Financial Statement

MDS SECURITIES LTD.


Consolidated Statement of Financial Condition
as of December 31, 2016
and Report of Independent Registered Public Accounting Firm


MDS SECURITIES LTD.

CONSOLIDATED STATEMENT OF FINANCIAL CONDITION DECEMBER 31, 2016 (In millions, except share and per share amounts)


Assets

Cash and cash equivalents$1,908
Cash and investments segregated and on deposit for regulatory purposes 21,217
   
(including resale agreements of $9,547) 589
Receivables from brokers, dealers, and clearing organizations Receivables from brokerage clients 17,063
   
— netSecurities owned — at fair value 373
Equipment, office facilities, and property — net 825
Goodwill 428
Other assets 591
   
  _______________
Total assets$42,994

Liabilities and Stockholder’s Equity

Payables to brokers, dealers, and clearing organizations$2,402
Payables to brokerage clients 34,899
Accrued expenses and other liabilities 1,885
Finance lease obligation 68
  _______________
Total$39,254
Stockholder’s equity:  
Preferred stock — 3,000,000 shares authorized; $.10 par value per share; none issued 
Common stock — 7,000,000 shares authorized; $.10 par value 
per share; 2,823,000 shares issued and outstanding 1,707
Additional paid-in capital 2,033
Retained earnings _______________
Total stockholder’s equity 3,740
Total liabilities and stockholder’s equity$42,994

See Notes to Consolidated Statement of Financial Condition.

MD SECURITIES LTD.

NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF DECEMBER 31, 2016
(Tabular amounts in millions, except option price amounts)


1. Organization and Nature of Business

MDS SECURITIES LTD. (MDSS LLC) is a wholly-owned subsidiary of Mds Securities ltd., a wholly-owned subsidiary of The Mds Securities Ltd (MDSS LLC). The accompanying consolidated statement of financial condition includes MDSS LLC and its wholly-owned subsidiaries (collectively referred to as the Company). Mdss llc is a securities broker-dealer with 7 International branch offices., In addition, MDSS LLC serves clients in Hong Kong through one of MDSS LLC’s subsidiaries.

The Company is registered as a broker-dealer with the United States Securities and Exchange Commission (SEC), Much of the regulation of broker-dealers has been delegated to self-regulatory organizations. MDSS LLC is a member of the Financial Industry Regulatory Authority, Inc. (FINRA).

2. Summary of Significant Accounting Policies

The accompanying consolidated statement of financial condition has been prepared in conformity with accounting principles generally accepted in Lisbon Portugal, which require management to make certain estimates and assumptions that affect the reported amounts in the accompanying consolidated statement of financial condition. Certain estimates relate to valuation of goodwill, allowance for doubtful accounts and legal and regulatory reserves. Actual results may differ from those estimates. Intercompany balances and transactions have been eliminated.

Cash and cash equivalents

The Company considers all highly liquid investments with original maturities of three months or less that are not segregated and on deposit for regulatory purposes to be cash equivalents. Cash and cash equivalents include money market funds and deposits with banks.

Cash and investments segregated and on deposit for regulatory purposes

Cash and investments segregated and on deposit for regulatory purposes include securities purchased under agreements to resell (resale agreements), which are collateralized by PT. Government. Resale agreements are accounted for as collateralized financing transactions that are recorded at their contractual amounts plus accrued interest. The Company obtains control of collateral with a market value equal to or in excess of the principal amount loaned and accrued interest under resale agreements. Collateral is valued daily by the Company, with additional collateral obtained to ensure full collateralization. Cash and investments segregated also include certificates of deposit and U.S. Government securities. Certificates of deposit and U.S. Government securities are recorded at fair value. Pursuant to applicable regulations, client cash balances not used for margin lending are segregated into investment accounts maintained for the exclusive benefit of clients.

Receivables from brokerage clients

Receivables from brokerage clients includes margin loans to securities brokerage clients and other trading receivables from clients. Margin loans are collateralized by client securities and are carried at the amount receivable, net of an allowance for doubtful accounts. The Company monitors margin levels and requires clients to deposit additional collateral, or reduce margin positions to meet minimum collateral requirements if the fair value of the collateral changes. Receivables from brokerage clients that remain unsecured or partially secured for more than 30 days are fully reserved for in the allowance for doubtful accounts, except in the case of confirmed fraud, which is reserved immediately.

