ANNUAL REPORT
(cid:57)(cid:71)(cid:3)(cid:67)(cid:84)(cid:71)(cid:3)(cid:67)(cid:3)(cid:70)(cid:75)(cid:88)(cid:71)(cid:84)(cid:85)(cid:75)(cid:403)(cid:71)(cid:70)(cid:3)(cid:73)(cid:78)(cid:81)(cid:68)(cid:67)(cid:78)(cid:3)
(cid:403)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:3)(cid:85)(cid:71)(cid:84)(cid:88)(cid:75)(cid:69)(cid:71)(cid:85)(cid:3)(cid:81)(cid:84)(cid:73)(cid:67)(cid:80)(cid:75)(cid:92)(cid:67)(cid:86)(cid:75)(cid:81)(cid:80)(cid:3)
(cid:82)(cid:84)(cid:81)(cid:88)(cid:75)(cid:70)(cid:75)(cid:80)(cid:73)(cid:3)(cid:71)(cid:90)(cid:71)(cid:69)(cid:87)(cid:86)(cid:75)(cid:81)(cid:80)(cid:14)(cid:3)(cid:84)(cid:75)(cid:85)(cid:77)(cid:3)
(cid:79)(cid:67)(cid:80)(cid:67)(cid:73)(cid:71)(cid:79)(cid:71)(cid:80)(cid:86)(cid:3)(cid:67)(cid:80)(cid:70)(cid:3)(cid:67)(cid:70)(cid:88)(cid:75)(cid:85)(cid:81)(cid:84)(cid:91)(cid:3)
(cid:85)(cid:71)(cid:84)(cid:88)(cid:75)(cid:69)(cid:71)(cid:85)(cid:14)(cid:3)(cid:79)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:3)(cid:75)(cid:80)(cid:86)(cid:71)(cid:78)(cid:78)(cid:75)(cid:73)(cid:71)(cid:80)(cid:69)(cid:71)(cid:3)
(cid:67)(cid:80)(cid:70)(cid:3)(cid:69)(cid:78)(cid:71)(cid:67)(cid:84)(cid:75)(cid:80)(cid:73)(cid:3)(cid:85)(cid:71)(cid:84)(cid:88)(cid:75)(cid:69)(cid:71)(cid:85)(cid:3)(cid:67)(cid:69)(cid:84)(cid:81)(cid:85)(cid:85)(cid:3)
(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:3)(cid:69)(cid:78)(cid:67)(cid:85)(cid:85)(cid:71)(cid:85)(cid:3)(cid:67)(cid:80)(cid:70)(cid:3)(cid:79)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:85)(cid:3)
(cid:67)(cid:84)(cid:81)(cid:87)(cid:80)(cid:70)(cid:3)(cid:86)(cid:74)(cid:71)(cid:3)(cid:89)(cid:81)(cid:84)(cid:78)(cid:70)(cid:16)
$671.0
$624.3
$72.7
$78.1
$5,951.3
$5,070.0
FINANCIAL HIGHLIGHTS
OPERATING REVENUES(cid:3)(cid:10)(cid:75)(cid:80)(cid:3)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:85)(cid:11)
2016
2015
2014
2013
2012
$490.9
$468.2
$448.1
(cid:43)(cid:48)(cid:37)(cid:49)(cid:47)(cid:39)(cid:3)(cid:40)(cid:52)(cid:49)(cid:47)(cid:3)(cid:37)(cid:49)(cid:48)(cid:54)(cid:43)(cid:48)(cid:55)(cid:43)(cid:48)(cid:41)(cid:3)(cid:49)(cid:50)(cid:39)(cid:52)(cid:35)(cid:54)(cid:43)(cid:49)(cid:48)(cid:53)(cid:14)(cid:3)(cid:36)(cid:39)(cid:40)(cid:49)(cid:52)(cid:39)(cid:3)(cid:54)(cid:35)(cid:58)(cid:3)(cid:10)(cid:75)(cid:80)(cid:3)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:85)(cid:11)
2016
2015
2014
2013
2012
$26.0
$21.2
$22.5
(cid:54)(cid:49)(cid:54)(cid:35)(cid:46)(cid:3)(cid:35)(cid:53)(cid:53)(cid:39)(cid:54)(cid:53)(cid:3)(cid:10)(cid:75)(cid:80)(cid:3)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:85)(cid:11)
2016
2015
2014
2013
2012
(cid:53)(cid:54)(cid:49)(cid:37)(cid:45)(cid:42)(cid:49)(cid:46)(cid:38)(cid:39)(cid:52)(cid:53)(cid:361)(cid:3)(cid:39)(cid:51)(cid:55)(cid:43)(cid:54)(cid:59)(cid:3)(cid:10)(cid:75)(cid:80)(cid:3)(cid:79)(cid:75)(cid:78)(cid:78)(cid:75)(cid:81)(cid:80)(cid:85)(cid:11)
2016
2015
2014
