INTL FCStone 2013 Annual Report Download - page 104

INTLFCSTONEINC.Form10K 83
PART II
ITEM 8Financial Statements and Supplementary Data
e Company’s derivative contracts are principally held in its
Commodities and Risk Management Services (“C&RM”) segment.
e Company assists its C&RM segment customers in protecting
the value of their future production by entering into option or
forward agreements with them on an OTC basis. e Company
also provides its C&RM segment customers with option products,
including combinations of buying and selling puts and calls. e
Company mitigates its risk by generally osetting the customer’s
transaction simultaneously with one of the Company’s trading
counterparties or will oset that transaction with a similar but not
identical position on the exchange. e risk mitigation of these
osetting trades is not within the documented hedging designation
requirements of the Derivatives and Hedging Topic of the ASC.
ese derivative contracts are traded along with cash transactions
because of the integrated nature of the markets for these products.
e Company manages the risks associated with derivatives on an
aggregate basis along with the risks associated with its proprietary
trading and market-making activities in cash instruments as part
of its rm-wide risk management policies. In particular, the risks
related to derivative positions may be partially oset by inventory,
unrealized gains in inventory or cash collateral paid or received.
e following table sets forth the Company’s net gains (losses)
related to derivative nancial instruments for the scal years
ended September 30, 2013, 2012 and 2011, in accordance with
the Derivatives and Hedging Topic of the ASC. e net gains
(losses) set forth below are included in ‘trading gains, net’ in the
consolidated income statements.
Year Ended September 30,
(in millions) 2013 2012 2011
(As Restated) (As Restated)
Commodities $ 84.6 $ 62.3 $ 32.8
Foreign exchange 11.6 10.4 15.0
Interest rate 0.1 1.4 3.5
Net gains from derivative contracts $ 96.3 $ 74.1 $ 51.3
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 September30, 2013
and September30,2012 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