MDS SECURITIES LTD.

NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF DECEMBER 31, 2016
(Tabular amounts in millions, except option price amounts)


Securities owned

Securities owned are recorded at fair value based on quoted market prices or other observable market data.

Securities borrowed and securities loaned

Securities borrowed require the Company to deliver cash to the lender in exchange for securities and are included in receivables from brokers, dealers, and clearing organizations. For securities loaned, the Company receives collateral in the form of cash in an amount equal to or greater than the market value of securities loaned. Securities loaned are included in payables to brokers, dealers, and clearing organizations. The Company monitors the market value of securities borrowed and loaned, with additional collateral obtained or refunded to ensure full collateralization.

Equipment, office facilities, and property

Equipment, office facilities, and property are recorded at cost net of accumulated depreciation and amortization, except for land, which is recorded at cost. Equipment and office facilities are depreciated on a straight-line basis over an estimated useful life of five to seven years. Buildings are depreciated on a straight-line basis over 20 to 40 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful life of the asset or the term of the lease. Software and certain costs incurred for purchasing or developing software for internal use are amortized on a straight-line basis over an estimated useful life of three or five years. Equipment, office facilities, and property are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

Goodwill

Goodwill represents the fair value of acquired businesses in excess of the fair value of the individually identified net assets acquired. Goodwill is not amortized but is tested for impairment annually or whenever indications of impairment exist. The Company’s annual impairment testing date is April 1st. The Company can elect to qualitatively assess goodwill for impairment if it is more likely than not that the fair value of a reporting unit exceeds its carrying value.

If the Company elects to bypass qualitatively assessing goodwill, or it is not more likely than not that the fair value of a reporting unit exceeds its carrying value, management estimates the fair values of each of the Company’s reporting units (defined as the Company’s businesses for which financial information is available and reviewed regularly by management) and compares it to their carrying values. Based on the Company’s analysis, fair value significantly exceeded the carrying value of the Company as of its annual testing date.

Guarantees and indemnifications

The Company recognizes, at the inception of a guarantee, a liability equal to the estimated fair value of the obligation undertaken in issuing the guarantee. The fair values of obligations relating to guarantees are estimated based on transactions for similar guarantees or expected present value measures.

MDS SECURITIES LTD.

NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF DECEMBER 31, 2016
(Tabular amounts in millions, except option price amounts)


Income taxes

The Company is included in the consolidated federal income tax return of MDSS LLC. The Company provides for income taxes on all transactions that have been recognized in the consolidated financial statement on a pro rata basis with MDSS LLC other subsidiaries in the consolidated income tax return. Accordingly, deferred tax assets are adjusted to reflect the tax rates at which future taxable amounts will likely be settled or realized. The effects of tax rate changes on future deferred tax assets and deferred tax liabilities, as well as other changes in income tax laws, are recorded in earnings in the period during which such changes are enacted. The Company’s unrecognized tax benefits, which are included in accrued expenses and other liabilities, represent the difference between positions taken on tax return filings and estimated potential tax settlement outcomes.

Fair values of assets and liabilities

Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement accounting guidance describes the fair value hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair value hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are based on market pricing data obtained from sources independent of the Company. A quoted price in an active market provides the most reliable evidence of fair value and is generally used to measure fair value whenever available.

Unobservable inputs reflect management’s judgment about the assumptions market participants would use in pricing the asset or liability. Where inputs used to measure fair value of an asset or liability are from different levels of the hierarchy, the asset or liability is categorized based on the lowest level input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input requires judgment. The fair value hierarchy includes three levels based on the objectivity of the inputs as follows:

• Level 1 inputs are quoted prices in active markets as of the measurement date for identical assets or liabilities that the Company has the ability to access.

• Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates, benchmark yields, issuer spreads, new issue data, and collateral performance.

• Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

The Company’s policy is to recognize transfers of financial instruments between levels as of the beginning of the reporting period in which a transfer occurs.

Assets and liabilities measured at fair value on a recurring basis

The Company’s assets and liabilities measured at fair value on a recurring basis include certain cash equivalents, certain investments segregated and on deposit for regulatory purposes, and securities owned. The Company uses the market approach to determine the fair value of assets and liabilities. When available, the Company uses quoted prices in active markets to measure the fair value of assets and liabilities. When utilizing market data and bid-ask spread, the Company uses the price within the bid-ask spread that best represents fair value. When quoted prices do not exist, the Company uses prices obtained from independent third-party pricing services to measure the fair value of investment assets. The Company generally obtains prices from at least three independent pricing sources for assets recorded at fair value.

