INTL FCStone 2014 Annual Report Download - page 62

INTL FCSTONE INC.  Form 10K46
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operating revenues related to physical base metals activity for
the years ended September 30, 2014, 2013 and 2012 were
$0.7 million, $10.3 million and $6.1 million, respectively.
We have reclassified the physical base metals activities in
the financial statements as discontinued operations for all
periods and amounts presented. See Note 20 - Discontinued
Operations of the Consolidated Financial Statements for
additional information.
As of September 30, 2014, we had deferred tax assets totaling
$32.0 million. We are required to assess our deferred tax assets
and the need for a valuation allowance at each reporting period.
In assessing the realizability of deferred tax assets, we consider
whether it is more likely than not that we will not realize some or
all of the deferred tax assets. We are required to record a valuation
allowance against deferred tax assets when it is considered more
likely than not that all or a portion of our deferred tax assets will
not be realized. e valuation allowance for deferred tax assets as
of September 30, 2014 and September 30, 2013 was $2.8 million
and $2.3 million, respectively. e valuation allowances as of
September 30, 2014 and September 30, 2013 were primarily
related to U.S. state and local and foreign net operating loss
carryforwards that, in the judgment of management, are not
more likely than not to be realized.
We incurred U.S. federal, state, and local taxable losses for the
years ended September 30, 2014, 2013 and 2012 of $17.3 million,
$24.5 million, and $21.9 million, respectively. ere are no
significant differences between actual levels of past taxable income
and the results of continuing operations, before income taxes in
these jurisdictions. U.S. federal, state, and local taxable losses
incurred during the years ended September 30, 2013 and 2012
were attributable to a decrease in exchange-traded and OTC
derivative transactional volumes and revenue caused by consecutive
droughts in the U.S., as well as losses incurred in the physical base
metals business. During 2013, we elected to pursue an exit of our
physical base metals business through an orderly liquidation of
open positions, which was completed during fiscal 2014. When
evaluating if U.S. federal, state, and local deferred taxes are
realizable, we considered deferred tax liabilities of $3.9 million
that are scheduled to reverse from 2015 to 2019 and $1.3 million
of deferred tax liabilities associated with unrealized gains in
securities which we could sell, if necessary. Furthermore, we
considered our ability to implement business and tax planning
strategies that would allow the remaining U.S. federal, state,
and local deferred tax assets, net of valuation allowances, to be
realized within 8 years. Based on the tax planning strategies that
are prudent and feasible, management believes that it is more
likely than not that we will realize the tax benefit of the deferred
tax assets, net of the existing valuation allowance, in the future.
However, the realization of deferred income taxes is dependent
on future events, and changes in estimate in future periods could
result in adjustments to the valuation allowance.
Customer and Counterparty Credit and
Liquidity Risk
Our operations expose us to credit risk of default of our customers
and counterparties. e risk includes liquidity risk to the extent
our customers or counterparties are unable to make timely
payment of margin or other credit support. ese risks expose
us indirectly to the financing and liquidity risks of our customers
and counterparties, including the risks that our customers and
counterparties may not be able to finance their operations.
As a clearing broker, we act on behalf of our customers for all
trades consummated on exchanges. We must pay initial and
variation margin to the exchanges, on a net basis, before we
receive the required payments from our customers. Accordingly,
we are responsible for our customers’ obligations with respect to
these transactions, which exposes us to significant credit risk. Our
customers are required to make any required margin deposits the
next business day, and we require our largest customers to make
intra-day margin payments during periods of significant price
movement. Our clients are required to maintain initial margin
requirements at the level set by the respective exchanges, but we
have the ability to increase the margin requirements for customers
based on their open positions, trading activity, or market conditions.
With OTC derivative transactions, we act as a principal, which
exposes us to the credit risk of both our customers and the
counterparties with which we offset our customer positions. 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. OTC customers are required to post sufficient
collateral to meet margin requirements based on Value-at-Risk
models as well as variation margin requirement based on the
price movement of the commodity or security in which they
transact. Our customers are required to make any required margin
deposits the next business day, and we may require our largest
clients to make intra-day margin payments during periods of
significant price movement. We have the ability to increase the
margin requirements for customers based on their open positions,
trading activity, or market conditions. On a limited basis, we
provide credit thresholds to certain customers, based on internal
evaluations and monitoring of customer creditworthiness.
In addition, with OTC transactions, we are at risk that a counterparty
will fail to meet its obligations when due. We would then be exposed
to the risk that the settlement of a transaction which is due a
customer will not be collected from the respective counterparty
with which the transaction was offset. We continuously monitor
the credit quality of our respective counterparties and mark our
positions held with each counterparty to market on a daily basis.
During the fiscal years ended September 30, 2014, 2013 and
2012, we recorded bad debts, net of recoveries of $5.5 million,
$0.7 million, and $0.7 million, respectively. During the year ended