INTL FCStone 2012 Annual Report Download - page 32
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Please find page 32 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.Form10K16
PART I
ITEM 1A Risk Factors
We are responsible for self-clearing our foreign exchange and
precious and base metals commodities trading activities and, in
addition, take principal risk to counterparties and customers
in these activities. Any metals or other physical commodities
positions are held by third party custodians. In this regard,
during our scal years ended September 30, 2011 and 2010, we
recognized $5.6 million and $2.5 million, respectively, in bad
debt expense as a result of defaults by customer counterparties
to whom we had consigned gold. Although the Company has
adopted additional procedures that are designed to reduce the
likelihood and magnitude of such credit losses, the possibility of
such losses is an inherent component of the business conducted
by the Company, and the Company will continue to be subject
to the risk of such losses.
Although we have procedures for reviewing credit exposures to
speci c customers and counterparties to address present credit
concerns, default risk may arise from events or circumstances
that are di cult to detect or foresee including rapid changes in
securities, commodity and foreign exchange price levels. Some
of our risk management methods depend upon the evaluation
of information regarding markets, clients or other matters
that are publicly available or otherwise accessible by us. at
information may not, in all cases, be accurate, complete, up-
to-date or properly evaluated. In addition, concerns about, or
a default by, one institution could lead to signi cant liquidity
problems, losses or defaults by other institutions, which in turn
could adversely a ect us. We may be materially and adversely
a ected in the event of a signi cant default by our customers
and counterparties.
In our securities and commodities trading businesses we rely on
the ability of our clearing brokers to adequately discharge their
obligations on a timely basis. We also depend on the solvency
of our clearing brokers and custodians. Any failure by a clearing
broker to adequately discharge its obligations on a timely basis,
or insolvency of a clearing broker or custodian, or any event
adversely a ecting our clearing brokers or custodians, could have
a material adverse e ect on our business, nancial condition
and operating results.
Our net operating revenues may decrease due to
changes in market volume, prices or liquidity.
Declines in the volume of securities, commodities and foreign
exchange transactions and in market liquidity generally may result
in lower revenues from market-making and trading activities.
Changes in price levels of securities and commodities and foreign
exchange rates also may result in reduced trading activity and
reduce our revenues from market-making transactions. Changed
price levels also can result in losses from changes in the fair value
of securities and commodities held in inventory. Sudden sharp
changes in fair values of securities and commodities can result in:
•illiquid markets;
•fair value losses arising from positions held by the Company;
•
the failure of buyers and sellers of securities and commodities
to ful ll their settlement obligations,
•
redemptions from funds managed in our asset management
business segment and consequent reductions in management fees;
•
reductions in accrued performance fees in our asset management
business segment; and
•increases in claims and litigation.
Any change in market volume, price or liquidity or any other of
these factors could have a material adverse e ect on our business,
nancial condition and operating results.
Our net operating revenues may decrease due to
changes in customer trading volumes which are
dependent in large part on commodity prices
and commodity price volatility.
Customer trading volumes are largely driven by the degree of
volatility—the magnitude and frequency of uctuations—in
prices of commodities. Higher volatility increases the need
to hedge contractual price risk and creates opportunities for
arbitrage trading. Energy and agricultural commodities markets
have periodically experienced signi cant price volatility. In
addition to price volatility, increases in commodity prices lead
to increased trading volume. As prices of commodities have
risen, especially energy prices, new participants have entered
the markets to address their growing risk-management needs
or to take advantage of greater trading opportunities. Sustained
periods of stability in the prices of commodities or generally lower
prices could result in lower trading volumes and, potentially,
lower revenues. Lower volatility and lower volumes could lead
to lower customer balances held on deposit, which in turn may
reduce the amount of interest revenue based on these deposits.
Factors that are particularly likely to a ect price volatility and
price levels of commodities include:
•supply and demand of commodities;
•weather conditions a ecting certain commodities;
•
national and international economic and political conditions;
•perceived stability of commodities and nancial markets;
•the level and volatility of interest rates and in ation; and
• nancial strength of market participants.
Any one or more of these factors may reduce price volatility or
price levels in the markets for commodities trading, which in
turn could reduce trading activity in those markets. Moreover,
any reduction in trading activity could reduce liquidity which
in turn could further discourage existing and potential market
participants and thus accelerate any decline in the level of trading
activity in these markets.