INTL FCStone 2012 Annual Report Download - page 79
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Please find page 79 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 63
PART II
ITEM 8 Financial Statements and Supplementary Data
holding derivatives include reducing, eliminating, and e ciently
managing the economic impact of these exposures as e ectively
as possible. Derivative instruments are recognized as either assets
or liabilities and are measured at fair value. e accounting for
changes in the fair value of a derivative depends on the intended
use of the derivative and the resulting designation. For a derivative
instrument designated as a cash ow hedge, the e ective portion
of the derivative’s gain or loss is initially recorded in OCI, net of
tax, and is subsequently recognized in earnings when the hedged
exposure a ects earnings. e ine ective portion of the gain or
loss is recognized in earnings. Gains and losses from changes
in fair values of derivatives that are not designated as cash ow
hedges for accounting purposes are recognized in earnings.
e Company’s derivative contracts consist of exchange-traded
and OTC derivatives. Fair values of exchange-traded derivatives
are generally determined from quoted market prices. OTC
derivatives are valued using valuation models. e valuation
models used to derive the fair values of OTC derivatives require
inputs including contractual terms, market prices, yield curves and
measurements of volatility. e Company uses similar models to
value similar instruments. Where possible, the Company veri es
the values produced by pricing models by comparing them to
market transactions. Inputs may involve judgment where market
prices are not readily available. e Company does not elect
hedge accounting under the Derivatives and Hedging Topic of
the ASC in accounting for derivatives used as economic hedges
on its commodities.
e Company provides clearing and execution of exchange-traded
futures and options-on-futures for middle-market intermediaries,
end-users, producers of commodities and the institutional
and professional trader market segments. e Company has
a subsidiary that is a registered futures commission merchant
(“FCM”), clearing on various exchanges. e primary sources of
revenues for the Company’s FCM are commissions and clearing
fees derived from executing and clearing orders for commodity
futures contracts and options-on-futures on behalf of its customers.
e Company also brokers foreign exchange forwards, options
and cash, or spot, transactions between customers and external
counterparties. A portion of the contracts are arranged on an
o setting basis, limiting the Company’s risk to performance of
the two o setting parties. e o setting nature of the contracts
eliminates the e ects of market uctuations on the Company’s
operating results. Due to the Company’s role as a principal
participating in both sides of these contracts, the amounts
are presented gross on the consolidated balance sheets at their
respective fair values, net of o setting assets and liabilities.
In addition, the Company engages in speculative trading and
holds proprietary positions in futures, options, swaps and forward
derivatives, including corn, wheat, soybeans, sugar and foreign
currency contracts. Since some of the derivatives held or sold
by the Company are for speculative trading purposes, these
derivative instruments are not designated as hedging instruments
and accordingly, the changes in fair value during the period are
recorded in the consolidated income statements as a component
of ‘trading gains, net’ (see Note 4 ).
e Company also holds proprietary positions in its foreign
exchange line of business. On a limited basis, the Company’s
foreign exchange trade desk will accept a customer transaction
and will o set that transaction with a similar but not identical
position with a counterparty. ese unmatched transactions are
intended to be short-term in nature and are often conducted
to facilitate the most e ective transaction for the Company’s
customer. ese spot and forward contracts are accounted for
as free-standing derivatives and reported in the consolidated
balance sheets at their fair values. e Company does not seek
hedge accounting treatment for these derivatives, and accordingly,
the changes in fair value during the period are recorded in the
consolidated income statements within ‘trading gains, net’ (see
Note 4 ). In applying the guidance in the Balance Sheet-O setting
Topic of the ASC, the Company’s accounting policy is such that
open contracts with the same customer are netted at the account
level, in accordance with netting arrangements in place with
each party, as applicable and rights to reclaim cash collateral or
obligations to return cash collateral are netted against fair value
amounts recognized for derivative instruments with the same
customer in accordance with the master netting arrangements
in place with each customer.
e Company may lease commodities to or from customers
or counterparties, or advance commodities to customers on an
unpriced basis, receiving payment when they become priced.
ese are valued at fair value utilizing the fair value option
based on guidance within the Financial Instruments Topic
of the ASC. e Company uses the fair value option to value
these nancial instruments since they are hybrid contracts with
embedded derivative features that cannot be reliably measured
and separated from the host contract. As permitted by the fair
value option election, the entire instrument is recorded at fair
value within the consolidated balance sheets as a component
of ‘ nancial instruments owned and sold, not yet purchased’.
Due to the short term nature of the instruments, the balance of
the agreements is not materially di erent than the recorded fair
value. e corresponding change in fair value of the instrument
is recognized within the consolidated income statements as a
component of ‘trading gains, net’ for the scal years ended 2012,
2011 and 2010. e Company does elect to value all of their
commodities lease agreements at fair value using the fair value
option. See fair value measurements in Note 3.
Exchange Memberships and Stock
e Company is required to hold certain exchange membership
seats and exchange rm common stock and pledge them for
clearing purposes, in order to provide the Company the right
to process trades directly with the various exchanges. Exchange
memberships include seats on the Chicago Board of Trade