduct of our business prior to completing the Merger that may adversely affect our ability to execute certain of our business strategies; and • matters relating to the Merger may require substantial commitments of time and resources by our management, which could otherwise have been devoted to other opportunities that may have been beneficial to us as an independent company and such commitments may impact future earnings of the combined company. In addition, if the Merger is not completed, we may experience negative reactions from the financial markets and from our customers and employees. We also could be subject to litigation related to any failure to complete the Merger or to enforcement proceedings commenced against us to perform our obligations under the Merger Agreement. If the Merger is not completed, we cannot assure our stockholders that the risks described above will not materialize and will not materially adversely affect our business, financial results and stock prices. The announcement and pendency of the Merger may adversely affect our business, financial condition and results of operations. Uncertainty about the effect of the Merger on our employees, customers, and other parties may have an adverse effect on our business, financial condition and results of operation regardless of whether the Merger is completed. These risks to our business include the following, all of which could be exacerbated by a delay in the completion of the Merger: • the impairment of our ability to attract, retain and motivate our employees, including key personnel; • the diversion of significant management time and resources towards the completion of the Merger; • difficulties maintaining relationships with customers and other business partners; • delays or deferments of certain business decisions by our customers and other business partners; • the inability to pursue alternative business opportunities or make appropriate changes to our business because of requirements in the Merger Agreement that we conduct our business in the ordinary course of business consistent with past practice and not engage in certain kinds of transactions prior to the completion of the Merger; • litigation relating to the Merger and the costs related thereto; and • the incurrence of significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger. Our debt arrangements in connection with financing the Merger may decrease our business flexibility and adversely affect our financial results. On December 15, 2016, we entered into a $1.0 billion senior unsecured delayed draw term loan facility. On January 12, 2017, we issued $650 million aggregate principal amount of our 3.650% Senior Notes due 2027. The proceeds from this delayed draw term loan facility and issuance of our senior notes, in addition to using cash on hand at CBOE Holdings and Bats, are expected to be used to finance a portion of the cash component of the Merger consideration, to refinance existing indebtedness of Bats and its subsidiaries and to pay related fees and expenses. In addition, on December 15, 2016, we entered into a $150 million revolving credit facility to be used for working capital and other general corporate purposes. Prior to entering into the Merger Agreement, we did not have any indebtedness and were not subject to any financial covenants. The financial and other covenants to which we have agreed to in connection with the incurrence of the indebtedness, and the combined company’s increased indebtedness, may have the effect, among other things, of reducing the combined company’s flexibility to respond to changing business and economic conditions, thereby placing the combined company at a competitive disadvantage compared to competitors that have less indebtedness and making the combined company more vulnerable to general adverse economic and industry conditions. The combined company’s increased indebtedness will also increase borrowing costs, and the covenants pertaining thereto may also limit the combined company’s ability to repurchase shares of our common stock, increase dividends or obtain additional financing to fund working capital, capital expenditures, acquisitions or general corporate requirements. The combined company will also be required to dedicate a larger portion of its cash flow from operations to payments on its indebtedness, thereby reducing the availability of its cash flow for other purposes, including working capital, capital expenditures and general corporate purposes. The combined company’s ability to make payments on and to refinance its debt obligations and to fund planned capital expenditures will depend on its ability to generate cash from the combined company’s operations. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond the combined company’s control. The combined company may not be able to refinance any of its indebtedness on commercially reasonable terms, or at all. If the combined company cannot service its indebtedness, the combined company may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances, any of which could impede the implementation of the combined company’s business strategy or prevent the combined company from entering into transactions that would otherwise benefit its business. Additionally, the combined company may not be able to effect such actions, if necessary, on commercially reasonable terms, or at all. Any of the foregoing consequences could adversely affect the combined company’s financial results. Deterioration in our credit profile may increase our costs of borrowing money. Our long-term indebtedness is rated by S&P Global Ratings and Moody’s Investors Service. There is no assurance that we will maintain such credit ratings, since credit ratings may be lowered or withdrawn entirely by a rating agency if, in its judgment, the circumstances warrant. If a rating agency were to downgrade our rating below investment grade, our borrowing costs and the costs of the proposed transactions contemplated by the Merger Agreement would increase. The Merger Agreement contains provisions that may discourage other companies from trying to acquire us. The Merger Agreement contains provisions that apply both during the pendency of the Merger transaction with Bats as well as afterward should the Merger with Bats not be consummated that may discourage a third party from submitting a business combination proposal to us that might result in greater value to our stockholders than the Merger. These Merger Agreement provisions include