2013
2012
NET ASSET VALUE PER SHARE
$3,039.7
$2,848.0
$2,953.0
$433.8
$397.1
$345.4
$335.4
$313.2
2016
2015
2014
2013
2012
2016 I ANNUAL REPORT
$23.56
$21.11
$18.29
$17.46
$16.50
SELECTED SUMMARY FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2016
2015
2014
2013
2012
Operating revenues
$ 671.0
$ 624.3
$ 490.9
$ 468.2
$ 448.1
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Compensation and other expenses:
(cid:38)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:250)(cid:87)(cid:86)
Communication and data services
Occupancy and equipment rental
Professional fees
Travel and business development
Depreciation and amortization
Bad debts and impairments
Other
Total compensation and other expenses
Gain on acquisitions
Income from continuing operations, before tax
Income tax expense
Net income from continuing operations
(Loss) income from discontinued operations, net of tax
Net income
Add: Net loss attributable to noncontrolling interests
Net income attributable to INTL FCStone Inc.
common stockholders
Earnings per share:
Basic
Diluted
Number of shares:
Basic
Diluted
Selected Balance Sheet Information:
Total assets
Lenders under loans
Senior unsecured notes
Stockholders’ equity
Other Data:
Return on average stockholders’ equity
(from continuing operations) (a)
EBITDA
Employees, end of period
(cid:38)(cid:82)(cid:80)(cid:83)(cid:72)(cid:81)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:250)(cid:87)(cid:86)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:3)
percentage of operating revenues
129.9
68.9
28.3
443.9
122.7
52.7
17.1
431.8
108.5
49.9
10.5
322.0
110.1
40.5
7.9
309.7
105.3
31.0
5.6
306.2
263.9
251.1
201.9
198.7
197.2
32.7
13.3
14.0
11.5
8.2
4.4
29.4
377.4
6.2
72.7
18.0
54.7
—
54.7
—
28.1
13.5
12.5
10.5
7.2
7.3
23.5
353.7
—
78.1
22.4
55.7
—
55.7
—
25.8
12.3
14.9
9.9
7.3
5.5
18.4
296.0
—
26.0
6.4
19.6
-0.3
19.3
—
23.1
12.0
12.4
10.4
8.0
0.8
23.1
288.5
—
21.2
2.6
18.6
0.7
19.3
—
22.4
11.0
12.6
10.4
7.2
1.5
21.4
283.7
—
22.5
5.5
17.0
-4.3
12.7
0.1
$ 54.7
$ 55.7
$ 19.3
$ 19.3
$ 12.8
$ 2.94
$ 2.90
$ 2.94
$ 2.87
$ 1.01
$ 0.98
$ 1.01
$ 0.97
$ 0.67
$ 0.64
18,410,561
18,525,374
18,528,302
18,443,233
18,282,939
18,625,372
18,932,235
19,132,302
19,068,497
19,156,899
$5,951.3
$ 182.8
$
45.5
$ 433.8
$5,070.0
$3,039.7
$ 41.6
$ 22.5
$ 45.5
$ 397.1
$ 45.5
$ 345.4
$2,848.0
$ 61.0
$ 45.5
$2,953.0
$ 218.2
—
$ 335.4
$ 313.2
13.2%
15.0%
5.8 %
5.7 %
5.6 %
$ 109.2
$ 102.4
$ 43.8
$ 37.1
$ 35.3
1,464
39.3%
1,231
40.2%
1,141
41.1 %
1,094
42.4 %
1,074
44.0 %
(a) For all periods presented, the return on average stockholders’ equity (from continuing operations)
excludes the effects of discontinued operations and net loss attributable to noncontrolling interests.
2016 I ANNUAL REPORT
WE OPEN MARKETS
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execution, risk management and advisory services, market intelligence
and clearing services across asset classes and markets around the world.
