INTL FCStone 2012 Annual Report Download - page 31
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Please find page 31 of the 2012 INTL FCStone annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.INTL FCSTONE INC.Form10K 15
PART I
ITEM 1A Risk Factors
the Company does not directly hold any European sovereign
debt, many of the Company’s customers and counterparties hold
positions in these instruments. If the crisis were to continue, the
Company would be subject to enhanced risk of counterparty
failure, as well as related problems arising from a lack of liquidity
in the Company’s markets. e continuation of the crisis may
a ect other aspects of the Company’s businesses for a variety
of reasons. A general decrease in worldwide economic activity
could reduce demand for Company’s equity market making and
foreign exchange business, as well as volumes in our Commodity
& Risk Management Services and Clearing and Execution
Services segments. Substantial changes in commodities prices
may a ect the levels of business in the precious and base metals
product lines.
On October 31, 2011 MF Global Holdings Ltd. (“ MF Global” ),
the parent company of the jointly registered futures commission
merchant and broker-dealer, MF Global Inc., led a voluntary
petition for relief under Chapter 11 of the United States
Bankruptcy Code. At that time, MF Global Inc. noti ed the
CFTC of potential de ciencies in customer segregated futures
accounts held at MF Global Inc. We are unable to predict the
e ect the bankruptcy of MF Global and the potential de ciency
in customer segregated futures accounts will have on both the
exchange traded and OTC derivative markets in which we operate.
It is possible that these developments will result in increased
governmental regulation and a decrease in customer con dence
in safeguards in place over segregated exchange traded deposits,
which could have a material adverse e ect on our operating results.
e ultimate e ect of the crisis on the Company’s liquidity,
nancial condition and capital resources is unknown.
We may have di culty managing our growth.
Since October 1, 2007, we have experienced signi cant growth in
our business. Our operating revenues grew from $114.9 million
in the 2008 scal year to $457.7 million in 2012 . e acquisition
of additional businesses since September 30, 2011 is expected
to increase operating revenues in 2013 .
is growth has required and will continue to require us to
increase our investment in management personnel, nancial and
management systems and controls, and facilities. In the absence
of continued revenue growth, the costs associated with our
expected growth would cause our operating margins to decline
from current levels. In addition, as is common in the nancial
industry, we are and will continue to be highly dependent on
the e ective and reliable operation of our communications and
information systems.
e scope of procedures for assuring compliance with applicable
rules and regulations has changed as the size and complexity of
our business has increased. In response, we have implemented
and continue to revise formal compliance procedures.
It is possible that we will not be able to manage our growth
successfully. Our inability to do so could have a material adverse
e ect on our business, nancial condition and operating results.
We are exposed to the credit risk of our
customers and counterparties and their failure
to meet their nancial obligations could
adversely a ect our business.
We have substantial credit risk in both our securities and
commodities businesses. As a market-maker of OTC and listed
securities, the majority of our securities transactions are conducted
as principal with broker-dealer counterparties located in the
U.S. We clear our securities transactions through an una liated
clearing broker. Substantially all of our equity and debt securities
are held by this clearing broker. Our clearing broker has the right
to charge us for losses that result from a counterparty’s failure to
ful ll its contractual obligations.
As a clearing broker in futures and option transactions, we act on
behalf of our customers for all trades consummated on exchanges.
We must pay initial and variation margin to the exchanges before
we receive the required payments from our customers. Accordingly,
we are responsible for our customers’ obligations with respect to
these transactions, including margin payments, which exposes
us to signi cant credit risk. Customer positions which represent
a signi cant percentage of open positions in a given market or
concentrations in illiquid markets may expose us to the risk that
we are not able to liquidate a customer’s position in a manner
which does not result in a de cit in that customers account. A
substantial part of our working capital is at risk if customers
default on their obligations to us and their account balances and
security deposits are insu cient to meet all of their obligations.
With OTC derivative transactions we act as a principal, which
exposes us to both the credit risk of our customers and the
counterparties with which we o set the customer’s position. 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. In addition, with OTC transactions, there is a risk
that a counterparty will fail to meet its obligations when due. We
would then be exposed to the risk that a settlement of a transaction
which is due a customer will not be collected from the respective
counterparty with which the transaction was o set. Customers
and counterparties that owe us money, securities or other assets
may default on their obligations to us due to bankruptcy, lack
of liquidity, operational failure or other reasons.
In this regard, during its scal year ended August 31, 2009, FCStone
Group, Inc. recognized $119.8 million in bad debt expense as
a result of defaults by customer counterparties. Although the
Company has adopted additional procedures that are designed
to reduce the likelihood and magnitude of such credit losses,
they are an inherent component of the business conducted by
the Company, and the Company will continue to be subject to
the risk of such losses.