INTL FCStone 2014 Annual Report Download - page 31

INTL FCSTONE INC.  Form 10K 15
PART I
ITEM 1A Risk Factors
We act as a principal for OTC commodity and foreign exchange
derivative transactions, which exposes us to both the credit risk
of our customers and the counterparties with which we offset
the customer’s position. As with exchange-traded transactions,
our OTC transactions require that we meet initial and variation
margin payments on behalf of our customers before we receive
the required payment from our customers. In addition, with OTC
transactions, there is a risk that a counterparty will fail to meet
its obligations when due. We would then be exposed to the risk
that a settlement of a transaction which is due a customer will
not be collected from the respective counterparty with which the
transaction was offset. Customers and counterparties that owe us
money, securities or other assets may default on their obligations
to us due to bankruptcy, lack of liquidity, operational failure or
other reasons.
We act as a principal in our physical commodities trading
activities which exposes us to the credit risk of our counterparties
and customers in these activities. Any metals or other physical
commodities positions are held by third party custodians.
Although we have procedures for reviewing credit exposures to
specific customers and counterparties to address present credit
concerns, default risk may arise from events or circumstances
that are difficult to detect or foresee, including rapid changes in
securities, commodity and foreign exchange price levels. Some
of our risk management methods depend upon the evaluation of
information regarding markets, clients or other matters that are
publicly available or otherwise accessible by us. at information
may not, in all cases, be accurate, complete, up-to-date or properly
evaluated. In addition, concerns about, or a default by, one
institution could lead to significant liquidity problems, losses or
defaults by other institutions, which in turn could adversely affect
us. We may be materially and adversely affected in the event of a
significant default by our customers and counterparties.
In our securities and commodities trading businesses we rely on
the ability of our clearing brokers to adequately discharge their
obligations on a timely basis. We also depend on the solvency
of our clearing brokers and custodians. Any failure by a clearing
broker to adequately discharge its obligations on a timely basis,
or insolvency of a clearing broker or custodian, or any event
adversely affecting our clearing brokers or custodians, could have
a material adverse effect on our business, financial condition and
operating results.
As a clearing member firm of commodities clearing houses in
the U.S. and abroad, we are also exposed to clearing member
credit risk. Commodities clearing houses require member firms
to deposit cash and/or government securities to a clearing fund.
If a clearing member defaults in its obligations to the clearing
house in an amount larger than its own margin and clearing fund
deposits, the shortfall is absorbed pro rata from the deposits of
the other clearing members. Several clearing houses of which we
are members also have the authority to assess their members for
additional funds if the clearing fund is depleted. A large clearing
member default could result in a substantial cost to us if we are
required to pay such assessments.
Our net operating revenues may decrease due to
changes in market volume, prices or liquidity.
Declines in the volume of securities, commodities and foreign
exchange transactions and in market liquidity generally may result
in lower revenues from market-making and trading activities.
Changes in price levels of securities and commodities and foreign
exchange rates also may result in reduced trading activity and
reduce our revenues from market-making transactions. Changed
price levels also can result in losses from changes in the fair value
of securities and commodities held in inventory. Sudden sharp
changes in fair values of securities and commodities can result in:
•illiquid markets;
•fair value losses arising from positions held by us;
•
the failure of buyers and sellers of securities and commodities
to fulfill their settlement obligations,
•
redemptions from funds managed in our asset management
business segment and consequent reductions in management fees;
• reductions in accrued performance fees in our asset management
business segment; and
•increases in claims and litigation.
Any change in market volume, price or liquidity or any other of
these factors could have a material adverse effect on our business,
financial condition and operating results.
Our net operating revenues may decrease due to
changes in customer trading volumes which are
dependent in large part on commodity prices
and commodity price volatility.
Customer trading volumes are largely driven by the degree of
volatility—the magnitude and frequency of fluctuations—in
prices of commodities. Higher volatility increases the need
to hedge contractual price risk and creates opportunities for
arbitrage trading. Energy and agricultural commodities markets
periodically experience significant price volatility. In addition to
price volatility, increases in commodity prices lead to increased
trading volume. As prices of commodities rise, especially energy
prices, new participants enter the markets to address their
growing risk-management needs or to take advantage of greater
trading opportunities. Sustained periods of stability in the prices
of commodities or generally lower prices could result in lower
trading volumes and, potentially, lower revenues. Lower volatility
and lower volumes could lead to lower customer balances held
on deposit, which in turn may reduce the amount of interest
revenue based on these deposits.
Factors that are particularly likely to affect price volatility and
price levels of commodities include:
•supply and demand of commodities;
•weather conditions affecting certain commodities;
•
national and international economic and political conditions;