INTL FCStone 2011 Annual Report Download - page 91

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INTL FCSTONE INC.Form10K 77
PART II
ITEM 8 Consolidated Financial Statements and Supplementary Data
the criteria, speci ed under the Derivatives and Hedging Topic,
to allow for the deferral of the e ective portion of unrecognized
hedging gains or losses in other comprehensive income or loss
since all of the forecasted variable interest payments are not
expected to occur. However, the Company expected that a
portion of those forecasted transactions were still going to occur.
As a result, the Company had a loss of $0.2million, net of
tax, as of December31,2010 remaining in accumulated other
comprehensive income or loss relating to transactions that were
still expected to occur for the discontinued hedge.
As of December31,2010, the remaining unrecognized loss relating
to both interest rate swaps in accumulated other comprehensive
income (loss) was $0.6million, net of tax. at amount was
expected to be recognized in earnings as the forecasted payments
aff ected interest expense. However, at the end of the period
ended March31,2011, the Company’s borrowing levels again
decreased signifi cantly and it was determined that the one
remaining swap, that was being classifi ed as a cash fl ow hedge,
no longer met the criteria for the deferral of the eff ective portion
of unrecognized hedging gains or losses and the Company
discontinued hedge accounting for the remaining swap. In
addition, as the Company did not expect the borrowing levels
to increase signifi cantly before the swaps were due to mature, the
remaining balances were recognized in earnings. e Company
recognized a loss of $0.3million, net of tax, for the fi scal year
ended September30,2011, as a result of the discontinuation
of hedge accounting which is included within ‘trading gains’ in
the consolidated income statements.
Credit Risk
In the normal course of business, the Company purchases and
sells fi nancial instruments, commodities and foreign currencies
as either principal or agent on behalf of its customers. If either
the customer or counterparty fails to perform, the Company may
be required to discharge the obligations of the nonperforming
party. In such circumstances, the Company may sustain a loss
if the fair value of the fi nancial instrument or foreign currency
is diff erent from the contract value of the transaction.
e majority of the Company’s transactions and, consequently, the
concentration of its credit exposure are with commodity exchanges,
customers, broker-dealers and other fi nancial institutions. ese
activities primarily involve collateralized and uncollateralized
arrangements and may result in credit exposure in the event
that a counterparty fails to meet its contractual obligations.
e Company’s exposure to credit risk can be directly impacted
by volatile fi nancial markets, which may impair the ability
of counterparties to satisfy their contractual obligations. e
Company seeks to control its credit risk through a variety of
reporting and control procedures, including establishing credit
limits based upon a review of the counterparties’ fi nancial
condition and credit ratings. e Company monitors collateral
levels on a daily basis for compliance with regulatory and internal
guidelines and requests changes in collateral levels as appropriate.
e Company is a party to fi nancial instruments in the normal
course of its business through customer and proprietary trading
accounts in exchange-traded and OTC derivative instruments.
ese instruments are primarily the execution of orders for
commodity futures, options on futures and forward foreign
currency contracts on behalf of its customers, substantially all
of which are transacted on a margin basis. Such transactions
may expose the Company to signifi cant credit risk in the event
margin requirements are not suffi cient to fully cover losses which
customers may incur. e Company controls the risks associated
with these transactions by requiring customers to maintain margin
deposits in compliance with individual exchange regulations and
internal guidelines. e Company monitors required margin
levels daily and, therefore, may require customers to deposit
additional collateral or reduce positions when necessary. e
Company also establishes credit limits for customers, which
are monitored daily. e Company evaluates each customer’s
creditworthiness on a case by case basis. Clearing, fi nancing,
and settlement activities may require the Company to maintain
funds with or pledge securities as collateral with other fi nancial
institutions. Generally, these exposures to both customers and
exchanges are subject to master netting, or customer agreements,
which reduce the exposure to the Company by permitting
receivables and payables with such customers to be off set in the
event of a customer default. Management believes that the margin
deposits held as of September30,2011 and September30,2010
were adequate to minimize the risk of material loss that could
be created by positions held at that time. Additionally, the
Company monitors collateral fair value on a daily basis and
adjusts collateral levels in the event of excess market exposure.
Generally, these exposures to both customers and counterparties
are subject to master netting, or customer agreements which
reduce the exposure to the Company.
e Company is also a party to a guarantee of payment and
performance by a third party of an ethanol marketing agreement
with a risk management customer which would require the
Company to purchase the output of the customer if the third party
could not perform under the marketing agreement. e guarantee
does not have a set term, and the underlying agreement cannot
be terminated by the third party unless the customer breaches the
agreement. e maximum potential amount of future payments
required under the guarantee cannot be estimated because the
underlying marketing agreement does not specify the amount
or the price of the ethanol to be purchased during the term of
the agreement. e price of the ethanol to be purchased is at
the discretion of the Company.
Derivative fi nancial instruments involve varying degrees of off -
balance sheet market risk whereby changes in the fair values of
underlying fi nancial instruments may result in changes in the
fair value of the fi nancial instruments in excess of the amounts
refl ected in the consolidated balance sheets. Exposure to market risk
is infl uenced by a number of factors, including the relationships
between the fi nancial instruments and the Company’s positions,
as well as the volatility and liquidity in the markets in which the