INTL FCStone 2011 Annual Report Download - page 63

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INTL FCSTONE INC.Form10K 49
PARTII
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk
MTM Revenue in Chart
Days
Daily Revenue ($000’s)
0
10
20
30
40
50
60
70
($2,000)
to
($1,500)
($1,500)
to
($1,000)
($1,000)
to
($500)
($500)
to
$0
$0
to
$500
$500
to
$1,000
$1,000
to
$1,500
$1,500
to
$2,000
$2,000
to
$2,500
$2,500
to
$3,000
$3,000
to
$3,500
Greater
than
$3,500
1114
25
48
70 68
27
12
41
In the Company’s securities market-making and trading activities,
the Company maintains inventories of equity and debt securities.
In the Company’s commodities market-making and trading
activities, the Company’s positions include physical inventories,
forwards, futures and options. e Company’s commodity
trading activities are managed as one consolidated book for each
commodity encompassing both cash positions and derivative
instruments. e Company monitors the aggregate position for
each commodity in equivalent physical ounces or metric tons.
Interest Rate Risk
In the ordinary course of our operations, we have interest rate
risk from the possibility that changes in interest rates will aff ect
the values of fi nancial instruments and impact interest income
earned. We generate interest income from the positive spread
earned on customer deposits. We typically invest in U.S. Treasury
bills and obligations issued by government sponsored entities,
reverse repurchase agreements involving U.S. Treasury bills and
government obligations or AA rated money market funds. We
have an investment policy which establishes acceptable standards
of credit quality and limits the amount of funds that can be
invested within a particular fund and institution.
We continue to employ an interest rate risk management strategy,
implemented in April2010, that uses derivative fi nancial
instruments in the form of interest rate swaps to manage a
portion of our aggregate interest rate position. Our objective is
to invest the majority of customer segregated deposits in high
quality, short-term investments and swap the resulting variable
interest earnings into the medium-term interest stream, by
using a strip of interest rate swaps that mature every quarter,
and enable us to achieve the two year moving average of the
two year swap rate. In 2011, operating revenues include realized
gains of $4.2million and unrealized losses of $0.2million
on interest rate swap derivative contracts used to manage a
portion of our aggregate interest rate position. In 2010, operating
revenues included realized and unrealized gains of $1.0million
and $2.5million, respectively, on interest rate swap derivative
contracts. ese interest rate swaps are not designated for hedge
accounting treatment, and changes in the marked-to-market
valuations of these interest rate swaps, which are volatile and
can fl uctuate from period to period, are recorded in earnings
on a quarterly basis. As of September30,2011, $1.1billion in
notional principal of interest rate swaps were outstanding with
a weighted-average life of 14 months.
We manage interest expense using floating rate debt and
periodically through interest rate swap transactions. Refer to Note6
to the Consolidated Financial Statements for information on the
interest rate swap transactions. e debt instruments are carried
at their unpaid principal balance which approximates fair value.
All of the Company’s outstanding debt as of September30,2011,
has a variable interest rate.