a general prohibition on us from soliciting, or, subject to certain exceptions, entering into discussions with any third party regarding any acquisition proposal or offers for competing transactions. In addition, we may be required to pay Bats a $110 million termination fee and reimburse Bats for its expenses incurred in connection with the Merger in an aggregate amount not to exceed $10 million in certain circumstances involving acquisition proposals for competing transactions. The price of our common stock might increase or decline prior to the completion of the Merger, which would change the value of the Merger consideration to be received by Bats stockholders pursuant to the Merger Agreement. The market price of our common stock at the time the Merger is completed may vary significantly from the price on the date of the Merger Agreement. On September 22, 2016, the last full trading day prior to media publications regarding the proposed Merger, our common stock closed at $69.41 per share as reported on NASDAQ, and on September 23, 2016, the last full day of trading prior to the announcement of the Merger Agreement, our common stock closed at $70.30 per share as reported on NASDAQ. If the market price of our common stock increases above $70.30, the market value of the Merger consideration will be greater than $32.50 per share of Bats common stock. The issuance of shares of our common stock to Bats stockholders pursuant to the Merger Agreement will substantially reduce the percentage ownership interests of our pre-existing stockholders. Based on the number of shares of our common stock and Bats common stock outstanding on December 9, 2016, the record date for the two companies' special meetings of stockholders held in connection with the Merger, we expect to issue or reserve for issuance approximately 31.9 million shares of our common stock pursuant to the Merger Agreement (including shares of our common stock issuable to Bats stockholders pursuant to outstanding and unexercised options to purchase Bats common stock granted under any Bats equity incentive plan, whether vested or unvested, and outstanding awards of restricted Bats common stock granted under any Bats equity incentive plan). Based on these numbers, immediately following the completion of the Merger, our pre-existing stockholders and former Bats stockholders would own approximately 72% and 28% of the outstanding shares of our common stock, respectively. The Merger will have no effect on the number of shares of our common stock owned by our existing stockholders. The issuance of approximately 31.9 million shares of our common stock to Bats stockholders and holders of equity incentive awards will cause a significant reduction in the relative percentage interests of our current stockholders in earnings, voting, liquidation value and book and market value. The Merger will result in changes to the board of directors and management of the combined company that may affect the strategy of the combined company as compared to our strategy as a standalone company. If the parties complete the Merger, the composition of our board of directors and our management team will change from our current board and management team. The board of directors of the combined company will consist of 14 members, including three individuals designated by Bats who are serving as Bats directors immediately prior to the effective time of the Merger. We will also have executive officers from both us and Bats. This new composition of our board of directors and our management team may affect the business strategy and operating decisions of the combined company upon the completion of the Merger. We will incur significant transaction and integration costs in connection with the Merger. We and Bats expect to incur a number of costs associated with completing the Merger and integrating the operations of the two companies. The substantial majority of these costs will be non-recurring expenses resulting from the Merger and will consist of transaction costs related to the Merger, facilities and systems consolidation costs and employment-related costs. Additional unanticipated costs may be incurred in the integration of our businesses with Bats’ businesses. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, will offset incremental transaction and Merger-related costs over time, this net benefit may not be achieved in the near term, or at all. We may not realize all of the anticipated benefits of the transactions contemplated by the Merger Agreement or such benefits may take longer to realize than expected. The success of the Merger will depend, in part, on our ability to realize the anticipated benefits from combining our businesses with Bats’ businesses. Our ability to realize the anticipated benefits of the Merger will depend, to a large extent, on our ability to integrate our businesses with Bats’ businesses. The combination of two independent companies is a complex, costly and time-consuming process. As a result, the combined company will be required to devote significant management attention and resources to integrating our business practices and operations with those of Bats. The integration process may disrupt the business of either or both of the companies and, if implemented ineffectively, could preclude realization of the full benefits expected by us. The failure of the combined company to meet the challenges involved in integrating successfully our operations with those of Bats or otherwise to realize the anticipated benefits of the proposed transactions could cause an interruption of, or a loss of momentum in, the activities of the combined company and could seriously harm its results of operations. In addition, the overall integration of the two companies may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of client relationships and diversion of management’s attention, and may cause the combined company’s stock price to decline. The difficulties of combining the operations of the companies include, among others: • unanticipated issues in integrating information technology, communications and other systems; • unforeseen expenses or delays associated with the integration or the Merger; • managing a significantly larger company; • the potential diversion of management focus and resources from other strategic opportunities and from operational matters, and potential disruption associated with the Merger; • maintaining employee morale and retaining key management and other key