INTL FCStone 2011 Annual Report Download - page 29

INTL FCSTONE INC.Form10K 15
PARTI
ITEM 1A Risk Factors
Although the Company has adopted additional procedures that
are designed to reduce the likelihood and magnitude of such
credit losses, they are an inherent component of the business
conducted by the Company, and the Company will continue
to be subject to the risk of such losses.
We are responsible for self-clearing our foreign exchange and
precious and base metals commodities trading activities and,
in addition, take principal risk to counterparties and customers
in these activities. Any metals or other physical commodities
positions are held by third party custodians. In this regard,
during our  scal years ended September30,2011 and 2010, we
recognized $5.6million and $2.5million, respectively, in bad
debt expense as a result of defaults by customer counterparties
to whom we had consigned gold. Although the Company has
adopted additional procedures that are designed to reduce the
likelihood and magnitude of such credit losses, the possibility of
such losses is an inherent component of the business conducted
by the Company, and the Company will continue to be subject
to the risk of such losses.
Although we have procedures for reviewing credit exposures to
speci c customers and counterparties to address present credit
concerns, default risk may arise from events or circumstances
that are di cult to detect or foresee including rapid changes in
securities, commodity and foreign exchange price levels. Some
of our risk management methods depend upon the evaluation of
information regarding markets, clients or other matters that are
publicly available or otherwise accessible by us.  at information
may not, in all cases, be accurate, complete, up-to-date or properly
evaluated. In addition, concerns about, or a default by, one
institution could lead to signifi cant liquidity problems, losses or
defaults by other institutions, which in turn could adversely aff ect
us. We may be materially and adversely aff ected in the event of a
signifi cant default by our customers and counterparties.
In our securities and commodities trading businesses we rely on
the ability of our clearing brokers to adequately discharge their
obligations on a timely basis. We also depend on the solvency
of our clearing brokers and custodians. Any failure by a clearing
broker to adequately discharge its obligations on a timely basis,
or insolvency of a clearing broker or custodian, or any event
adversely aff ecting our clearing brokers or custodians, could have
a material adverse eff ect on our business, fi nancial condition
and operating results.
Our net operating revenues may decrease due to
changes in market volume, prices or liquidity
Declines in the volume of securities, commodities and foreign
exchange transactions and in market liquidity generally may result
in lower revenues from market-making and trading activities.
Changes in price levels of securities and commodities and
foreign exchange rates also may result in reduced trading activity
and reduce our revenues from market-making transactions.
Changedprice levels also can result in losses from changes in
the fair value of securities and commodities held in inventory.
Sudden sharp changes in fair values of securities and commodities
can result in:
•illiquid markets;
•fair value losses arising from positions held by the Company;
• the failure of buyers and sellers of securities and commodities
to fulfi ll their settlement obligations;
• redemptions from funds managed in our asset management
business segment and consequent reductions in management fees;
• reductions in accrued performance fees in our asset management
business segment; and
•increases in claims and litigation.
Any change in market volume, price or liquidity or any other of
these factors could have a material adverse eff ect on our business,
fi nancial condition and operating results.
Our net operating revenues may decrease due to
changes in customer trading volumes which are
dependent in large part on commodity prices and
commodity price volatility
Customer trading volumes are largely driven by the degree of
volatility—the magnitude and frequency of fl uctuations—in
prices of commodities. Higher volatility increases the need
to hedge contractual price risk and creates opportunities for
arbitrage trading. Energy and agricultural commodities markets
have periodically experienced signifi cant price volatility. In
addition to price volatility, increases in commodity prices lead
to increased trading volume. As prices of commodities have
risen, especially energy prices, new participants have entered
the markets to address their growing risk-management needs
or to take advantage of greater trading opportunities. Sustained
periods of stability in the prices of commodities or generally lower
prices could result in lower trading volumes and, potentially,
lower revenues. Lower volatility and lower volumes could lead
to lower customer balances held on deposit, which in turn may
reduce the amount of interest revenue based on these deposits.
Factors that are particularly likely to aff ect price volatility and
price levels of commodities include:
•supply and demand of commodities;
•weather conditions aff ecting certain commodities;
• national and international economic and political conditions;
•perceived stability of commodities and fi nancial markets;
•the level and volatility of interest rates and infl ation; and
•fi nancial strength of market participants.
Any one or more of these factors may reduce price volatility or
price levels in the markets for commodities trading, which in
turn could reduce trading activity in those markets. Moreover,