INTL FCStone 2014 Annual Report Download - page 82

INTL FCSTONE INC.  Form 10K66
PART II
ITEM 8 Financial Statements and Supplementary Data
changes in the fair value of a derivative depends on the intended
use of the derivative and the resulting designation. For a derivative
instrument designated as a cash flow hedge, the effective portion
of the derivative’s gain or loss is initially recorded in OCI, net of
tax, and is subsequently recognized in earnings when the hedged
exposure affects earnings. e ineffective portion of the gain or
loss is recognized in earnings. Gains and losses from changes
in fair values of derivatives that are not designated as cash flow
hedges for accounting purposes are recognized in earnings.
e Company’s derivative contracts consist of exchange-traded
and OTC derivatives. Fair values of exchange-traded derivatives are
generally determined from quoted market prices. OTC derivatives are
valued using valuation models. e valuation models used to derive
the fair values of OTC derivatives require inputs including contractual
terms, market prices, yield curves and measurements of volatility.
e Company uses similar models to value similar instruments.
Where possible, the Company verifies the values produced by pricing
models by comparing them to market transactions. Inputs may
involve judgment where market prices are not readily available. e
Company does not elect hedge accounting under the Derivatives
and Hedging Topic of the ASC in accounting for derivatives used
as economic hedges on its commodities.
e Company provides clearing and execution of exchange-traded
futures and options on futures for middle-market intermediaries,
end-users, producers of commodities and the institutional
and professional trader market segments. e Company has
a subsidiary that is a registered futures commission merchant
(“FCM”), clearing on various exchanges. e primary sources of
revenues for the Company’s FCM are commissions and clearing
fees derived from executing and clearing orders for commodity
futures contracts and options on futures on behalf of its customers.
e Company also brokers foreign exchange forwards, options
and cash, or spot, transactions between customers and external
counterparties. A portion of the contracts are arranged on an
offsetting basis, limiting the Company’s risk to performance of
the two offsetting parties. e offsetting nature of the contracts
eliminates the effects of market fluctuations on the Company’s
operating results. Due to the Company’s role as a principal
participating in both sides of these contracts, the amounts
are presented gross on the consolidated balance sheets at their
respective fair values, net of offsetting assets and liabilities.
During fiscal 2014, the Company concluded its business activities
related to speculative trading and holding proprietary positions in
futures, options and swaps, including corn, wheat, soybeans, sugar.
Since some of the derivatives held or sold by the Company were
for speculative trading purposes, those derivative instruments were
not designated as hedging instruments and accordingly, the changes
in fair value during the period were recorded in the consolidated
income statements as a component of ‘trading gains, net’ (see Note 4).
e Company holds proprietary positions in its foreign exchange
line of business. On a limited basis, the Company’s foreign
exchange trade desk will accept a customer transaction and will
offset that transaction with a similar but not identical position
with a counterparty. ese unmatched transactions are intended
to be short-term in nature and are often conducted to facilitate
the most effective transaction for the Company’s customer. ese
spot and forward contracts are accounted for as free-standing
derivatives and reported in the consolidated balance sheets at
their fair values. e Company does not seek hedge accounting
treatment for these derivatives, and accordingly, the changes in fair
value during the period are recorded in the consolidated income
statements in ‘trading gains, net’ (see Note 4). In applying the
guidance in the Balance Sheet-Offsetting Topic of the ASC, the
Company’s accounting policy is such that open contracts with
the same customer are netted at the account level, in accordance
with netting arrangements in place with each party, as applicable
and rights to reclaim cash collateral or obligations to return cash
collateral are netted against fair value amounts recognized for
derivative instruments with the same customer in accordance with
the master netting arrangements in place with each customer.
e Company may lease commodities to or from customers
or counterparties, or advance commodities to customers on an
unpriced basis, receiving payment when they become priced.
ese are valued at fair value utilizing the fair value option based
on guidance in the Financial Instruments Topic of the ASC. As
permitted by the fair value option election, the entire instrument
is recorded at fair value in the consolidated balance sheets as a
component of ‘financial instruments owned and sold, not yet
purchased’. Due to the short term nature of the instruments,
the balance of the agreements is not materially different than the
recorded fair value. e corresponding change in fair value of the
instrument is recognized in the consolidated income statements
as a component of ‘trading gains, net’ for the fiscal years ended
September 30, 2014, 2013 and 2012. e Company does elect
to value all of their commodities lease agreements at fair value
using the fair value option. See fair value measurements in Note 3.
Exchange Memberships and Stock
e Company is required to hold certain exchange membership
seats and exchange firm common stock and pledge them for clearing
purposes, in order to provide the Company the right to process trades
directly with the various exchanges. Exchange memberships include
seats on the Chicago Board of Trade (“CBOT”), the Minneapolis
Grain Exchange, the New York Mercantile Exchange (“NYMEX”),
the Commodity Exchange, Inc. (“COMEX”) Division of the New
York Mercantile Exchange, Mercado de Valores de Buenos Aires
S.A. (“MERVAL”), the Chicago Mercantile Exchange (“CME”)
Growth and Emerging Markets, InterContinental Exchange,
Inc. (“ICE”) Futures US, ICE Europe Ltd and London Metal
Exchange (“LME”). Exchange firm common stock include shares
of CME Group, Inc., ICE and LME. In December 2012, the
CME completed its acquisition of the Board of Trade of Kansas
City, Missouri, Inc. (“KCBT”). e Company received proceeds of
$1.5 million and recognized a gain of $0.9 million before taxes, in
connection with its class A shares of the KCBT held as of September
30, 2012, during the fiscal year ended September 30, 2013.