employees; • integrating two unique business cultures, which may prove to be incompatible; • the possibility of faulty assumptions underlying expectations regarding the integration process and expense synergies; • consolidating corporate and administrative infrastructures and eliminating duplicative operations; • coordinating geographically separate organizations; • changes in applicable laws and regulations; • managing costs or inefficiencies associated with integrating the operations of the combined company; and • making any necessary modifications to internal financial control standards to comply with the Sarbanes Oxley Act of 2002 and the rules and regulations promulgated thereunder. Many of these factors will be outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy, which could materially impact our business, financial condition and results of operations. In addition, even if Bats’ and our operations are integrated successfully, we may not realize the full benefits of the proposed transactions, including the synergies, cost savings or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, or at all. As a result, we cannot assure you that the combination of Bats with us will result in the realization of the full benefits anticipated from the transactions contemplated by the Merger Agreement. A failure to integrate successfully or a material disruption in information technology systems could adversely affect the combined company’s business and results of operations. The combined company will rely extensively on its information technology systems. The failure of information technology systems to operate effectively, difficulty in integrating our information technology systems with Bats’ information technology systems, inconsistencies in standards, controls, procedures and policies and problems with transitioning to upgraded or replacement systems could adversely impact the business of the combined company. In addition, a number of our TPHs are not connected to Bats’ information technology platforms and will be required to complete the process of connecting to these platforms as part of the integration. The process of integrating information technology systems may take longer, cost more and provide fewer synergies than initially anticipated. There may also be new regulations adopted during the transition period that require systems changes, which could divert attention away from integration process and cause delays. To the extent this occurs, the benefits of the proposed transaction may be reduced, delayed or may never come to fruition. Although Bats has experience with transitioning other businesses to its information technology platform, there are certain portions of our business, such as open outcry trading and complex order trading, that have not yet been addressed by Bats’ information technology platform. We currently expect to complete the integration of our information technology systems with those of Bats in phases over a four-year period following the Merger. However, we may not be able to successfully achieve the transition on the timetable currently contemplated, and the transition may not be successful or could encounter various difficulties and unexpected issues. Any delays or issues that we encounter in the transition could have a material adverse effect on the businesses of the combined company and could negatively affect our reputation, which in turn could have a material adverse effect on the combined company’s overall business, results of operations and financial condition, as well as impair customer confidence in the combined company’s product offerings and overall services. If the combined company is unable to manage its growth, its business and financial results could suffer. The combined company’s future financial results will depend in part on its ability to manage its core businesses, including any growth that the combined company may be able to achieve. Over the past several years, we and Bats have each engaged in the identification of, and competition for, growth and expansion opportunities. In order to achieve those initiatives, the combined company will need to, among other things, recruit, train, retain and effectively manage employees and expand its operations and financial control systems. If the combined company is unable to manage its businesses effectively and profitably, its business and financial results could suffer. To be successful, the combined company must retain and motivate key employees, including those experienced with post-acquisition integration, and failure to do so could seriously harm the combined company. The success of the combined company largely depends on the skills, experience and continued efforts of management and other key personnel. As a result, to be successful, the combined company must retain and motivate executives and other key employees. In particular, the combined company expects to benefit from the integration experience of certain Bats personnel. Certain key executives of Bats have executed offer letters with us to continue their employment following the Merger. However, these executives will continue to be at-will employees, and the offer letters provide no assurance that these executives will remain with the combined company. Additionally, certain of our information technology employees will be important to retain during the transition period to effectively manage our information technology platforms and to assist Bats in the process of integrating its information technology platform. If these personnel were to leave, the combined company may experience increased difficulty in the post-Merger integration process, maintenance of the current information technology platform and may not be able to adequately replace such personnel, which could have a material adverse effect on the combined company’s overall business, results of operations and financial condition. Our and Bats’ employees may experience uncertainty about their future roles with the combined company until integration strategies for the combined company are announced or executed. These circumstances may adversely affect the combined company’s ability to retain key personnel. The combined company also must continue to motivate employees and maintain their focus on the strategies and goals of the combined company. Doing so may be difficult due to the uncertainties and challenges associated with post-Merger integration. If the combined company is unable to retain executives and other key