INTL FCStone 2014 Annual Report Download - page 21

INTL FCSTONE INC.  Form 10K 5
PART I
ITEM 1 Business
Securities
rough INTL FCStone Securities Inc., we provide value-added
solutions that facilitate cross-border trading. We believe our clients
value our ability to manage complex transactions, including
foreign exchange, utilizing our local understanding of market
convention, liquidity and settlement protocols around the world.
Our clients include U.S.-based regional and national broker-
dealers and institutions investing or executing client transactions
in international markets and foreign institutions seeking access
to the U.S. securities markets. We are one of the leading market
makers in foreign securities, including unlisted ADRs and foreign
ordinary shares. We make markets in approximately 800 ADRs
and foreign ordinary shares traded in the OTC market and will,
on request, make prices in more than 8,000 other ADRs and
foreign common shares. In addition, we are a broker-dealer in
Argentina where we are active in providing institutional executions
in the local capital markets.
We provide a full range of corporate finance advisory services to
our middle market clients, including capital market solutions
and a wide array of advisory services across a broad spectrum of
industries. Our advisory services span mergers and acquisitions,
liability management, restructuring opinions and valuations.
We also originate, structure and place a wide array of debt
instruments in the international and domestic capital markets.
ese instruments include complex asset-backed securities
(primarily in Argentina), unsecured bond and loan issues,
negotiable notes and other trade-related debt instruments used
in cross-border trade finance. On occasion, we may invest our
own capital in debt instruments before selling them. We also
actively trade in a variety of international debt instruments as
well as operate an asset management business in which we earn
fees, commissions and other revenues for management of third
party assets and investment gains or losses on our investments in
funds and proprietary accounts managed either by our investment
managers or by independent investment managers.
Physical Commodities
is segment consists of our physical precious metals trading
and physical agricultural and energy commodity businesses. In
precious metals, we provide a full range of trading and hedging
capabilities, including OTC products, to select producers,
consumers, and investors. In our trading activities, we act as a
principal, committing our own capital to buy and sell precious
metals on a spot and forward basis.
Our physical agricultural and energy commodity business
provides financing to commercial commodity-related companies
against physical inventories, including grain, lumber, meats,
energy products and renewable fuels. We use sale and repurchase
agreements to purchase commodities evidenced by warehouse
receipts, subject to a simultaneous agreement to sell such
commodities back to the original seller at a later date. ese
transactions are accounted for as product financing arrangements,
and accordingly no commodity inventory, purchases or sales
are recorded. Additionally, we engage as a principal in physical
purchase and sale transactions related to inputs to the renewable
fuels and feed ingredient industries.
During the second quarter of fiscal 2013, as a result of a change in
management strategy in our base metals product line, we elected
to pursue an exit of our physical base metals business through the
sale and orderly liquidation of then-current open positions. We
completed the exit of the physical base metals business during the
second quarter of fiscal 2014. We have reclassified the physical
base metals activities in the financial statements for all periods
presented as discontinued operations.
We record our physical commodities revenues on a gross basis.
Operating revenues and losses from our commodities derivatives
activities are included in ‘trading gains, net’ in the consolidated
income statements. Inventory for the commodities business is
valued at the lower of cost or fair value under the provisions of
the Inventory Topic of the ASC. We generally mitigate the price
risk associated with commodities held in inventory through
the use of derivatives. We do not elect hedge accounting under
U.S. GAAP in accounting for this price risk mitigation. In such
situations, unrealized gains in inventory are not recognized under
U.S. GAAP, but unrealized gains and losses in related derivative
positions are recognized under U.S. GAAP. As a result, our
reported earnings from physical commodities trading may be
subject to significant volatility, and these requirements may have
a temporary impact on our reported earnings.
Following the discontinuance of our physical base metals business,
we believe the effects of these requirements on our results have
lessened and whereas we previously managed this business segment
as well as assessed our overall performance on an adjusted marked-
to-market basis, we now manage both on a U.S. GAAP basis.
Clearing and Execution Services (“CES”)
We seek to provide competitive and efficient clearing and execution
of exchange-traded futures and options for the institutional and
professional trader market segments. rough our platform, client
orders are accepted and directed to the appropriate exchange for
execution. We then facilitate the clearing of clients’ transactions.
Clearing involves the matching of clients’ trades with the exchange,
the collection and management of client margin deposits to
support the transactions, and the accounting and reporting of
the transactions to clients. We seek to leverage our capabilities
and capacity by offering facilities management or outsourcing
solutions to other FCMs.
In addition, we provide prime brokerage foreign exchange services
to financial institutions and professional traders. We provide our
clients with the full range of OTC products, including 24-hour
a day execution of spot, forwards and options as well as non-
deliverable forwards in both liquid and exotic currencies. We also
operate a proprietary foreign exchange desk that arbitrages the
exchange-traded foreign exchange markets with the cash markets.