INTL FCStone 2011 Annual Report Download - page 56

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INTL FCSTONE INC.Form10K42
PARTII
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
variation margin to the exchanges, on a net basis, before we
receive the required payments from our customers. Accordingly,
we are responsible for our customers’ obligations with respect to
these transactions, which exposes us to signi cant credit risk. 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 signi cant
price movement. Our clients are required to maintain initial
margin requirements at the level set by the respective exchanges,
but we have the ability to increase the margin requirements for
customers based on their open positions, trading activity, or
market conditions.
With OTC derivative transactions, we act as a principal, which
exposes us to the credit risk of both our customers and the
counterparties with which we o set our customer positions. As
with exchange-traded transactions, our OTC transactions require
that we meet initial and variation margin payments on behalf
of our customers before we receive the required payment from
our customers. OTC customers are required to post su cient
collateral to meet margin requirements based on Value-at-Risk
models as well as variation margin requirement based on the
price movement of the commodity or security in which they
transact. Our customers are required to make any required margin
deposits the next business day, and we may require our largest
clients to make intra-day margin payments during periods of
signi cant price movement. We have the ability to increase the
margin requirements for customers based on their open positions,
trading activity, or market conditions. On a limited basis, we
provide credit thresholds to certain customers, based on internal
evaluations and monitoring of customer creditworthiness.
In addition, with OTC transactions, we are at risk that a
counterparty will fail to meet its obligations when due. We
would then be exposed to the risk that the settlement of a
transaction which is due a customer will not be collected from
the respective counterparty with which the transaction was o set.
We continuously monitor the credit quality of our respective
counterparties and mark our positions held with each counterparty
to market on a daily basis.
As a result of the acquisition of FCStone, the Company acquired
notes receivable of $133.7million as of September30,2009
from certain customers and an introducing broker which arose
from previous customer account de cits. At the time of the
acquisition, the Company estimated collectability of these notes
to be $16.7million. During 2011, the Company recovered
$15.6million as partial payment against these notes, and charged
o $111.5million of note receivable, which was fully reserved.
Since the acquisition of FCStone, total recoveries from these
customers and introducing broker through September30,2011
is $15.5million, and remaining outstanding notes receivable
related to these customer account de cits is $1.2million. e
Company expects to collect the remaining amounts from the
introducing broker, by withholding commissions due on future
revenues collected by the Company, although no assurance can
be given as to the timing of collection.
During 2011, the Company recorded bad debt expense, net of
recoveries of $4.5million, including provision increases and direct
write-off s of $8.2million, off set by recoveries of $3.7million.
e provision increases during 2011 were primarily related to
credit losses recognized on consigned gold transactions within
the C&RM segment, and a clearing customer defi cit account
within the CES segment. A portion of the loss on consigned gold
related to a customer for which a partial provision was recorded
during the fourth quarter of 2010. During the 2011, negotiation
eff orts with the customer resulted in settlement of the loss in
excess of the amount previously estimated and a charge to bad
debt expense for the incremental uncollectible portion. During
2011, the Company recorded recoveries of bad debt expense
related to collection following a settlement relating to a disputed
trade that was “given-up” to FCStone during the quarter ended
June30,2010 by another futures commission merchant for a
customer that held an account with us.
Primary Sources and Uses of Cash
e Company’s assets and liabilities may vary signifi cantly
from period to period due to changing customer requirements,
economic and market conditions and the growth of the Company.
e Company’s total assets as of September30,2011 and
September30,2010, were $2,635.7million and $2,021.7million,
respectively. e Company’s operating activities generate or
utilize cash as a result of net income or loss earned or incurred
during each period and fl uctuations in its assets and liabilities.
e most signifi cant fl uctuations arise from changes in the level
of customer activity, commodities prices and changes in the
balances of fi nancial instruments and commodities inventory.
FCStone,LLC, our FCM subsidiary, occasionally uses its margin
line credit facilities, on a short-term basis, to meet intraday
settlements with the commodity exchanges prior to collecting
margin funds from our customers.
e majority of the assets of FCStone,LLC are restricted from
being transferred to its parent or other affi liates due to specifi c
regulatory requirements. ese restrictions have no impact on
the ability of the Company to meet its cash obligations, and no
impact is expected in the future.
We have liquidity and funding policies and processes in place that
are intended to maintain signifi cant fl exibility to address both
company-specifi c and industry liquidity needs. e majority of
our excess funds are held with high quality institutions, under
highly-liquid reverse repurchase agreements, with a maturity
of typically three days or less, U.S. government obligations
and AA-rated money market investments. e Company does
not hold any direct investments in the general obligations of a
sovereign nation (“sovereign debt”).
As of September30,2011, $114.2million of cash, cash equivalent
and available-for-sale investment securities was held by our
foreign subsidiaries. If these funds are needed for operations
in the U.S., the Company would be required to accrue and