INTL FCStone 2014 Annual Report Download - page 69

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INTL FCSTONE INC. Form 10K 53
PART II
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
In the ordinary course of our operations, we have interest rate
risk from the possibility that changes in interest rates will affect
the values of financial instruments and impact interest income
earned. We generate interest income from the positive spread
earned on customer deposits. We typically invest in U.S. Treasury
bills, notes, and obligations issued by government sponsored
entities, reverse repurchase agreements involving U.S. Treasury
bills and government obligations or AA-rated money market
funds. We have an investment policy which establishes acceptable
standards of credit quality and limits the amount of funds that
can be invested within a particular fund and institution.
Since mid-2010, we have employed an interest rate management
strategy, where we have used derivative financial instruments
in the form of interest rate swaps to manage a portion of our
aggregate interest rate position. Our objective is to invest the
majority of customer segregated deposits in high quality, short-
term investments and swap the resulting variable interest earnings
into a medium-term interest stream when a sufficient interest
rate spread exists between the two durations, by using a strip of
interest rate swaps that mature every quarter, and enable us to
achieve the two-year moving average of the two-year swap rate.
ese interest rate swaps are not designated for hedge accounting
treatment, and changes in the fair values of these interest rate
swaps, which are volatile and can fluctuate from period to period,
are recorded in earnings on a quarterly basis.
In fiscal 2013, operating revenues include realized gains of
$1.4 million and unrealized losses of $1.3 million on interest
rate swap derivative contracts used to manage a portion of our
aggregate interest rate position. In fiscal 2012, operating revenues
included realized gains of $2.5 million and unrealized losses of
$1.1 million on interest rate swap derivative contracts. e last
remaining interest rate swap expired in the fourth quarter of
fiscal 2013, and we currently have no interest rate swap derivative
contracts outstanding.
We manage interest expense using a combination of variable
and fixed rate debt as well as including the average outstanding
borrowings in our calculations of the notional value of interest rate
swaps to be entered into as part of our interest rate management
strategy discussed above. Refer to Note 4 to the Consolidated
Financial Statements for information on the interest rate
swap transactions. e debt instruments are carried at their
unpaid principal balance which approximates fair value. As of
September 30, 2014, $22.5 million of our debt was variable-rate
debt. We are subject to earnings and liquidity risks for changes in
the interest rate on this debt. As of September 30, 2014, we had
$45.5 million outstanding in fixed-rate long-term debt. ere are
no earnings or liquidity risks associated with our fixed-rate debt.