INTL FCStone 2013 Annual Report Download - page 40

INTLFCSTONEINC.Form10K 19
PART I
ITEM1ARisk Factors
such as the CFTC and the SEC, broad rule-making authority to
implement various provisions of the Dodd-Frank Act, including
comprehensive regulation of the OTC derivatives market. ese
regulators will continue to exercise, their expanded rule-making
powers in ways that will aect how we conduct our business.
We have incurred and expect to continue to incur signicant
costs to comply with these regulatory requirements. We have
also incurred and expect to continue to incur signicant costs
related to the development, operation and enhancement of
our technology relating to trade execution, trade reporting,
surveillance, record keeping and data reporting obligations,
compliance and back-up and disaster recovery plans designed
to meet the requirements of the regulators.
Changes that will be required in our OTC and clearing businesses
may adversely impact our results of operations. Following the
implementation of all of the rules contemplated by the Dodd-Frank
Act, the markets for cleared and non-cleared swaps may be less
robust, there may be less volume and liquidity in these markets
and there may be less demand for our services. Certain banks and
other institutions will be limited in their conduct of proprietary
trading and will be further limited or prohibited from trading
in certain derivatives. e new rules, including the restrictions
on the trading activities for certain banks and large institutions,
could impact transaction volumes and liquidity in these markets
and our revenues would be adversely impacted as a result.
Changes that will be required in our OTC and clearing businesses
may also adversely impact our cash ows and nancial condition.
Registration will impose substantial new requirements upon
these entities including, among other things, capital and margin
requirements, business conduct standards and record keeping and
data reporting obligations. Increased regulatory oversight could
also impose administrative burdens on us related to, among other
things, responding to regulatory examinations or investigations.
We registered our subsidiary, INTL FCStone Markets, LLC, as a
swap dealer on December 31, 2012. Most of the rules aecting this
business have now been nalized, and external business conduct rules
came into eect on May 1, 2013. Nevertheless, some important
rules, such as those setting capital and margin requirements, have
not been nalized or fully implemented, and it is too early to predict
with any degree of certainty how we will be aected.
e increased costs associated with compliance, and the changes
that will be required in our OTC and clearing businesses, may
adversely impact our results of operations, cash ows, and/or
nancial condition.
We are subject to net capital requirements.
e SEC, FINRA and various other regulatory agencies require
our broker-dealer subsidiaries, INTL FCStone Securities Inc.
and FCC Investments, Inc. to maintain specic levels of net
capital. Failure to maintain the required net capital may subject
these subsidiaries to suspension or revocation of registration
by the SEC and suspension or expulsion by FINRA and other
regulatory bodies.
e CFTC and various other self-regulatory organizations require
our futures commission merchant subsidiary, FCStone, LLC, to
maintain specic levels of net capital. Failure to maintain the
required net capital may subject this subsidiary to limitations on
its activities, including suspension or revocation of its registration
by the CFTC and suspension or expulsion by the NFA and
various exchanges of which it is a member.
e FCA requires our UK subsidiary, INTL FCStone Ltd. to
maintain specic levels of net capital. Failure to maintain the
required net capital may subject INTL FCStone Ltd. to suspension
or revocation of its registration by the FCA.
Ultimately, any failure to meet capital requirements by our
securities broker-dealer subsidiaries, or our FCM subsidiary or
our UK subsidiary could result in liquidation of the subsidiary.
Failure to comply with the net capital rules could have material
and adverse consequences such as limiting their operations, or
restricting us from withdrawing capital from these subsidiaries.
In addition, a change in the net capital rules, the imposition of
new rules or any unusually large charge against net capital could
limit our operations that require the intensive use of capital.
ey could also restrict our ability to withdraw capital from
these subsidiaries. Any limitation on our ability to withdraw
capital could limit our ability to pay cash dividends, repay debt
and repurchase shares of our outstanding stock. A signicant
operating loss or any unusually large charge against net capital
could adversely aect our ability to expand or even maintain our
present levels of business, which could have an adverse eect on
our business, nancial condition and operating results.
We are subject to margin funding requirements
onshort notice.
Our business involves establishment and carrying of substantial
open positions for customers on futures exchanges and in the
OTC derivatives markets. We are required to post and maintain
margin or credit support for these positions. Although we collect
margin or other deposits from our customers for these positions,
signicant adverse price movements can occur which will require
us to post margin or other deposits on short notice, whether or
not we are able to collect additional margin or credit support
from our customers. We maintain borrowing facilities for the
purpose of funding margin and credit support and have systemsto
endeavor to collect margin and other deposits from customers on
a same-day basis, there can be no assurance that these facilities
and systems will be adequate to eliminate the risk of margin calls
in the event of severe adverse price movements aecting open
positions of our customers. Generally, if a customer is unable
to meet its margin call, we promptly liquidate the customer’s
account. However, there can be no assurance that in each case
the liquidation of the account will not result in a loss to us or
that liquidation will be feasible, given market conditions, size
of the account and tenor of the positions.