CREDIT LOSSES

9 Months Ended

Sep. 30, 2023

CREDIT LOSSES

CREDIT LOSSES

6. CREDIT LOSSES

Current expected credit losses are estimated for accounts receivable and certain notes receivable.

Accounts receivable represent amounts due from the Company’s member firms. The allowance for accounts receivable credit losses is calculated using an aging schedule.

The allowance for notes receivable credit losses is associated with notes receivable included within other assets, net on the condensed consolidated balance sheets and relates to promissory notes to fund the implementation and operation of the consolidated audit trail (“CAT”), which notes are to be repaid by Consolidated Audit Trail, LLC (“CATLLC”). CAT involves the creation of an audit trail that is required by SEA Rule 613, and it strives to enhance regulators’ ability to monitor trading activity in the U.S. markets through a phased implementation. CATLLC is a national market system plan that was created by self-regulatory organizations that include the Company’s six Exchanges, the other U.S. national securities exchanges and FINRA (who collectively are referred to as the “Plan Participants”) to implement and operate the CAT. The funding of the CAT’s implementation and operations is ultimately expected to be provided by Plan Participants and by broker-dealers (who are referred to as “Industry Members”). However, the funding to date has solely been provided to CATLLC by the Plan Participants in exchange for promissory notes.

On September 6, 2023, the SEC issued an order approving an amendment to the CAT national market system plan to implement a revised funding model (“CAT Funding Model”) for CATLLC to fund the CAT. The approved CAT Funding Model contemplates two categories of CAT fees calculated based on the “executed equivalent shares” of transactions in eligible securities: (i) CAT fees assessed by CATLLC to Industry Members who are CAT Executing Brokers (as that term is defined in the CAT national market system plan) to recover a portion of historical CAT costs previously paid to CATLLC by the Plan Participants; and (ii) CAT fees assessed by CATLLC to CAT Executing Brokers and Plan Participants to fund prospective CAT costs. The Plan Participants will file fee filings with the SEC to implement the applicable transaction-based fee rates that are to be assessed by CATLLC to CAT Executing Brokers for each CAT fee. Initially, CATLLC plans to implement a CAT fee related to a portion of historical CAT costs incurred prior to 2022. The funds generated from the assessment of that CAT fee will be used by CATLLC to repay a portion of the promissory notes to the Plan Participants. Additional CAT fees related to other historical CAT costs and to prospective CAT costs are planned to be introduced at a later time. Once the CAT fee related to ongoing prospective CAT costs becomes effective through fee filings submitted by the Plan Participants, it is anticipated there will no longer be any need for promissory notes to be provided by the Plan Participants to CATLLC.

A challenge to the SEC’s September 6, 2023 order was filed by the American Securities Association and Citadel Securities, LLC against SEC before the U.S. Court of Appeals for the 11th Circuit on October 17, 2023. This challenge or any other challenge to the SEC order approving the CAT Funding Model and/or Plan Participant(s) fee filings may significantly delay implementation efforts. As a result, the Plan Participants may continue to incur additional significant costs, and/or it may result in them not being able to collect on the promissory notes related to the funding of the implementation and operation of the CAT.

Until the fees for historical CAT costs that are associated with the promissory notes are collected from CAT Executing Brokers and remitted by CATLLC to the Plan Participants, the Plan Participants may continue to incur additional significant costs, including additional promissory notes to fund CAT. The allowance for notes receivable credit losses associated with the CAT is calculated using a methodology that is primarily based on the structure of the notes and various potential outcomes under the CAT Funding Model.

The following represents the changes in allowance for credit losses during the nine months ended September 30, 2023 (in millions):

	Balance at December 31, 2022		Current period provision for expected credit losses		Write-offs charged against the allowance		Recoveries collected		Balance at September 30, 2023
Allowance for notes receivable credit losses	$	30.1	$	—	$	—	$	—	$	30.1
Allowance for accounts receivable credit losses		2.2		2.8		(0.3)		(0.1)		4.6
Total allowance for credit losses	$	32.3	$	2.8	$	(0.3)	$	(0.1)	$	34.7