INTL FCStone 2005 Annual Report Download - page 33

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businesses to capture all known transactions. Recording all known transactions involves reviewing trades that
occur after the financial period that relate to the financial period. The accuracy of capturing this information is
dependent upon the completeness and accuracy of the operations systems including personnel and the
Company’s clearing firm.
Off Balance Sheet Arrangements
The Company is party to certain financial instruments with off-balance sheet risk in the normal course of
business as a registered securities broker-dealer and from its market making and proprietary trading in the foreign
exchange and commodities trading business. In addition, the Company has sold financial instruments that it does
not currently own and will therefore be obligated to purchase such financial instruments at a future date. The
Company has recorded these obligations in the consolidated financial statements at September 30, 2005 at fair
value of the related financial instruments (totaling $92,016,000). The Company will incur losses if the fair value
of the financial instruments increases subsequent to September 30, 2005. The total of $92,016,000 includes a
liability of $3,182,000 for options and futures contracts, based on their market value as of September 30, 2005.
Listed below is the market value of trading-related derivatives as of September 30, 2005 and September 30,
2004. Assets represent net unrealized gains and liabilities represent net unrealized losses.
September 30,
2005
September 30,
2005
September 30,
2004
September 30,
2004
Assets Liabilities Assets Liabilities
Interest Rate Derivatives ........................ $ 30,000 $ — $ — $ 1,000
Foreign Exchange Derivates ..................... $ 17,000 $ — $ 49,000 $ 3,000
Commodity Price Derivatives .................... $3,291,000 $3,182,000 $1,713,000 $1,516,000
Total ....................................... $3,338,000 $3,182,000 $1,762,000 $1,520,000
Options and futures contracts held by the Company result from market-making and proprietary trading
activities in the Company’s foreign exchange/commodities trading business segment. The Company assists its
customers in its commodities business to protect the value of their future production (precious or base metals) by
selling them put options on an OTC basis. The Company also provides its commodities customers with
sophisticated option products, including combinations of buying and selling puts and calls. The Company
mitigates its risk by effecting offsetting OTC options with market counterparties or through the purchase or sale
of commodities futures traded through the COMEX division of the New York Mercantile Exchange. The risk
mitigation of offsetting options is not within the documented hedging designation requirements of FAS 133.
These derivative contracts are traded along with cash transactions because of the integrated nature of the
markets for such products. The Company manages the risks associated with derivatives on an aggregate basis
along with the risks associated with its proprietary trading and market-making activities in cash instruments as
part of its firm-wide risk management policies.
Effects of Inflation
Because the Company’s assets are, to a large extent, liquid in nature, they are not significantly affected by
inflation. Increases in the Company’s expenses, such as compensation and benefits, clearing and related
expenses, occupancy and equipment rental, due to inflation, may not be readily recoverable from increasing the
prices of services offered by the Company. In addition, to the extent that inflation results in rising interest rates or
has other adverse effects on the securities markets and on the value of the securities held in inventory, it may
adversely affect the Company’s financial position and results of operations.
Quantitative and Qualitative Disclosures about Market Risk
The Company conducts its market-making and trading activities predominantly as a principal, which
subjects its capital to significant risks. These risks include, but are not limited to, absolute and relative price
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