INTL FCStone 2013 Annual Report Download - page 52

INTLFCSTONEINC.Form10K 31
PART II
ITEM7Management’s Discussion and Analysis of Financial Condition and Results ofOperations
osetting are often recognized in dierent periods. Additionally,
in certain circumstances, U.S. GAAP does not permit us to
reect changes in estimated values of forward commitments to
purchase and sell commodities. For these reasons, management
primarily assesses our operating results on a marked-to-market
basis. Management relies on these adjusted operating results to
evaluate the performance of our physical commodities businesses
and its personnel, as well as our overall performance. Additionally,
we focus on mitigating exposure to market risk, ensuring adequate
liquidity to maintain daily operations and making non-interest
expenses variable, to the greatest extent possible.
Recent Events Aecting the Financial Services Industry
e Dodd-Frank Act created a comprehensive new regulatory
regime governing the OTC and listed derivatives markets
and their participants by requiring, among other things:
centralized clearing of standardized derivatives (with certain
stated exceptions); the trading of clearable derivatives on
swap execution facilities or exchanges; and registration and
comprehensive regulation of new categories of market participants
as “swap dealers” and swap “introducing brokers.” 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.
We will continue to monitor all applicable developments in the
implementation of the Dodd-Frank Act. e legislation and
implementing regulations aect not only us, but also many of
our customers and counterparties.
In addition, in light of the bankruptcy ling of MF Global and
actions taken by the CFTC to freeze assets of Peregrine Financial
Group, on November 14, 2013, the CFTC nalized new rules
known as “Enhancing Customer Protections Rules.” ese provisions,
among other things, require enhanced customer protections, risk
management programs, internal monitoring and controls, capital
and liquidity standards, customer disclosures, and auditing and
examination programs for FCMs. ese rules are eective January
13, 2014, however, certain provisions have alternative compliance
dates which extend through December 31, 2018.
Fiscal 2013 Highlights
• Record operating revenues and adjusted operating revenues of
$478.4 million and $467.3 million, respectively.
•Completed expansion and renewal of a three-year syndicated
committed loan facility for $140.0 million.
• Completed our rst debt oering with a $45.5 million oering
of Senior Notes due in July 2020.
• Successfully registered INTL FCStone Markets, LLC as a
swap dealer.
• Increased capacity of global payments business with a successful
migration to a new technology platform.
• Successfully transferred the accounts and integrated the
operations of Tradewire Securities, LLC.
• Reached an agreement to transfer the accounts of First American
Capital and Trading Corp. which is expected to close in the rst
quarter of scal 2014, which will add correspondent clearing
service capabilities to our Securities segment.
Executive Summary
We experienced growth in both operating revenues and adjusted
operating revenues during scal 2013 compared to scal 2012.
Net operating revenues, which represent operating revenues net of
transaction-based clearing expenses, introducing broker commissions
and interest expense, increased $9.1 million to $315.3 million in
scal 2013. However, adjusted net operating revenues declined
$8.8 million primarily resulting from an increase in transaction-
based clearing expenses in the Securities segment as well as an
increase in introducing broker commissionsin boththeSecurities
and Clearing and Execution Services (“CES”) segments.
All of our segments, with the exception of the Commodity and
Risk Management Services (“C&RM”) segment experienced
operating revenue growth over both the prior year three-month
and year-to-date periods. e C&RM and CES segments continue
to be constrained by historically low interest rates. Interest income
earned on customer deposits declined 14% to $5.5 million,
even though average customer assets on deposit, which generate
interest income for us increased $66.7 million over the prior
scal year to $1.7 billion.
e decrease in our core C&RM operating revenues was primarily
a result of declines in both exchange-traded and OTC transactional
volumes in our soft commodities product line, which was
constrained by the lingering eects of the consecutive droughts
in the United States during 2011 and 2012 on the agricultural
commodity markets.