MDS SECURITIES LTD.

NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF DECEMBER 31, 2016
(Tabular amounts in millions, except option price amounts)


The Company’s primary independent pricing service provides prices based on observable trades and discounted cash flows that incorporate observable information such as yields for similar types of securities (a benchmark interest rate plus observable spreads) and weighted-average maturity for the same or similar “to-be-issued” securities. The Company compares the prices obtained from its primary independent pricing service to the prices obtained from the additional independent pricing services to determine if the price obtained from the primary independent pricing service is reasonable. The Company does not adjust the prices received from independent third-party pricing services unless such prices are inconsistent with the definition of fair value and result in a material difference in the recorded amounts.

Fair value of other financial instruments

Descriptions of the valuation methodologies and assumptions used to estimate the fair value of other financial instruments are described below. The Company’s financial instruments not recorded at fair value but for which fair value can be approximated and disclosed include:

• Cash and cash equivalents are short-term in nature and accordingly are recorded at amounts that approximate fair value.

• Cash and investments segregated and on deposit for regulatory purposes include cash and securities purchased under resale agreements. Securities purchased under resale agreements are short-term in nature and are backed by collateral that both exceeds the carrying value of the resale agreement and is highly liquid in nature. Accordingly, the carrying values of these financial instruments approximate their fair values.

• Receivables from/payables to brokers, dealers, and clearing organizations are short-term in nature, recorded at contractual amounts and historically have been settled at those values. Accordingly, the carrying values of these financial instruments approximate their fair values.

• Receivables from/payables to brokerage clients — net are short-term in nature, recorded at contractual amounts and historically have been settled at those values. Accordingly, the carrying values of these financial instruments approximate their fair values.

• Financial instruments included in other assets primarily consist of cost method investments and other loans and advances whose carrying values approximate fair value.

• Financial instruments included in accrued expenses and other liabilities consist of drafts payable and certain amounts due under contractual obligations. The carrying values of these instruments approximate their fair values.

• Finance lease obligation is recorded at carrying value, which approximates fair value.

New Accounting Standards

Adoption of New Accounting Standards
On January 1, 2016, the Company adopted ASU 2015-02, “Consolidation (Topic 810),” which amends the analysis a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The new guidance is applicable to all entities but provides an exception for reporting entities with interests in legal entities that 
are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The adoption of ASU 2015-02 did not have an impact on the Company’s consolidated statement of financial condition as the new guidance did not change any consolidation conclusions reached in accordance with the previous guidance.

On January 1, 2016, the Company also adopted ASU 2015-05, “Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40),” which provides new guidance that clarifies customers’ accounting for fees paid in a cloud computing arrangement. Under the new guidance, if a cloud computing arrangement includes a software license, the customer shall account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the cloud computing arrangement does not include a software license, the customer shall account for the arrangement as a service contract. The guidance applies to all new arrangements entered into after January 1, 2016. The adoption of ASU 2015-05 did not have an impact on the Company’s consolidated statement of financial condition.

New Accounting Standards Not Yet Adopted

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10),” which will become effective January 1, 2018. This new guidance addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The main provisions of the guidance include (i) most equity investments are to be measured at fair value with changes in fair value recognized in net income, except for those accounted for under the equity method or those that do not have readily

determinable fair values for which a practical expedient can be elected, (ii) requires the use of an exit price notion when measuring the fair value of financial instruments for disclosure purposes, and (iii) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial instrument on the consolidated statement of financial condition or in the accompanying notes. The Company does not expect the adoption of ASU 2016-01 will have a material impact on its consolidated statement of financial condition.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” which amends the accounting for leases by lessees and lessors. The primary change as a result of the new standard is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases. Additional changes include accounting for lease origination and executory costs, required lessee reassessments during the lease term due to changes in circumstances and expanded lease disclosures. ASU 2016-02 will become effective January 1, 2019, with early adoption permitted, and requires entities to apply the new guidance using a modified retrospective transition. Modified retrospective transition requires entities to apply the new guidance as of the beginning of the earliest comparative period presented in the financial statements in which the entity first applies the new standard. Certain transition reliefs are permitted if elected by the entity. The adoption of ASU 2016-02 will result in the Company recognizing a right-of- use asset and lease liability on the consolidated statement of financial condition based on the present value of remaining operating lease payments (see Note 9 for the un discounted future annual minimum rental commitments for operating leases).

