INTL FCStone 2011 Annual Report Download - page 60

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INTL FCSTONE INC.Form10K46
PARTII
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
or will o set that transaction with a similar but not identical
position on the exchange. ese unmatched transactions are
intended to be short-term in nature and are conducted to facilitate
the most eff ective transaction for our customer.
Derivative contracts are traded along with cash transactions because
of the integrated nature of the markets for such products. e
Company manages the risks associated with derivatives on an
aggregate basis along with the risks associated with its proprietary
trading and market-making activities in cash instruments as part
of its fi rm-wide risk management policies.
e Company is a member of various commodity exchanges and
clearing organizations. Under the standard membership agreement,
all members are required to guarantee the performance of other
members and, accordingly, in the event another member is unable
to satisfy its obligations to the exchange, may be required to fund
a portion of the shortfall. Our liability under these arrangements
is not quantifi able and could exceed the cash and securities we
have posted as collateral at the exchanges. However, management
believes that the potential for us to be required to make payments
under these arrangements is remote. Accordingly, no contingent
liability for these arrangements has been recorded in the consolidated
balance sheets as of September30,2011 and 2010, respectively.
Eff ects of Infl ation
Because the Company’s assets are, to a large extent, liquid in
nature, they are not signifi cantly aff ected by infl ation. Increases
in the Company’s expenses, such as compensation and benefi ts,
clearing and related expenses, occupancy and equipment rental,
due to infl ation, may not be readily recoverable from increasing
the prices of services off ered by the Company. In addition, to
the extent that infl ation results in rising interest rates or has
other adverse eff ects on the fi nancial markets and on the value
of the fi nancial instruments held in inventory, it may adversely
aff ect the Company’s fi nancial position and results of operations.
Critical Accounting Policies
e preparation of consolidated fi nancial statements in conformity
with U.S. GAAP requires management to make estimates and
assumptions that aff ect the reported amounts of assets and
liabilities, disclosure of contingent liabilities at the date of the
fi nancial statements and the reported amounts of revenue and
expenses during the reported period. e accounting estimates
and assumptions discussed in this section are those that the
Company considers the most critical to the fi nancial statements.
e Company believes these estimates and assumptions can
involve a high degree of judgment and complexity. Due to
their nature, estimates involve judgment based upon available
information. Actual results or amounts could diff er from estimates
and the diff erence could have a material impact on the fi nancial
statements. erefore, understanding these policies is important
in understanding the reported and potential future results of
operations and the fi nancial position of the Company.
Valuation of Financial Instruments and Foreign Currencies.
Substantially all fi nancial instruments are refl ected in the
consolidated fi nancial statements at fair value or amounts that
approximate fair value. ese fi nancial instruments include: cash
and cash equivalents; cash, securities and other assets segregated
under federal and other regulations; fi nancial instruments
purchased under agreements to resell; deposits with clearing
organizations; fi nancial instruments owned; and fi nancial
instruments sold but not yet purchased. Unrealized gains and
losses related to these fi nancial instruments, which are not
customer owned positions, are refl ected in earnings. Where
available, we use prices from independent sources such as listed
market prices, or broker or dealer price quotations. Fair values
for certain derivative contracts are derived from pricing models
that consider current market and contractual prices for the
underlying fi nancial instruments or commodities, as well as
time value and yield curve or volatility factors underlying the
positions. In some cases, even though the value of a security is
derived from an independent market price or broker or dealer
quote, certain assumptions may be required to determine the
fair value. However, these assumptions may be incorrect and the
actual value realized upon disposition could be diff erent from the
current carrying value. e value of foreign currencies, including
foreign currencies sold, not yet purchased, are converted into its
U.S. dollar equivalents at the foreign exchange rates in eff ect at
the close of business at the end of the accounting period. For
foreign currency transactions completed during each reporting
period, the foreign exchange rate in eff ect at the time of the
transaction is used.
e application of the valuation process for fi nancial instruments
and foreign currencies is critical because these items represent a
signifi cant portion of our total assets. Valuations for substantially
all of the fi nancial instruments held are available from independent
publishers of market information. e valuation process may
involve estimates and judgments in the case of certain fi nancial
instruments with limited liquidity and OTC derivatives. Given
the wide availability of pricing information, the high degree of
liquidity of the majority of our assets, and the relatively short
periods for which they are typically held in inventory, there is
insignifi cant sensitivity to changes in estimates and insignifi cant
risk of changes in estimates having a material eff ect on our
fi nancial statements. e basis for estimating the valuation of
any fi nancial instruments has not undergone any change.
Revenue Recognition. A signifi cant portion of our revenues
are derived principally from realized and unrealized trading
income in securities, derivative instruments, commodities and
foreign currencies purchased or sold for our account. Realized