INTL FCStone 2012 Annual Report Download - page 46
Download and view the complete annual report
Please find page 46 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.Form10K30
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
INTL FCStone Inc. and its consolidated subsidiaries (“we” or
the “Company”) form a nancial services group employing more
than 1,000 people in o ces in twelve countries. e Company’s
services include comprehensive risk management advisory services
for commercial customers; execution of listed futures and options-
on-futures contracts on all major commodity exchanges; the sale
of structured over-the-counter (“OTC”) products in a wide range
of commodities; physical trading and hedging of precious and
base metals and select other commodities; trading of more than
130 foreign currencies; market-making in international equities;
and debt origination and asset management.
e Company provides these services to a diverse group of more
than 20,000 customers located in more than 100 countries,
including producers, processors and end-users of nearly all
widely-traded physical commodities; commercial counterparties
who are end-users of our products and services; governmental
and non-governmental organizations; and commercial banks,
brokers, institutional investors and major investment banks.
As discussed in Item 6 - Selected Financial Data, U.S. GAAP
requires the Company to carry derivatives at fair value but
physical commodities inventory at the lower of cost or fair value.
ese requirements may have a signi cant temporary impact
on our reported earnings. Under U.S. GAAP, gains and losses
on commodities inventory and derivatives which the Company
intends to be o setting are often recognized in di erent periods.
Additionally, in certain circumstances, U.S. GAAP does not
require us to re ect changes in estimated values of forward
commitments to purchase and sell commodities. For these
reasons, management primarily assesses the Company’s operating
results on a marked-to-market basis. Management relies on these
adjusted operating results to evaluate the performance of the
Company’s commodities business segment and its personnel,
as well as the overall Company. Additionally, the Company
focuses on mitigating exposure to market risk, ensuring adequate
liquidity to maintain daily operations and making non-interest
expenses variable, to the greatest extent possible.
Recent Events Aff ecting the Financial Services Industry
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. Following the bankruptcy ling, the CME
Group Inc. selected our wholly owned subsidiary, FCStone,
LLC, as one of a number of FCM’s chosen to receive blocks
of MF Global customers. During this process, FCStone, LLC
opened accounts for the customers of these introducing brokers
and completed the transfer of their positions. In conjunction
with the block transfer and during the subsequent period, the
Company has opened over 2,300 new accounts for former MF
Global customers.
In addition, on November 25, 2011, the Company arranged
with the administrator of MF Global’s UK operations to acquire
the Metals Division of MF Global UK Limited (in special
administration). e Company has hired more than 50 professional
sta based in London, New York, and Sydney from this metals
trading business based in London. is business serves institutional
investors and nancial services rms in the Americas, Europe and
the Asia-Paci c region. Following this transaction, INTL FCStone
(Europe) received approval from the London Metals Exchange
(“LME”) to upgrade its LME Category Two membership to a
LME Category One ring dealing membership.
At the time of the MF Global bankruptcy ling, MF Global
noti ed the Commodity Futures Trading Commission (the
“CFTC”) of potential de ciencies in customer segregated futures
accounts held at MF Global Inc. In addition, on July 10, 2012
the CFTC took action to freeze the assets of Peregrine Financial
Group (“PFG”), a futures commission merchant, following
the discovery of potential de ciencies in customer segregated
futures accounts at PFG. e CFTC has extensive regulations
to provide for the safety and security of customer assets on
deposit with FCMs. ese regulations require that all FCMs
maintain customer segregated assets in quali ed depositories in
excess of its customer segregated liabilities. FCM’s are required
to complete a daily calculation of these excess segregated assets
as well as their net capital positions and are required to le a
CFTC Form 1-FR on a monthly basis.
Following these industry events, the NFA, CFTC and CME have
enacted additional regulations designed to safeguard customer
assets on deposit with FCMs including semi-monthly Segregated
Investment Detail Reports, direct electronic con rmations of
segregated balances held at depositories and additional ling
requirements involving disbursements made out of customer
segregated accounts. In addition, the CFTC enacted changes
to the rules governing the acceptable investment of customer
segregated assets by removing investments in the general obligations
of a sovereign nation and repurchase transactions with a liated
entities from the category of otherwise allowable securities.
FCStone, LLC primarily invests the segregated assets of customers
in U.S. Treasury Bills and money market mutual funds. As of
September30, 2012, FCStone, LLC maintained $45.0 million
in segregated assets in excess of its segregated liabilities.
As more fully discussed in the Item 1. - Business section of this
report under the heading Government Regulation and Exchange
Membership, on July21, 2010, the President signed into law
the Dodd-Frank Wall Street Reform and Consumer Protection