INTL FCStone 2014 Annual Report Download - page 96

INTL FCSTONE INC.  Form 10K80
PART II
ITEM 8 Financial Statements and Supplementary Data
with its proprietary trading and market-making activities in cash
instruments as part of its firm-wide risk management policies.
In particular, the risks related to derivative positions may be
partially offset by inventory, unrealized gains in inventory or
cash collateral paid or received.
e following table sets forth the Company’s net gains (losses)
related to derivative financial instruments for the fiscal years
ended September 30, 2014, 2013 and 2012, in accordance with
the Derivatives and Hedging Topic of the ASC. e net gains
(losses) set forth below are included in ‘trading gains, net’ in the
consolidated income statements.
(in millions)
Year Ended September 30,
2014 2013 2012
Commodities $ 65.7 $ 84.6 $ 62.3
Foreign exchange 7.5 11.6 10.4
Interest rate — 0.1 1.4
Net gains from derivative contracts $ 73.2 $ 96.3 $ 74.1
Credit Risk
In the normal course of business, the Company purchases and
sells financial instruments, commodities and foreign currencies
as either principal or agent on behalf of its customers. If either
the customer or counterparty fails to perform, the Company may
be required to discharge the obligations of the nonperforming
party. In such circumstances, the Company may sustain a loss
if the fair value of the financial instrument or foreign currency
is different from the contract value of the transaction.
e majority of the Company’s transactions and, consequently, the
concentration of its credit exposure are with commodity exchanges,
customers, broker-dealers and other financial institutions. ese
activities primarily involve collateralized and uncollateralized
arrangements and may result in credit exposure in the event
that a counterparty fails to meet its contractual obligations.
e Company’s exposure to credit risk can be directly impacted
by volatile financial markets, which may impair the ability
of counterparties to satisfy their contractual obligations. e
Company seeks to control its credit risk through a variety of
reporting and control procedures, including establishing credit
limits based upon a review of the counterparties’ financial
condition and credit ratings. e Company monitors collateral
levels on a daily basis for compliance with regulatory and internal
guidelines and requests changes in collateral levels as appropriate.
e Company is a party to financial instruments in the normal
course of its business through customer and proprietary trading
accounts in exchange-traded and OTC derivative instruments.
ese instruments are primarily the execution of orders for
commodity futures, options on futures and forward foreign
currency contracts on behalf of its customers, substantially all
of which are transacted on a margin basis. Such transactions
may expose the Company to significant credit risk in the event
margin requirements are not sufficient to fully cover losses which
customers may incur. e Company controls the risks associated
with these transactions by requiring customers to maintain margin
deposits in compliance with individual exchange regulations and
internal guidelines. e Company monitors required margin
levels daily and, therefore, may require customers to deposit
additional collateral or reduce positions when necessary. e
Company also establishes credit limits for customers, which
are monitored daily. e Company evaluates each customer’s
creditworthiness on a case by case basis. Clearing, financing,
and settlement activities may require the Company to maintain
funds with or pledge securities as collateral with other financial
institutions. Generally, these exposures to both customers and
exchanges are subject to master netting, or customer agreements,
which reduce the exposure to the Company by permitting
receivables and payables with such customers to be offset in
the event of a customer default. Management believes that the
margin deposits held as of September 30, 2014 and September 30,
2013 were adequate to minimize the risk of material loss that
could be created by positions held at that time. Additionally,
the Company monitors collateral fair value on a daily basis and
adjusts collateral levels in the event of excess market exposure.
Generally, these exposures to both customers and counterparties
are subject to master netting, or customer agreements which
reduce the exposure to the Company.
Derivative financial instruments involve varying degrees of off-
balance sheet market risk whereby changes in the fair values of
underlying financial instruments may result in changes in the
fair value of the financial instruments in excess of the amounts
reflected in the consolidated balance sheets. Exposure to market risk
is influenced by a number of factors, including the relationships
between the financial instruments and the Company’s positions,
as well as the volatility and liquidity in the markets in which the
financial instruments are traded. e principal risk components
of financial instruments include, among other things, interest
rate volatility, the duration of the underlying instruments and
changes in commodity pricing and foreign exchange rates.
e Company attempts to manage its exposure to market risk
through various techniques. Aggregate market limits have been
established and market risk measures are routinely monitored
against these limits.