INTL FCStone 2013 Annual Report Download - page 35

INTLFCSTONEINC.Form10K14
PART I
ITEM1ARisk Factors
We operate as a principal in the OTC derivatives
markets which involves the risks associated with
commodity derivative instruments.
We oer OTC derivatives to our customers in which we act as
a principal counterparty. We endeavor to simultaneously oset
the commodity price risk of the instruments by establishing
corresponding osetting positions with commodity counterparties,
or alternatively we may oset those transactions with similar but
not identical positions on an exchange. To the extent that we are
unable to simultaneously oset an open position or the osetting
transaction is not fully eective to eliminate the commodity
derivative risk, we have market risk exposure on these unmatched
transactions. Our exposure varies based on the size of the overall
positions, the terms and liquidity of the instruments brokered,
and the amount of time the positions remain open.
To the extent an unhedged position is not disposed of intra-day,
adverse movements in the commodities underlying these positions
or a downturn or disruption in the markets for these positions
could result in a substantial loss. In addition, any principal gains
and losses resulting from these positions could on occasion have
a disproportionate eect, positive or negative, on our nancial
condition and results of operations for any particular reporting period.
Transactions involving OTC derivative contracts may be adversely
aected by uctuations in the level, volatility, correlation or
relationship between market prices, rates, indices and/or other
factors. ese types of instruments may also suer from illiquidity
in the market or in a related market.
OTC derivative transactions are subject to
uniquerisks.
OTC derivative transactions are subject to the risk that, as a result
of mismatches or delays in the timing of cash ows due from or to
counterparties in OTC derivative transactions or related hedging,
trading, collateral or other transactions, we or our counterparty may
not have adequate cash available to fund its current obligations.
We could incur material losses pursuant to OTC derivative
transactions because of inadequacies in or failures of our internal
systems and controls for monitoring and quantifying the risk
and contractual obligations associated with OTC derivative
transactions and related transactions or for detecting human
error, systems failure or management failure.
OTC derivative transactions may be modied or terminated
only by mutual consent of the original parties and subject to
agreement on individually negotiated terms. Accordingly it
may not be possible to modify, terminate or oset obligations
or exposure to the risk associated with a transaction prior to its
scheduled termination date.
We may have diculty managing our growth.
We have experienced signicant growth in our business. Our
operating revenues grew from $90.6 million in the 2009 scal
year to $478.4 million in scal 2013. We expect the acquisition
of additional businesses since September 30, 2012 to increase
operating revenues in 2014.
is growth required, and will continue to require, us to
increase our investment in management personnel, nancial
and management systems and controls, and facilities. In the
absence of continued revenue growth, the costs associated with
our expected growth would cause our operating margins to decline
from current levels. In addition, as is common in the nancial
industry, we are and will continue to be highly dependent on
the eective and reliable operation of our communications and
information systems.
e scope of procedures for assuring compliance with applicable
rules and regulations changes as the size and complexity of
our business increases. In response, we have implemented and
continue to revise formal compliance procedures.
It is possible that we will not be able to manage our growth
successfully. Our inability to do so could have a material adverse
eect on our business, nancial condition and operating results.
We have identied a material weakness in our
internal control over nancial reporting which
existed as of September 30, 2013. If we fail to
properly remediate this or any future weaknesses
or deciencies or maintain proper and eective
internal controls, our ability to produce accurate
and timely nancial statements could be impaired
which could have an adverse eect on our business
and stock price.
We are required by the SEC to establish and maintain adequate
internal control over nancial reporting that provides reasonable
assurance regarding the reliability of our nancial reporting
and the preparation of nancial statements in accordance with
generally accepted accounting principles. We are likewise required,
on a quarterly basis, to evaluate the eectiveness of our internal
controls and to disclose any changes and material weaknesses
in those internal controls.
While preparing our nancial statements for the scal year
ended September 30, 2013, Management identied a material
weakness in internal control over nancial reporting that existed
as of September 30, 2013, related to the accurate and timely
accounting for certain principal over-the-counter derivative
trading activities. Specically, controls over the reconciliation
between trading system data and the general ledger were not
designed detect errors timely in recording trading gains to
the general ledger. As a result of this material weakness, the
Company misstated certain principal over-the-counter derivative
trading activities. e nancial misstatements resulting from our
material weakness resulted in a restatement of our Consolidated
Financial Statements contained herein. See Item 9A, Controls and
Procedures for a complete discussion of this material weakness
in our internal control over nancial reporting.