INTL FCStone 2014 Annual Report Download - page 66

INTL FCSTONE INC.  Form 10K50
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
$30.7 million for derivatives, based on their fair value as of
September 30, 2014 and September 30, 2013, respectively.
In our foreign exchange and commodities trading product lines,
we hold options and futures-on-options contracts resulting
from market-making and proprietary trading activities in these
product lines. We assist customers in our commodities trading
business to protect the value of their future production (precious
or base metals) by selling them put options on an OTC basis.
We also provide our commodities trading business customers
with sophisticated option products, including combinations of
buying and selling puts and calls. We mitigate our risk by effecting
offsetting options with market counterparties or through the
purchase or sale of exchange-traded commodities futures. e
risk mitigation of offsetting options is not within the documented
hedging designation requirements of the Derivatives and Hedging
Topic of the ASC.
In our Commercial Hedging segment, when transacting OTC
and foreign exchange contracts with our customers, our OTC and
foreign exchange trade desks will generally offset the customer’s
transaction simultaneously with one of our trading counterparties
or will offset that transaction with a similar, but not identical,
position on the exchange. ese unmatched transactions are
intended to be short-term in nature and are conducted to facilitate
the most effective transaction for our customer.
Derivative contracts are traded along with cash transactions
because of the integrated nature of the markets for such products.
We manage the risks associated with derivatives on an aggregate
basis along with the risks associated with our proprietary trading
and market-making activities in cash instruments as part of our
firm-wide risk management policies.
We are a member of various commodity exchanges and clearing
organizations. Under the standard membership agreement, all
members are required to guarantee the performance of other
members and, accordingly, in the event another member is
unable to satisfy its obligations to the exchange, we may be
required to fund a portion of the shortfall. Our liability under
these arrangements is not quantifiable and could exceed the
cash and securities we have posted as collateral at the exchanges.
However, management believes that the potential for us to be
required to make payments under these arrangements is remote.
Accordingly, no contingent liability for these arrangements has been
recorded in the consolidated balance sheets as of September 30,
2014 and 2013.
Effects of Inflation
Because our assets are, to a large extent, liquid in nature, they are
not significantly affected by inflation. Increases in our expenses,
such as compensation and benefits, transaction-based clearing
expenses, occupancy and equipment rental, due to inflation,
may not be readily recoverable from increasing the prices of our
services. While rising interest rates are generally favorable for
us, to the extent that inflation has other adverse effects on the
financial markets and on the value of the financial instruments
held in inventory, it may adversely affect our financial position
and results of operations.
Critical Accounting Policies
e preparation of consolidated financial statements in conformity
with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenue and
expenses during the reported period. e accounting estimates and
assumptions discussed in this section are those that we consider
the most critical to the financial statements. We believe these
estimates and assumptions can involve a high degree of judgment
and complexity. Due to their nature, estimates involve judgment
based upon available information. Actual results or amounts could
differ from estimates and the difference could have a material
impact on the financial statements. erefore, understanding these
policies is important in understanding our reported and potential
future results of operations and financial position.
Valuation of Financial Instruments and Foreign Currencies.
Substantially all financial instruments are reflected in the
consolidated financial statements at fair value or amounts that
approximate fair value. ese financial instruments include:
cash and cash equivalents; cash, securities and other assets
segregated under federal and other regulations; financial
instruments purchased under agreements to resell; deposits
with clearing organizations; financial instruments owned; and
financial instruments sold but not yet purchased. Unrealized
gains and losses related to these financial instruments, which
are not customer owned positions, are reflected in earnings.
Where available, we use prices from independent sources such
as listed market prices, or broker or dealer price quotations. Fair
values for certain derivative contracts are derived from pricing
models that consider current market and contractual prices for
the underlying financial instruments or commodities, as well as
time value and yield curve or volatility factors underlying the
positions. In some cases, even though the value of a security is
derived from an independent market price or broker or dealer
quote, certain assumptions may be required to determine the
fair value. However, these assumptions may be incorrect and
the actual value realized upon disposition could be different
from the current carrying value. e value of foreign currencies,
including foreign currencies sold, not yet purchased, are converted
into its U.S. dollar equivalents at the foreign exchange rates