INTL FCStone 2011 Annual Report Download - page 55

INTL FCSTONE INC.Form10K 41
PARTII
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operating revenues were a ected by low volatility in the exchange-
traded markets as a result of the macro-economic conditions,
as well as historically low short-term interest rates. In addition,
volumes in this segment were signi cantly lower than the prior
as a result of the Company’s intentional reduction in the number
of high volume professional trading customers which it provided
clearing services to in the prior year. Operating revenues for 2010
include a trading loss of $2.7million related to open commodity
positions acquired from an under-margined customer.
Segment income was $1.1million for 2010, which included a
$2.3million bad debt expense provision recorded in Q32010,
related to a disputed trade that was “given-up” to FCStone by
another FCM for a customer that held an account with us as
well as the trading loss noted above. Variable expenses, which
are primarily clearing and related expenses, represented 80% of
operating revenues.
Other–  e Company’s asset management segment revenues
include management and performance 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 or proprietary accounts managed either
by the Company’s investment managers or by independent
investment managers. With the acquisition of FCStone, the
Other segment’s revenues now include interest income and
fees earned in relation to commodity fi nancing transactions as
well as a limited amount of principal physical commodity sales
transactions related to inputs to the renewable fuels industry.
Operating revenues were $8.9million in 2010 compared to
$3.4million in 2009.  e operations of FCStone contributed
$1.5million to operating revenues in 2010. Assets under
management as of September30,2010 were approximately
$349.3million compared with approximately $353.4million
as of September30,2009. Management fees decreased by 9%
from $3.8million in 2009 to $3.5million in 2010, primarily
as a decrease in rates on assets managed. Fees and commissions
increased by 149% from $1.3million in 2009 to $3.2million
in 2010 as the environment in Argentina for asset-backed
securitizations improved. Segment income was $3.7million
in 2010 compared to a segment loss of $0.7million in 2009.
Liquidity, Financial Condition and Capital Resources
Overview
Liquidity is defi ned as our ability to generate suffi cient amounts
of cash to meet all of our cash needs. Liquidity is of critical
importance to us and imperative to maintain our operations on
a daily basis. In FCStone,LLC, the Company’s FCM subsidiary,
we have responsibilities to meet margin calls at all exchanges
on a daily basis and intra-day basis, if necessary. Our customers
are required to make any required margin deposits the next
business day, and we require our largest customers to make
intra-day margin payments during periods of signifi cant price
movement. Margin required to be posted to the exchanges is
a function of the net open positions of our customers and the
required margin per contract.
In addition, in our commodities trading, C&RM OTC, securities
and foreign exchange trading activities, we may be called upon
to meet margin calls with our various trading counterparties
based upon the underlying open transactions we have in place
with those counterparties.
 e Company continuously reviews its overall credit and capital
needs to ensure that its capital base, both stockholders’ equity and
debt, as well as available credit facilities can appropriately support
the anticipated fi nancing needs of its operating subsidiaries.
As of September30,2011, the Company had total equity capital
of $296.3million and bank loans of $77.4million.
A substantial portion of the Company’s assets are liquid. As of
September30,2011, approximately 94% of the Company’s
assets consisted of cash; deposits and receivables from exchange-
clearing organizations, broker-dealers, clearing organizations
and counterparties; customer receivables, marketable fi nancial
instruments and investments, and physical commodities inventory,
at cost. All assets that are not customer and counterparty deposits,
are fi nanced by the Company’s equity capital, bank loans,
short-term borrowings from fi nancial instruments sold, not yet
purchased, and other payables.
Customer and Counterparty Credit and
Liquidity Risk
Our operations expose us to credit risk of default of our customers
and counterparties.  e risk includes liquidity risk to the extent
our customers or counterparties are unable to make timely
payment of margin or other credit support.  ese risks expose
us indirectly to the fi nancing and liquidity risks of our customers
and counterparties, including the risks that our customers and
counterparties may not be able to fi nance their operations.
 roughout the commodities and securities industries, continued
volatility in commodity prices has required increased lines of
credit, and placed a strain on working capital debt facilities. In
many cases, our customers have been forced to increase leverage
to unprecedented levels in order for them to continue to carry
inventory and properly execute hedging strategies. Continuing
volatility in the fi nancial markets has tightened credit further.
As a clearing broker, we act on behalf of our customers for all
trades consummated on exchanges. We must pay initial and