INTL FCStone 2011 Annual Report Download - page 116

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INTL FCSTONE INC.Form10K102
PART II
ITEM 8 Consolidated Financial Statements and Supplementary Data
Clearing and Execution Services (CES)
e Company seeks to provide competitive and effi cient clearing
and execution of exchange-traded futures and options for the
institutional and professional trader market segments. rough
its platform, customer orders are accepted and directed to the
appropriate exchange for execution. e Company then facilitates
the clearing of customers’ transactions. Clearing involves the
matching of customers’ trades with the exchange, the collection
and management of margin deposits to support the transactions,
and the accounting and reporting of the transactions to customers.
e Company seeks to leverage its capabilities and capacity
by off ering facilities management or outsourcing solutions to
other FCMs.
Other
is segment consists of the Company’s asset management
and commodity fi nancing and facilitation business. e asset
management revenues include fees, commissions and other
revenues received by the Company for management of third
party assets and investment gains or losses on the Company’s
investments in funds and proprietary accounts managed either
by the Company’s investment managers or by independent
investment managers.
e Company operates a commodity fi nancing and facilitation
business which provides fi nancing to commercial commodity-
related companies against physical inventories, including grain,
lumber, meats, energy products and renewable fuels. Sale and
repurchase agreements are used to purchase commodities evidenced
by warehouse receipts, subject to a simultaneous agreement to sell
such commodities back to the original seller at a later date. ese
transactions are accounted for as product fi nancing arrangements,
and accordingly no commodity inventory, purchases or sales are
recorded. Additionally, the Company, as a principal, engages in
physical purchase and sale transactions related to inputs to the
renewable fuels and feed ingredient industries.
e total revenues reported combine gross revenues for the
physical commodities business and net revenues for all other
businesses. In order to refl ect the way that the Company’s
management views the results, the tables below also refl ect the
segment contribution to ‘operating revenues’, which is shown
on the face of the consolidated income statements and which
is calculated by deducting physical commodities cost of sales
from total revenues.
Segment data includes the profi tability measure of net contribution
by segment. Net contribution is one of the key measures used by
management to assess the performance of each segment and for
decisions regarding the allocation of the Company’s resources.
Net contribution is calculated as revenue less direct cost of sales,
clearing and related expenses, variable compensation, introducing
broker commissions and interest expense. Variable compensation
paid to risk management consultants / traders generally represents
a fi xed percentage of an amount equal to revenues generated,
and in some cases, revenues produced less clearing and related
charges, base salaries and an overhead allocation.
Segment data also includes segment income which is calculated
as net contribution less non-variable direct expenses of the
segment. ese non-variable direct expenses include trader base
compensation and benefi ts, operational employee compensation
and benefits, communication and data services, business
development, professional fees, bad debt expense and other
direct expenses.
Inter-segment revenues, charges, receivables and payables are
eliminated upon consolidation, except revenues and costs related
to foreign currency transactions undertaken on an arm’s length
basis by the foreign exchange trading business for the securities
business. e foreign exchange trading business competes for
this business as it does for any other business. If its rates are not
competitive, the securities businesses buy or sell their foreign
currency through other market counterparties.
To conform to the current presentation, the Company has
reclassifi ed $2.2million and $1.7million, for the fi scal years
ended September30,2010 and 2009, respectively, of costs not
allocated to operating segments as non-variable direct segment
costs, impacting reported net segment income. Additionally,
to conform to the current presentation, the Company has
reclassifi ed $52.8million of segment assets from CES to Foreign
Exchange as of September30,2010. On a recurring basis, the
Company sweeps excess cash from certain operating segments
to a centralized corporate treasury function in exchange for an
intercompany receivable asset. e intercompany receivable asset
is eliminated during consolidation, and therefore this practice
may impact reported total assets between segments.