(cid:50)(cid:88)(cid:85)(cid:3)(cid:74)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:83)(cid:79)(cid:68)(cid:87)(cid:73)(cid:82)(cid:85)(cid:80)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:68)(cid:3)(cid:83)(cid:75)(cid:92)(cid:86)(cid:76)(cid:70)(cid:68)(cid:79)(cid:3)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:78)(cid:72)(cid:92)(cid:3)(cid:250)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:86)(cid:3)
with regulatory approvals to execute both exchange-listed as well as
over-the-counter instruments in the asset classes we are active in.
(cid:50)(cid:88)(cid:85)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:16)(cid:250)(cid:85)(cid:86)(cid:87)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:68)(cid:70)(cid:75)(cid:3)(cid:71)(cid:76)(cid:73)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:87)(cid:76)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:88)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:79)(cid:68)(cid:85)(cid:74)(cid:72)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:76)(cid:87)(cid:88)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:72)(cid:81)(cid:74)(cid:72)(cid:81)(cid:71)(cid:72)(cid:85)(cid:86)(cid:3)(cid:87)(cid:85)(cid:88)(cid:86)(cid:87)(cid:15)(cid:3)
(cid:68)(cid:81)(cid:71)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:72)(cid:81)(cid:68)(cid:69)(cid:79)(cid:72)(cid:71)(cid:3)(cid:88)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:72)(cid:86)(cid:87)(cid:68)(cid:69)(cid:79)(cid:76)(cid:86)(cid:75)(cid:3)(cid:79)(cid:72)(cid:68)(cid:71)(cid:72)(cid:85)(cid:86)(cid:75)(cid:76)(cid:83)(cid:3)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:3)(cid:81)(cid:88)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:79)(cid:72)(cid:91)(cid:3)(cid:250)(cid:72)(cid:79)(cid:71)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:250)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)
markets around the world. With roots dating back to 1924, we specialize in serving customers in
the commodities, securities, global payments and foreign exchange markets, among others. Our
customers include commercial customers, asset managers, introducing broker-dealers, insurance
companies, brokers, institutional investors, commercial and investment banks and governmental
and non-governmental organizations.
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(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:71)(cid:72)(cid:72)(cid:83)(cid:3)(cid:76)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:250)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:85)(cid:87)(cid:76)(cid:86)(cid:72)(cid:15)(cid:3)(cid:72)(cid:91)(cid:87)(cid:72)(cid:81)(cid:86)(cid:76)(cid:89)(cid:72)(cid:3)(cid:81)(cid:72)(cid:87)(cid:90)(cid:82)(cid:85)(cid:78)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:75)(cid:76)(cid:83)(cid:86)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:16)(cid:87)(cid:82)(cid:88)(cid:70)(cid:75)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:3)
when desired. This philosophy has enabled us to establish leadership positions in a number of
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(cid:50)(cid:88)(cid:85)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:16)(cid:250)(cid:85)(cid:86)(cid:87)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:68)(cid:70)(cid:75)(cid:3)(cid:72)(cid:80)(cid:83)(cid:75)(cid:68)(cid:86)(cid:76)(cid:93)(cid:72)(cid:86)(cid:3)(cid:74)(cid:88)(cid:76)(cid:71)(cid:68)(cid:81)(cid:70)(cid:72)(cid:15)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:74)(cid:85)(cid:76)(cid:87)(cid:92)(cid:15)(cid:3)(cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:83)(cid:68)(cid:85)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:85)(cid:88)(cid:86)(cid:87)(cid:17)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)
differentiates us from large banking institutions and often leads to deeply valued, long-term
relationships.
A well-capitalized and regulatorily compliant organization, our businesses are supported by our
global infrastructure of regulated operating subsidiaries, advanced technology platforms and a
team of more than 1,400 employees. We currently serve more than 20,000 customers, located in
more than 130 countries.
1924
1930
1970
1978
Saul Stone, a door-to-
door egg wholesaler,
formed Saul Stone and
Company, predecessor
to FCStone.
In the 1930’s, Saul Stone and
Company became one of
(cid:87)(cid:75)(cid:72)(cid:3)(cid:250)(cid:85)(cid:86)(cid:87)(cid:3)(cid:70)(cid:79)(cid:72)(cid:68)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:80)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:86)(cid:3)
of the Chicago Mercantile
Exchange (CME).
In the early 1970’s, Saul Stone
and Company became one of the
major innovators on the CME’s
International Monetary Market,
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forefront of the industry.