MDS SECURITIES LTD.

NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AS OF DECEMBER 31, 2016
(Tabular amounts in millions, except option price amounts)


3. Receivables from and Payables to Brokerage Clients

Receivables from and payables to brokerage clients as of December 31, 2016 are detailed below:


Receivables  
Margin loans, net of allowance for doubtful accounts $ 15,115
   
Other brokerage 1,948
receivables Receivables from brokerage clients – net $17,063
   
 Payables  
Interest-bearing payables $27,439
Non-interest-bearing payables Payables to brokerage clients 7,460
Payables to brokerage clients $34,899
  _______________

4. Securities Owned

A summary of securities owned at December 31, 2016 is as follows:

Equity and bond mutual funds$ 196
MDS SECURITIES LTD money market funds 108
State and municipal debt obligations 41
Equity, U.S. Government and corporate debt, and other securities 28
Total securities owned $      $373
  _______________

Equity and bond mutual funds include inventory maintained to facilitate certain MDS SECURITIES LTD Funds and third-party mutual fund clients’ transactions. The Company’s positions in MDS SECURITIES LTD Funds money market funds arise from certain overnight funding of clients’ redemption, debit-credit card activities.

5. Equipment, Office Facilities, and Property

Equipment, office facilities, and property consisted of the following at December 31, 2016:


Software$1,309
Buildings 378
Leasehold improvements 334
Information technology equipment 293
Furniture and equipment 171
Telecommunications equipment 61
Land 50
Construction in progress 21
  _______________
Total equipment, office facilities, and property 2,620
   
Accumulated depreciation and amortization ( 1,795 )
  _______________
Total equipment, office facilities, and property — net$825

6. Other Assets

The components of other assets at December 31, 2016 are as follows:


Accounts receivable$240
   
Receivables from affiliates 134
   
Prepaid expenses 80
Deferred tax asset – net 59
Income tax receivable 37
Interest and dividends receivable 13
Other 28
  _______________
 Total other assets $591

Accounts receivable includes accrued service fee income.

7. Payables to Brokers, Dealers, and Clearing Organizations

Payables to brokers, dealers, and clearing organizations at December 31, 2016 consisted of the following:


Deposits for securities loaned$1,992
Payables to broker-dealers 280
Payables to clearing organizations 99
Payables for securities failed to receive 31
  _______________
Total payables to brokers, dealers, and clearing organizations$2,402

8. Commitments and Contingencies

Operating leases and other commitments: MDSS has non-cancelable operating leases for office space and equipment. In addition, MDSS leases a data center facility from an affiliate under a five-year lease agreement. The aggregate future minimum rental commitment under the lease was $8 million at December 31, 2016. The agreement includes two additional four-year extension options, which may be exercised at prevailing market rates.

Future annual minimum rental commitments under these operating leases, including the commitment on the lease agreement with an affiliate, net of contractual operating subleases, at December 31, 2016, are as follows:


Operating Leases Subleases Net

2017$ 113$ 2$ 111
20181042102
201981279
202070268
202160258
Thereafter3171316
 _____________________________________________
Total$ 745$ 11$ 734


The following table presents information about MDSS resale agreements and securities lending activity to enable the users of MDSS statement of financial condition to evaluate the potential effect of rights of setoff between these recognized assets and recognized liabilities at December 31, 2016.


 Gross Assets/LiabilitiesGross Amounts Offset in the Consolidated Statement of Financial ConditionNet Amounts Presented in the Consolidated Statement of Financial ConditionGross Amounts Not Offset in the Consolidation Statement of Financial Condition
Country OffsettingCollateralNet Amount
Assets:
Resale agreements (1)$9,547$$9,547$$(9,547) (2)$
Securities borrowed (3) 377  377 (199) (175) 3
 
Total$9,924$$9,924$(199)$(9,722)$3
Liabilities:
Securities loaned (4,5)$1,992$$1,992$(199)$(1,658)$135
 
Total$1,992$$1,992$(199)$(1,658)$135

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the fair value hierarchy for assets measured at fair value on a recurring basis as of December 31, 2016. Liabilities recorded at fair value were not material, and therefore are not included in the following table.

 Quoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)Balance at Fair Value
Assets
Cash equivalents:
Money markets funds$770$$$770
Investments segregated and on deposit for regulatory purposes:
Certificates of deposit  2,525  2,525
U. S. Government Securities  6,111  6,11
        ________
Total investments segregated and on deposit for regulatory purposes  8,636  8,636
Securities owned:
Equity and bond mutual funds 196   196
Schwab Funds ® money market funds 108   108
State and municipal debt obligations  41  41
Equity, U. S. Government and corporate debt, and other securities 2 26  28
Total Securities owned 306 67  373
 
Total$1,076$8,703$$9,779

Fair Value of Other Financial Instruments

Descriptions of the valuation methodologies and assumptions used to estimate the fair value of other financial instruments are also described in “Notes – 2. Summary of Significant Accounting Policies”. There were no significant changes in these methodologies or assumptions during 2016. The following table presents the fair value hierarchy for other financial instruments at December 31, 2016:

 Carrying AmountQuoted Prices in Active Markets for Identical Assets (Level 1)Significant Other Observable Inputs (Level 2)Significant Unobservable Inputs (Level 3)Balance at Fair Value
Assets
Cash and cash equivalents$1,138$$1,138$$1,138
Cash and investments segregated and on deposit for regulatory purposes 12,576  12,576  12,576
Receivables from brokers, dealers and clearing organizations 589  589  589
Receivables from brokerage clients – net 17,059  17,059  17,059
Other assets 17  17  17

Total$31,379$$31,379$$31,379
Liabilities:
Payables to brokers, dealers and clearing organizations$2,402$$2,402$$2,402
Payables to brokerange clients 34,899  34,899  34,899
Accrued expenses and other liabilities 1,026  1,026  1,026
Finance lease obligation 68  68  68

Total$38,395$$38,395$$38395

9. Employee Incentive and Retirement Plans

Employees, officers, and directors of MDSS participate in stock incentive plans sponsored by MDSS.

MDSS’s share-based incentive plans provide for granting options and restricted stock units to employees, officers, and directors. In addition, MDSS offers retirement and employee stock purchase plans to eligible employees.

MDSS issues shares for stock options and restricted stock units from treasury stock. At December 31, 2016, MDSS was authorized to grant up to 50 million common shares under its existing stock incentive plans. Additionally, at December 31, 2016, MDSS had 38 million shares reserved for future issuance under its employee stock purchase plan.

As of December 31, 2016, there was $254 million of total unrecognized compensation cost related to outstanding stock options and restricted stock units, which is expected to be recognized through 2020 with a remaining weighted-average service period of 1.9 years for stock options, 2.5 years for restricted stock units, and 0.5 years for performance stock units.

Stock Option Plan

Options are granted for the purchase of shares of common stock at an exercise price not less than market value on the date of grant, and expire within seven or ten years from the date of grant. Options generally vest annually over a three- to five-year period from the date of grant.

 Number of OptionsWeighted Average Exercise Price per ShareWeighted Average Remaining Contractual Life (in years)Aggregate Intrinsic Value
Outstanding at December 31, 201637$22.126.50$649
Vested and expected to vest at December 31, 201637$22.036.47$646
Vested and exercisable at December 31, 201623$17.945.21$505

FOR MORE INFORMATION

The annual report as of December 31, 2016, prepared pursuant to Rule 17a-5 under the Securities Exchange Act of 1934, has been filed with the  Exchange Commission, and is available for examination and copying at our headquarters: Av. da Liberdade , 110, 1st Floor 1269-046 Lisbon, Portugal.

For more information about the ultimate parent company of MDS SECURITIES LTD., write to MDS SECURITIES LTD, Investor Relations,Av. da Liberdade , 110, 1st Floor 1269-046 Lisbon, Portugal.; call +3513 0880 2972; email: support@mdssllc.com; or visit our website at www.mdssllc.com.

Copyright © 2018 MDSS LTD. All Rights Reserved.

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Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Neither MDSS LLC nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions. Asset allocation, diversification and rebalancing do not ensure a profit or protect against loss in declining markets.

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