INTL FCStone 2011 Annual Report Download - page 32

INTL FCSTONE INC.Form10K18
PARTI
ITEM 1A Risk Factors
Changes that will likely be required in our OTC and clearing
businesses may adversely impact our results of operations. Following
the adoption of the Dodd-Frank Act and related rules the markets
for cleared and non-cleared swaps may be less robust, there may
be less volume and liquidity in these markets and there may be
less demand for our services. Certain banks and other institutions
will be limited in their conduct of proprietary trading and will be
further limited or prohibited from trading in certain derivatives.
 e new rules, including the restrictions on the trading activities
for certain banks and large institutions, could materially impact
transaction volumes and liquidity in these markets and our revenues
would be adversely impacted as a result.
Changes that will likely be required in our OTC and clearing
businesses may also adversely impact our cash fl ows and fi nancial
condition. Registration will impose substantial new requirements
upon these entities including, among other things, capital and
margin requirements and business conduct standards. Increased
regulatory oversight could also impose administrative burdens
on us related to, among other things, responding to regulatory
examinations or investigations. Based upon regulations proposed
to date, we anticipate that one or more of our subsidiaries may
be subject to registration under the Dodd-Frank Act.  ese
initiatives and legislation may not only aff ect us but also certain
of our customers and counterparties.
Additionally, the Dodd-Frank Act will require publicly traded
companies to give stockholders a non-binding vote on executive
compensation and so-called “golden parachute” payments,
and authorizes the SEC to promulgate rules that would allow
stockholders to nominate their own candidates using a company’s
proxy materials.
Although the original date set for completion of fi nal rules was
mid-July2011, the CFTC has announced that it will phase in
its new rules through June30,2012. Many provisions of the
Dodd-Frank Act have not yet been implemented and will require
interpretation and additional rule making by federal regulators.
We are closely monitoring all relevant sections of the Dodd-Frank
Act to ensure continued compliance with laws and regulations.
While the ultimate eff ect of the Dodd-Frank Act on us cannot
currently be determined, the law and its implementing rules and
regulations are likely to result in increased compliance costs and
fees paid to regulators, along with possible restrictions on our
operations, all of which may have a material adverse eff ect on our
operating results and fi nancial condition.
We are subject to net capital requirements
 e SEC, FINRA and various other regulatory agencies require
our broker-dealer subsidiaries, INTL Trading,Inc. and FCC
Investments,Inc. to maintain specifi c levels of net capital. Failure to
maintain the required net capital may subject these subsidiaries to
suspension or revocation of registration by the SEC and suspension
or expulsion by FINRA and other regulatory bodies.
 e CFTC and various other self-regulatory organizations require
our futures commission merchant subsidiary, FCStone,LLC, to
maintain specifi c levels of net capital. Failure to maintain the
required net capital may subject this subsidiary to limitations on
its activities, including suspension or revocation of its registration
by the CFTC and suspension or expulsion by the NFA and various
exchanges of which it is a member.
Ultimately, any failure to meet capital requirements by our securities
broker-dealer subsidiaries or our FCM subsidiary could result
in liquidation of the subsidiary. Failure to comply with the net
capital rules could have material and adverse consequences such
as limiting their operations, or restricting the Company from
withdrawing capital from these subsidiaries.
In addition, a change in the net capital rules, the imposition of new
rules or any unusually large charge against net capital could limit
our operations that require the intensive use of capital.  ey could
also restrict our ability to withdraw capital from these subsidiaries.
Any limitation on our ability to withdraw capital could limit our
ability to pay cash dividends, repay debt and repurchase shares of
our outstanding stock. A signifi cant operating loss or any unusually
large charge against net capital could adversely aff ect our ability
to expand or even maintain our present levels of business, which
could have a material adverse eff ect on our business, fi nancial
condition and operating results.
We are subject to margin funding requirements on
short notice
Our business involves establishment and carrying of substantial
open positions for customers on futures exchanges and in the
OTC derivatives markets. We are required to post and maintain
margin or credit support for these positions. Although we collect
margin or other deposits from our customers for these positions,
signifi cant adverse price movements can occur which will require
us to post margin or other deposits on short notice, whether or
not we are able to collect additional margin or credit support from
our customers. We maintain borrowing facilities for the purpose of
funding margin and credit support and have systems to endeavor
to collect margin and other deposits from customers on a same-day
basis, there can be no assurance that these facilities and systems
will be adequate to eliminate the risk of margin calls in the event
of severe adverse price movements aff ecting open positions of our
customers. Generally, if a customer is unable to meet its margin
call, we promptly liquidate the customer’s account. However,
there can be no assurance that in each case the liquidation of the
account will not result in a loss to us or that liquidation will be
feasible, given market conditions, size of the account and tenor
of the positions.
Low short-term interest rates negatively impact our
profi tability
The level of prevailing short-term interest rates affects our
profi tability because a portion of our revenue is derived from
interest earned from the investment of funds deposited with us by
our customers. As of September30,2011, we had $1.5billion in