employees, the roles and responsibilities of such executive officers and employees will need to be filled either by existing or new officers and employees, which may require the combined company to devote time and resources to identifying, hiring and integrating replacements for the departed executives and employees that could otherwise be used to integrate our and Bats’ businesses or otherwise pursue business opportunities. There can be no assurance that the combined company will be able to retain and motivate its employees in the same manner as we and Bats have historically done. The combined company may need to hire additional personnel in order to assist with the transition of our businesses to the Bats information technology platform. It may be difficult for the combined company to retain and recruit qualified employees in sufficient numbers, and if the combined company is unable to satisfy its needs for qualified and capable employees, its business and operating results could be adversely affected. There is substantial competition for qualified and capable personnel in the technology space, which may make it difficult for the combined company to retain and recruit qualified employees in sufficient numbers. Increased difficulty in retaining or recruiting sufficient and qualified personnel by the combined company may lead to increased employment compensation costs, which could adversely affect the combined company’s results of operations. In addition, the increased number of employees may impose a significant administrative burden on the combined company. If the combined company is unable to retain and recruit highly qualified employees by offering competitive compensation, stable work environment and leadership opportunities now and in the future, the combined company’s business and operating results could be negatively impacted. Bats generates a significant percentage of its total revenues from, and is provided with significant liquidity in its markets and other services by, entities who are affiliates of its significant stockholders, and there is no assurance that such entities will continue to generate such revenue or provide such liquidity and other services after the completion of the Merger. Bats earns a significant percentage of its revenue from customers who are affiliates of its significant stockholders. In addition, Bats relies on certain entities who are affiliates of significant Bats stockholders to route orders that are not routed directly by Bats and to clear certain trades routed to other markets. The significant stockholders of Bats may not receive shares of our common stock in the Merger, or even if they do, their proportionate stake in the combined company will be significantly less than their stake in Bats prior to the Merger, so there may be less incentive for the affiliates of Bats’ significant stockholders to maintain their current business relationships with the combined company following the Merger at current levels or at all. If the affiliates of Bats’ significant stockholders do not remain customers following the Merger at current levels or at all or if any of the affiliates of Bats’ significant stockholders do not continue to route and clear trades as they did prior to the Merger, the combined company may experience decreased revenues and business interruptions, which could have a material adverse effect on the business, results of operations and financial condition of the combined company. The combined company will record goodwill and intangible assets that could become impaired and adversely affect its results of operations and financial condition. Accounting standards in the United States require that one party to the Merger be identified as the acquirer. In accordance with these standards, the Merger will be accounted for as an acquisition of Bats by us and will follow the acquisition method of accounting for business combinations. The assets and liabilities of Bats will be consolidated with our assets and liabilities. The excess of the purchase price over the fair values of Bats’ assets and liabilities, if any, will be recorded as goodwill. We will be required to assess goodwill and intangible assets for impairment at least annually. In the future we may take charges against earnings resulting from impairment. Any determination requiring the write off of a significant portion of our goodwill or other intangible assets could adversely affect our results of operations and financial condition. The Merger may not be accretive and may cause dilution to our earnings per share, which may negatively affect the market price of our common stock. We currently anticipate that the Merger will be accretive to adjusted earnings per share in the first year following the completion of the Merger. This expectation is based on preliminary estimates, which may materially change. We could also encounter additional transaction and integration-related costs or other factors such as the failure to realize all of the benefits anticipated in the Merger. All of these factors could cause dilution to our earnings per share or decrease or delay the expected accretive effect of the Merger and cause a decrease in the price of our common stock. The combined company will indirectly hold 100% of the issued share capital and voting rights in Bats Trading Limited (“BTL”) and its wholly owned subsidiary, Chi-X Europe Limited (“Chi-X Europe”). As a result, any person who holds, or has voting power with respect to, 10% or more of the outstanding shares of our common stock following the effective time of the Merger, will be subject to certain regulatory requirements under U.K. law. A person that indirectly acquires control in a FCA entity is required to file a change in control notice with the FCA. Though both are FCA regulated entities, the statutorily prescribed change in control notification threshold for BTL is acquisition of voting power with respect to 20% or more of the issued share capital thereof. The change in control notification threshold for Chi-X Europe is acquisition of voting power with respect to 10% or more of the issued share capital thereof. Therefore, any person who holds, or has voting power with respect to, 10% or more of the outstanding shares of our common stock will be required to file a change in control notice in respect of Chi-X Europe and, if this holding is in excess of 20%, also for BTL. This obligation may discourage, delay or prevent accumulations of 10% or more of our common stock. Item 1B.