INTL FCStone 2011 Annual Report Download - page 89

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INTL FCSTONE INC.Form10K 75
PART II
ITEM 8 Consolidated Financial Statements and Supplementary Data
ere were no sales of AFS Securities during three and nine
months ended September30,2011 and September30,2010,
and as a result, no realized gains or losses were recorded for
the three and nine months ended September30,2011 and
September30,2010.
For the purposes of the maturity schedule, mortgage-backed
securities, which are not due at a single maturity date, have been
allocated over maturity groupings based on the expected maturity
of the underlying collateral. Mortgage-backed securities may
mature earlier than their stated contractual maturities because
of accelerated principal repayments of the underlying loans.
e Company has also classifi ed equity investments in exchange
fi rms’ common stock not pledged for clearing purposes as available-
for-sale. e investments are recorded at fair value, with unrealized
gains and losses recorded, net of taxes, as a component of OCI
until realized. As of September30,2011, the cost and fair value
of the equity investments in exchange fi rms is $4.4million and
$3.7million, respectively. As of September30,2010, all equity
investments in exchange fi rms held by the Company were pledged
for clearing purposes and recorded at cost within ‘other assets’
in the consolidated balance sheet. e Company has recorded
unrealized losses of $0.4million, net of income tax benefi t of
$0.3million in OCI related to equity investments in exchange
fi rms as of September30,2011. e Company monitors the
fair value of exchange common stock on a periodic basis, and
does not consider any current unrealized losses to be anything
other than temporary impairment.
NOTE 6 Financial Instruments with Off -Balance Sheet Risk and Concentrations
of Credit Risk
e Company is party to certain fi nancial instruments with
off -balance sheet risk in the normal course of its business.
e Company has sold fi nancial instruments that it does not
currently own and will therefore be obliged to purchase such
fi nancial instruments at a future date. e Company has recorded
these obligations in the consolidated fi nancial statements as of
September30,2011 at the fair values of the related fi nancial
instruments. e Company will incur losses if the fair value
of the underlying fi nancial instruments increases subsequent
to September30,2011. e total of $390.9million as of
September30,2011 includes $122.9million for derivative
contracts, which represent a liability to the Company based on
their fair values as of September30,2011.
Derivatives
e Company utilizes derivative products in its trading capacity
as a dealer in order to satisfy client needs and mitigate risk.
e Company manages risks from both derivatives and non-
derivative cash instruments on a consolidated basis. e risks of
derivatives should not be viewed in isolation, but in aggregate
with the Company’s other trading activities. e majority of the
Company’s derivative positions are included in the consolidating
balance sheets within ‘fi nancial instruments owned, at fair value’,
‘deposits and receivables from exchange-clearing organizations’
and ‘fi nancial instruments sold, not yet purchased, at fair value’.
The Company continues 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 the aggregate interest rate position.
e Company’s 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, in order to achieve the two year moving average
of the two year swap rate. e risk mitigation of these interest
rate swaps is not within the documented hedging designation
requirements of the Derivatives and Hedging Topic of the ASC,
and as a result they are recorded at fair value, with changes in the
marked-to-market valuation of the fi nancial instruments recorded
within ‘trading gains’ in the consolidated income statements.
As of September30,2011, $1.1billion in notional principal of
interest rate swaps were outstanding with a weighted-average
life of 14 months.