INTL FCStone 2013 Annual Report Download - page 76
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INTLFCSTONEINC.Form10K 55
PART II
ITEM 7AQuantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
In the ordinary course of our operations, we have interest rate
risk from the possibility that changes in interest rates will aect
the values of nancial instruments and impact interest income
earned. We generate interest income from the positive spread
earned on customer deposits. We typically invest in U.S. Treasury
bills and obligations issued by government sponsored entities,
reverse repurchase agreements involving U.S. Treasury bills and
government obligations or AA-rated money market funds. We
have an investment policy which establishes acceptable standards
of credit quality and limits the amount of funds that can be
invested within a particular fund and institution.
Since mid-2010, we have employed an interest rate management
strategy, where we have used derivative nancial instruments
in the form of interest rate swaps to manage a portion of our
aggregate interest rate position. Our objective is to invest the
majority of customer segregated deposits in high quality, short-
term investments and swap the resulting variable interest earnings
into a medium-term interest stream when a sucient interest
rate spread exists between the two durations, by using a strip
of interest rate swaps that mature every quarter, and enable us
to achieve the two-year moving average of the two-year swap
rate. In scal 2013, operating revenues include realized gains of
$1.4 million and unrealized losses of $1.3 million on interest
rate swap derivative contracts used to manage a portion of our
aggregate interest rate position. In scal 2012, operating revenues
included realized gains of $2.5 million and unrealized losses of
$1.1 million on interest rate swap derivative contracts. In scal
2011, operating revenues included realized and unrealized
gains of $4.2 million and $0.2 million, respectively, on interest
rate swap derivative contracts. ese interest rate swaps are not
designated for hedge accounting treatment, and changes in the
fair values of these interest rate swaps, which are volatile and can
uctuate from period to period, are recorded in earnings on a
quarterly basis. e last remaining interest rate swap expired in
the fourth quarter of scal 2013.
We manage interest expense using oating rate debt as well as
including the average outstanding borrowings in our calculations
of the notional value of interest rate swaps to be entered into as
part of our interest rate management strategy discussed above.
Refer to Note 5 to the Consolidated Financial Statements
for information on the interest rate swap transactions. e
debt instruments are carried at their unpaid principal balance
which approximates fair value. All of our outstanding debt as of
September 30, 2013, has a variable interest rate.