INTL FCStone 2012 Annual Report Download - page 60
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Please find page 60 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.Form10K44
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Liquidity, Financial Condition and Capital Resources
Overview
Liquidity is de ned as our ability to generate su cient amounts
of cash to meet all of our cash needs. Liquidity is of critical
importance to us and imperative to maintain our operations on
a daily basis. In FCStone, LLC, the Company’s FCM subsidiary,
we have responsibilities to meet margin calls at all exchanges
on a daily basis and intra-day basis, if necessary. Our customers
are required to make any required margin deposits the next
business day, and we require our largest customers to make
intra-day margin payments during periods of signi cant price
movement. Margin required to be posted to the exchanges is
a function of the net open positions of our customers and the
required margin per contract.
In addition, in our commodities trading, C&RM OTC, securities
and foreign exchange trading activities, we may be called upon
to meet margin calls with our various trading counterparties
based upon the underlying open transactions we have in place
with those counterparties.
e Company continuously reviews its overall credit and capital
needs to ensure that its capital base, both stockholders’ equity and
debt, as well as available credit facilities can appropriately support
the anticipated nancing needs of its operating subsidiaries.
As of September30, 2012, the Company had total equity
capital of $319.1 million and bank loans of 218.2 million.
Total equity as of September30, 2012 includes an unrealized
gain of $6.3 million, net of income tax expense of $2.0 million,
that is recorded in OCI, related to shares of e London Metal
Exchange (LME) held by the Company, that have been designated
as available-for-sale. In July 2012, the shareholders of London
Metal Exchange Holdings Limited, the parent company of
the LME, voted to accept the sale of the LME by Hong Kong
Exchanges & Clearing Limited. In December 2012, the CME
completed its acquisition of the KCBT. e Company expects
to receive proceeds of $1.5 million and recognize a gain of $0.9
million before taxes, in connection with its class A shares of the
KCBT held as of September30, 2012, during the rst quarter
of scal year 2013.
A substantial portion of the Company’s assets are liquid. As of
September30, 2012, approximately 92% of the Company’s
assets consisted of cash; deposits and receivables from exchange-
clearing organizations, broker-dealers, clearing organizations
and counterparties; customer receivables, marketable nancial
instruments and investments, and physical commodities inventory,
at cost. All assets that are not customer and counterparty deposits,
are nanced by the Company’s equity capital, bank loans,
short-term borrowings from nancial instruments sold, not yet
purchased, and other payables.
Customer and Counterparty Credit
and Liquidity Risk
Our operations expose us to credit risk of default of our customers
and counterparties. e risk includes liquidity risk to the extent
our customers or counterparties are unable to make timely
payment of margin or other credit support. ese risks expose
us indirectly to the nancing and liquidity risks of our customers
and counterparties, including the risks that our customers and
counterparties may not be able to nance their operations.
roughout the commodities and securities industries, continued
volatility in commodity prices has required increased lines of
credit, and placed a strain on working capital debt facilities. In
many cases, our customers have been forced to increase leverage
to unprecedented levels in order for them to continue to carry
inventory and properly execute hedging strategies. Continuing
volatility in the nancial markets has tightened credit further.
As a clearing broker, we act on behalf of our customers for all
trades consummated on exchanges. We must pay initial and
variation margin to the exchanges, on a net basis, before we receive
the required payments from our customers. Accordingly,we are
responsible for our customers’ obligations with respect to these
transactions, which exposes us to signi cant credit risk. Our
customers are required to make any required margin deposits
the next business day, and we require our largest customers to
make intra-day margin payments during periods of signi cant
price movement. Our clients are required to maintain initial
margin requirements at the level set by the respective exchanges,
but we have the ability to increase the margin requirements for
customers based on their open positions, trading activity, or
market conditions.
With OTC derivative transactions, we act as a principal, which
exposes us to the credit risk of both our customers and the
counterparties with which we o set our customer positions. 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. OTC customers are required to post su cient
collateral to meet margin requirements based on Value-at-Risk
models as well as variation margin requirement based on the
price movement of the commodity or security in which they
transact. Our customers are required to make any required margin
deposits the next business day, and we may require our largest
clients to make intra-day margin payments during periods of
signi cant price movement. We have the ability to increase the
margin requirements for customers based on their open positions,
trading activity, or market conditions. On a limited basis, we
provide credit thresholds to certain customers, based on internal
evaluations and monitoring of customer creditworthiness.