INTL FCStone 2011 Annual Report Download - page 27

INTL FCSTONE INC.Form10K 13
PARTI
ITEM 1A Risk Factors
We face risks associated with our market making
and trading activities
We conduct our market-making and trading activities
predominantly as a principal, which subjects our capital to
signi cant risks.  ese activities involve the purchase, sale or
short sale for customers and for our own account of fi nancial
instruments, including equity and debt securities, commodities
and foreign exchange.  ese activities are subject to a number
of risks, including risks of price fl uctuations, rapid changes in
the liquidity of markets and counterparty creditworthiness.
These risks may limit our ability to either resell financial
instruments we purchased or to repurchase securities we sold
in these transactions. In addition, we may experience diffi culty
borrowing fi nancial instruments to make delivery to purchasers to
whom we sold short, or lenders from whom we have borrowed.
From time to time, we have large position concentrations in
securities of a single issuer or issuers in specifi c countries and
markets.  is concentration could result in higher trading
losses than would occur if our positions and activities were less
concentrated.
 e success of our market-making activities depends on:
• the price volatility of specifi c fi nancial instruments, currencies
and commodities,
•our ability to attract order fl ow;
•the skill of our personnel;
•the availability of capital; and
•general market conditions.
To a t t r a c t m a r ke t - t r a d in g , ma r k e t - ma k i n g a n d tr a d i n g b u s i ne s s ,
we must be competitive in:
•providing enhanced liquidity to our customers;
•the effi ciency of our order execution;
•the sophistication of our trading technology; and
•the quality of our customer service.
In our role as a market maker and trader, we attempt to derive
a profi t from the diff erence between the prices at which we buy
and sell fi nancial instruments, currencies and commodities.
However, competitive forces often require us to:
•match the quotes other market makers display; and
• hold varying amounts of fi nancial instruments, currencies and
commodities in inventory.
By having to maintain inventory positions, we are subject to a high
degree of risk. We cannot ensure that we will be able to manage
our inventory risk successfully or that we will not experience
signifi cant losses, either of which could materially adversely
aff ect our business, fi nancial condition and operating results.
We operate as a principal in the OTC derivatives
markets which involves the risks associated with
commodity derivative instruments
We off er OTC derivatives to our customers in which we act as
a principal counterparty. We endeavor to simultaneously off set
the commodity price risk of the instruments by establishing
corresponding off setting positions with commodity counterparties,
or alternatively we may off set those transactions with similar but
not identical positions on an exchange. To the extent that we are
unable to simultaneously off set an open position or the off setting
transaction is not fully eff ective to eliminate the commodity
derivative risk, we have market risk exposure on these unmatched
transactions. Our exposure varies based on the size of the overall
positions, the terms and liquidity of the instruments brokered,
and the amount of time the positions remain open.
To th e e xt e n t a n un he d g ed p o si t io n i s n o t d is po se d o f i n tr a-
day, adverse movements in the commodities underlying these
positions or a downturn or disruption in the markets for these
positions could result in a substantial loss. In addition, any
principal gains and losses resulting from these positions could
on occasion have a disproportionate eff ect, positive or negative,
on our fi nancial condition and results of operations for any
particular reporting period.
Transactions involving OTC derivative contracts may be adversely
aff ected by fl uctuations in the level, volatility, correlation or
relationship between market prices, rates, indices and/or other
factors.  ese types of instruments may also suff er from illiquidity
in the market or in a related market.
OTC derivative transactions are subject
to unique risks
OTC derivative transactions are subject to the risk that, as a
result of mismatches or delays in the timing of cash fl ows due
from or to counterparties in OTC derivative transactions or
related hedging, trading, collateral or other transactions, we or
our counterparty may not have adequate cash available to fund
its current obligations.
We could incur material losses pursuant to OTC derivative
transactions because of inadequacies in or failures of our internal
systems and controls for monitoring and quantifying the risk
and contractual obligations associated with OTC derivative
transactions and related transactions or for detecting human
error, systems failure or management failure.
OTC derivative transactions may be modifi ed or terminated
only by mutual consent of the original parties and subject to
agreement on individually negotiated terms. Accordingly it
may not be possible to modify, terminate or off set obligations
or exposure to the risk associated with a transaction prior to its
scheduled termination date.