INTL FCStone 2014 Annual Report Download - page 45

INTL FCSTONE INC.  Form 10K 29
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Recent Events Affecting 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.” Our subsidiary, INTL FCStone Markets,
LLC, is a registered swap dealer. Most of the rules affecting this
business are now final, and external business conduct rules came
into effect on May 1, 2013. Nevertheless, some important rules,
such as those setting capital and margin requirements, have
not been finalized or fully implemented, and it is too early to
predict with any degree of certainty how we will be affected.
We will continue to monitor all applicable developments in the
implementation of the Dodd-Frank Act. e legislation and
implementing regulations affect not only us, but also many of
our customers and counterparties.
We are reviewing the regulatory changes that will be introduced
by the Markets in Financial Instruments Directive (“MIFID 2”)
and the Markets in Financial Instruments Regulation (“MIFIR”)
to assess the impact this legislation is likely to have on our
United Kingdom business when implemented in 2016 and
2017. Among other things, the legislation will impose additional
transaction and position reporting requirements, disclosure
obligations, as well as requiring certain over-the-counter derivatives
to be traded on organized trading facilities (“OTFs”).
On November 14, 2013, the CFTC finalized 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. e majority of these rules
came into effect on January 13, 2014, however, certain remaining
provisions were effective as of November 14, 2014.
Fiscal 2014 Highlights
• Record overall operating revenues of $490.9 million, as well
as record operating revenues in the Global Payments and
Securities segments.
•Fixed expenses declined 2%, versus fiscal 2013.
•
Average customer segregated deposits returned to record
fiscal 2011 levels at $1.8 billion, with fourth quarter of fiscal
2014 averaging $2.0 billion.
•
Global Payments segment operating revenues increased 35%
over fiscal 2013 to reach $55.4 million.
•
Completed the consolidation of our U.K. Subsidiaries, forming
one financial services firm permitted to provide all financial
services except deposit taking and fund management.
•
Realized the benefits of the restructuring of our bank facilities
and issuance of Senior Notes in fiscal 2013, ending the
year with $22.5 million in outstanding borrowings versus
$270.0 million in committed facilities.
•
Completed our planned exit of the physical base metals business.
Executive Summary
We experienced modest growth in operating revenues during
fiscal 2014, driven by record operating revenues in our Global
Payments and Securities segments as well as improved performance
in our Commercial Hedging segment. ese increases were
tempered by declines in our Physical Commodities and Clearing
and Execution Services (“CES”) segments. Interest income on
customer deposits remained constrained by historically low
short term interest rates, however, average customer equity,
which generates interest income for us, increased 7% to
$1.8 billion compared to fiscal 2013. It is also of note that
fiscal 2013 operating revenues include a $9.2 million gain
recognized during the first quarter of fiscal 2013 on the sale of
our shares in the LME and the Board of Trade of Kansas City,
Missouri, Inc. (“KCBT”), following their acquisitions by the
Hong Kong Exchanges & Clearing Limited and the Chicago
Mercantile Exchange (“CME”), respectively.
e increase in our core Commercial Hedging operating revenues
was primarily a result of an increase in exchange-traded and OTC
customer volumes. e increase in exchange-traded volumes was
driven by improving domestic agricultural markets as well as
continued volume growth in the LME metals business, partially
attributed to expansion in the Far East markets. OTC volume
growth was driven by increases in energy and renewable fuels
customer activity, partially offset by a decline in Brazil FX
hedging volumes.
Operating revenues in our Global Payments segment experienced
strong growth compared to the prior year. is sustained growth
has resulted from the continued acquisition of commercial
bank clients and the successful implementation of a new back
office platform which enables us to process increased volumes,
including smaller notional payments, without requiring the
hiring of additional support personnel.