INTL FCStone 2012 Annual Report Download - page 94
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Please find page 94 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.Form10K78
PART II
ITEM 8 Financial Statements and Supplementary Data
e interest rate swaps were initially classi ed under the Derivatives
and Hedging Topic of the ASC as cash ow hedges. As a result
of decreased borrowings by the Company in scal year 2010, it
was determined that one of the interest rate swaps no longer met
the criteria, speci ed under the Derivatives and Hedging Topic,
to allow for the deferral of the e ective portion of unrecognized
hedging gains or losses in other comprehensive income or
loss since all of the forecasted variable interest payments are
not expected to occur. However, the Company expected that
a portion of those forecasted transactions were still going to
occur. As a result, the Company had a loss of $0.2 million, net
of tax, as of December31, 2010 remaining in accumulated other
comprehensive income or loss relating to transactions that were
still expected to occur for the discontinued hedge.
As of December31, 2010, the remaining unrecognized loss relating
to both interest rate swaps in accumulated other comprehensive
income (loss) was $0.6 million, net of tax. at amount was
expected to be recognized in earnings as the forecasted payments
a ected interest expense. However, at the end of the period ended
March31, 2011, the Company’s borrowing levels again decreased
signi cantly and it was determined that the one remaining swap,
that was being classi ed as a cash ow hedge, no longer met the
criteria for the deferral of the e ective portion of unrecognized
hedging gains or losses and the Company discontinued hedge
accounting for the remaining swap. In addition, as the Company
did not expect the borrowing levels to increase signi cantly
before the swaps were due to mature, the remaining balances
were recognized in earnings. e Company recognized a loss of
$0.3 million, net of tax, for the scal year ended September30,
2011, as a result of the discontinuation of hedge accounting
which is included within ‘trading gains, net’ in the consolidated
income statements.
Credit Risk
In the normal course of business, the Company purchases and
sells nancial instruments, commodities and foreign currencies
as either principal or agent on behalf of its customers. If either
the customer or counterparty fails to perform, the Company may
be required to discharge the obligations of the nonperforming
party. In such circumstances, the Company may sustain a loss
if the fair value of the nancial instrument or foreign currency
is di erent from the contract value of the transaction.
e majority of the Company’s transactions and, consequently, the
concentration of its credit exposure are with commodity exchanges,
customers, broker-dealers and other nancial institutions. ese
activities primarily involve collateralized and uncollateralized
arrangements and may result in credit exposure in the event
that a counterparty fails to meet its contractual obligations.
e Company’s exposure to credit risk can be directly impacted
by volatile nancial markets, which may impair the ability
of counterparties to satisfy their contractual obligations. e
Company seeks to control its credit risk through a variety of
reporting and control procedures, including establishing credit
limits based upon a review of the counterparties’ nancial
condition and credit ratings. e Company monitors collateral
levels on a daily basis for compliance with regulatory and internal
guidelines and requests changes in collateral levels as appropriate.
e Company is a party to nancial instruments in the normal
course of its business through customer and proprietary trading
accounts in exchange-traded and OTC derivative instruments.
ese instruments are primarily the execution of orders for
commodity futures, options-on-futures and forward foreign
currency contracts on behalf of its customers, substantially all
of which are transacted on a margin basis. Such transactions
may expose the Company to signi cant credit risk in the event
margin requirements are not su cient to fully cover losses which
customers may incur. e Company controls the risks associated
with these transactions by requiring customers to maintain margin
deposits in compliance with individual exchange regulations and
internal guidelines. e Company monitors required margin
levels daily and, therefore, may require customers to deposit
additional collateral or reduce positions when necessary. e
Company also establishes credit limits for customers, which
are monitored daily. e Company evaluates each customer’s
creditworthiness on a case by case basis. Clearing nancing,
and settlement activities may require the Company to maintain
funds with or pledge securities as collateral with other nancial
institutions. Generally, these exposures to both customers and
exchanges are subject to master netting, or customer agreements,
which reduce the exposure to the Company by permitting
receivables and payables with such customers to be o set in
the event of a customer default. Management believes that the
margin deposits held as of September30, 2012 and September30,
2011 were adequate to minimize the risk of material loss that
could be created by positions held at that time. Additionally,
the Company monitors collateral fair value on a daily basis and
adjusts collateral levels in the event of excess market exposure.
Generally, these exposures to both customers and counterparties
are subject to master netting, or customer agreements which
reduce the exposure to the Company.
Derivative nancial instruments involve varying degrees of o -
balance sheet market risk whereby changes in the fair values of
underlying nancial instruments may result in changes in the
fair value of the nancial instruments in excess of the amounts
re ected in the consolidated balance sheets. Exposure to market risk
is in uenced by a number of factors, including the relationships
between the nancial instruments and the Company’s positions,
as well as the volatility and liquidity in the markets in which the
nancial instruments are traded. e principal risk components
of nancial instruments include, among other things, interest
rate volatility, the duration of the underlying instruments and
changes in foreign exchange rates. e Company attempts to
manage its exposure to market risk through various techniques.
Aggregate market limits have been established and market risk
measures are routinely monitored against these limits.