INTL FCStone 2013 Annual Report Download - page 73

INTLFCSTONEINC.Form10K52
PART II
ITEM7Management’s Discussion and Analysis of Financial Condition and Results ofOperations
buying and selling puts and calls. We mitigate our risk by eecting
osetting options with market counterparties or through the
purchase or sale of exchange-traded commodities futures. e
risk mitigation of osetting options is not within the documented
hedging designation requirements of the Derivatives and Hedging
Topic of the ASC.
In our C&RM segment, when transacting OTC and foreign
exchange contracts with our customers, our OTC and
foreign exchange trade desks will generally oset the customer’s
transaction simultaneously with one of our trading counterparties
or will oset that transaction with a similar, but not identical,
position on the exchange. ese unmatched transactions are
intended to be short-term in nature and are conducted to facilitate
the most eective transaction for our customer.
Derivative contracts are traded along with cash transactions
because of the integrated nature of the markets for such products.
We manage the risks associated with derivatives on an aggregate
basis along with the risks associated with our proprietary trading
and market-making activities in cash instruments as part of our
rm-wide risk management policies.
We are a member of various commodity exchanges and clearing
organizations. Under the standard membership agreement, all
members are required to guarantee the performance of other
members and, accordingly, in the event another member is
unable to satisfy its obligations to the exchange, we may be
required to fund a portion of the shortfall. Our liability under
these arrangements is not quantiable and could exceed the
cash and securities we have posted as collateral at the exchanges.
However, management believes that the potential for us to be
required to make payments under these arrangements is remote.
Accordingly, no contingent liability for these arrangements
has been recorded in the consolidated balance sheets as of
September 30, 2013 and 2012, respectively.
Eects of Ination
Because our assets are, to a large extent, liquid in nature, they are
not signicantly aected by ination. Increases in our expenses,
such as compensation and benets, transaction-based clearing
expenses, occupancy and equipment rental, due to ination,
may not be readily recoverable from increasing the prices of our
services. While rising interest rates are generally favorable for
us, to the extent that ination has other adverse eects on the
nancial markets and on the value of the nancial instruments
held in inventory, it may adversely aect our nancial position
and results of operations.
Critical Accounting Policies
e preparation of consolidated nancial statements in conformity
with U.S. GAAP requires management to make estimates and
assumptions that aect the reported amounts of assets and
liabilities, disclosure of contingent liabilities at the date of the
nancial statements and the reported amounts of revenue and
expenses during the reported period. e accounting estimates
and assumptions discussed in this section are those that we
consider the most critical to the nancial statements. We believe
these estimates and assumptions can involve a high degree of
judgment and complexity. Due to their nature, estimates involve
judgment based upon available information. Actual results or
amounts could dier from estimates and the dierence could
have a material impact on the nancial statements. erefore,
understanding these policies is important in understanding our
reported and potential future results of operations and nancial
position.
Valuation of Financial Instruments and Foreign Currencies.
Substantially all nancial instruments are reected in the
consolidated nancial statements at fair value or amounts that
approximate fair value. ese nancial instruments include:
cash and cash equivalents; cash, securities and other assets
segregated under federal and other regulations; financial
instruments purchased under agreements to resell; deposits
with clearing organizations; nancial instruments owned; and
nancial instruments sold but not yet purchased. Unrealized
gains and losses related to these nancial instruments, which
are not customer owned positions, are reected in earnings.
Where available, we use prices from independent sources such
as listed market prices, or broker or dealer price quotations. Fair
values for certain derivative contracts are derived from pricing
models that consider current market and contractual prices for
the underlying nancial instruments or commodities, as well as
time value and yield curve or volatility factors underlying the
positions. In some cases, even though the value of a security is
derived from an independent market price or broker or dealer
quote, certain assumptions may be required to determine the
fair value. However, these assumptions may be incorrect and
the actual value realized upon disposition could be dierent
from thecurrent carrying value. e value of foreign currencies,
including foreign currencies sold, not yet purchased, are converted
into its U.S. dollar equivalents at the foreign exchange rates
in eect at the close of business at the end of the accounting
period. For foreign currency transactions completed during each
reporting period, the foreign exchange rate in eect at the time
of the transaction is used.