INTL FCStone 2011 Annual Report Download - page 115

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INTL FCSTONE INC.Form10K 101
PART II
ITEM 8 Consolidated Financial Statements and Supplementary Data
During the fourth quarter of scal year2010, the Company made an adjustment between loss (income) from discontinued operations
and extraordinary loss (gain). Additionally, see discussion in Note18 of purchase accounting adjustments and corrections of immaterial
errors that impacted extraordinary loss (gain) for the respective quarters during scal year2010.
NOTE 22 Segment Analysis
e Company reports its operating segments based on services
provided to customers. e Company’s activities are divided
into the following fi ve functional areas:
•Commodity and Risk Management Services
•Foreign Exchange
•Securities
•Clearing and Execution Services
•Other
Commodity and Risk Management Services
(C&RM)
e Company serves its commercial customers through its force
of approximately 167 risk management consultants with a high
value added service that diff erentiates us from other competitors
and maximizes the opportunity to retain customers. e Integrated
Risk Management Program (“IRMP®”) involves providing
customers with commodity risk management consulting services
that are designed to develop a customized long term hedging
program to help them mitigate their exposure to commodity price
risk and maximize the amount and certainty of their operating
profi ts. Customers are assisted in the execution of their hedging
strategies through the Company’s exchange-traded futures and
options clearing and execution operations and through access
to more customized alternatives provided by the OTC trading
desk. Generally, customers direct their own trading activity and
risk management consultants do not have discretionary authority
to transact trades on behalf of customers. When transacting
OTC contracts with customers, the Company may off set the
customer’s transaction simultaneously with one of its trading
counterparties. Alternatively, the OTC trade desk will accept a
customer transaction and off set that transaction with a similar
but not identical position on the exchange.
In addition, the Company provides a full range of trading and
hedging capabilities to select producers, consumers, recyclers and
investors in precious metals and certain base metals. Acting as
a principal, the Company commits its own capital to buy and
sell the metals on a spot and forward basis.
e Company records its physical commodities revenues on a
gross basis. Operating revenues and losses from the Company’s
commodities derivatives activities are included within ‘trading
gains’ in the consolidated income statements. Inventory for
the commodities business is valued at the lower of cost or fair
value under the provisions of the Inventory Topic of the ASC.
e Company generally mitigates the price risk associated with
commodities held in inventory through the use of derivatives.
e Company does not elect hedge accounting under U.S. GAAP
in accounting for this price risk mitigation. In such situations,
unrealized gains in inventory are not recognized under U.S. GAAP,
but unrealized gains and losses in related derivative positions
are recognized under U.S. GAAP. As a result, the Company’s
reported earnings from commodities trading may be subject to
signifi cant volatility when calculated under U.S. GAAP.
Foreign Exchange
e Company provides treasury, global payment and foreign
exchange services to fi nancial institutions, multi-national
corporations, government organizations and charitable
organizations as well as assisting commercial customers with the
execution of foreign exchange hedging strategies. e Company
transacts in over 130 currencies and specializes in smaller, more
diffi cult emerging markets where there is limited liquidity. In
addition, the Company executes trades based on the foreign
currency fl ows inherent in the Company’s existing business
activities. e Company primarily acts as a principal in buying
and selling foreign currencies on a spot basis. e Company
derives revenue from the diff erence between the purchase and
sale prices.
e Company also provides spot foreign currency trading for
a customer base of eligible contract participants and high net
worth retail customers as well as operating a proprietary foreign
exchange desk which arbitrages the futures and cash markets.
Securities
rough INTL Trading, the Company acts as a wholesale market
maker in select foreign securities including unlisted ADRs and
foreign ordinaryshares. INTL Trading provides execution and
liquidity to national broker-dealers, regional broker-dealers and
institutional investors.
e Company also originates, structures and places a wide array
of emerging market debt instruments in the international and
domestic capital markets. ese instruments include complex
asset backed securities, unsecured bond and loan issues, negotiable
notes and other trade-related debt instruments used in cross-
border trade fi nance. On occasions the Company may invest
its own capital in debt instruments before selling them. It also
actively trades in a variety of international debt instruments.