A new entity called Farmers
Commodities Corporation
was formed to accommodate
the grain hedging brokerage
services.
1981
International Assets
was established as
an internationally
focused boutique
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(cid:36)(cid:59)(cid:3)(cid:54)(cid:42)(cid:39)(cid:3)(cid:48)(cid:55)(cid:47)(cid:36)(cid:39)(cid:52)(cid:53)
$434 Million Stockholders’ Equity
Access to 36 Global Exchanges
$580 Billion FX Prime Brokerage
1.4 Million OTC Contracts Traded
$55 Million Net Income
92 Million Gold Equivalent Ounces Traded
$1.9 Billion Average Custom Equity
$89 Billion Equity Market Making
$671 Million Operating Revenue
Managing Business in more than 130 Countries
100 Million Exchange Contracts Traded
More than 1,400 Employees Globally
$109 Million EBITDA
1983
1994
2000
2003
2004
2007
Farmers Commodities
Corporation (FCC) became
a clearing member of the
Kansas City Board of Trade in
1983 and in 1985 purchased
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Board of Trade.
International
Assets was listed
on NASDAQ.
FCC acquired Saul
Stone and Company
to become one of
the nation’s largest
commercial grain
(cid:69)(cid:85)(cid:82)(cid:78)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:3)(cid:250)(cid:85)(cid:80)(cid:86)(cid:17)
Current management
team take control of
Internationa Assests
with a strategy to
focus on wholesale
execution
International Assets
acquired global
payments business
Global Currencies,
thereby establishing
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International Assets
acquired Gainvest
group in South
America, specializing
in asset management
and asset backed
securities.
CHAIRMAN’S LETTER
In the past two years, I have used this letter to express optimism that the
adverse market conditions – low interest rates, low commodities prices,
low volatility – that have generated headwinds for some of our key
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verge of normalizing.
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that INTL FCStone achieved solid results in many of our key metrics for the second consecutive year.
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services industry. Smaller players are exiting because they cannot afford the cost of regulatory
compliance. Larger players have become unwilling to service all but the largest customers. Both
trends have helped to increase our natural customer base. In this sense, regulation – quite ironically –
has become our friend.
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services in commodities, securities, global payments, foreign exchange and other markets by
further expanding our platform to meet our customers’ evolving needs. With our acquisitions of the
correspondent clearing and wealth management businesses of Sterne Agee, and of the London-based
EMEA oils business of ICAP PLC, we are more strongly positioned than ever to provide execution,
market intelligence and clearing services across asset classes and in all major markets.
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we do not take speculative positions, but as a liquidity provider to our customers, our liquidity
resources are paramount. The strength of these resources is demonstrated both by our selective and
opportunistic share buyback program and by our decision to redeem $45.5 million of the Company’s
8.5% senior notes, enabled by our ability to tap liquidity resources at a substantially cheaper cost.
During the tail end of 2016, the “new normal” we’ve been operating under in recent years seemed to
transition to a “world of the unexpected.” The UK referendum returned a surprising result in favor of
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events triggered extreme volatility in the markets. It is a credit to our management and risk controls
that we serviced our customers effectively and seamlessly through these turbulent times.
It also demonstrated the progress we’ve made as a company. Since 2002, your company has grown
operating revenue from $5.2 million to $671.0 million (CAGR 42%) and net income from a loss of
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million to approximately $700 million over the same period. Shareholder equity has grown from $4.3
million to $433.8 million (CAGR 39%)
2007
2008
2009
2010
2010
FCStone acquired
Chicago-based
Downes-O’Neill,
dairy specialists.
FCStone acquired
Nashville-based
Globecot, cotton
specialists.
International Assets
Holding Corporation
and FCStone Group,
Inc. merged.
Risk Management
Incorporated, energy risk
management specialists,
was acquired by the
newly merged company.
The Company acquired
Hanley Group companies
to expand the group’s OTC
trading business.
2010
The Company
acquired the futures
division of Hencorp,
coffee, cocoa and
sugar specialists.
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(cid:91)(cid:71)(cid:67)(cid:84)(cid:16)(cid:365)
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culture. Compensation is heavily weighted towards the variable so
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The company is frugal in its outlook and encourages a team spirit
which results in selling across our platform. Management looks for
consensus rather than exercising absolute authority. Lastly, in a
business where our most important assets are our people, culture is
of paramount importance – and we have a vital and productive one.
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are approaching an internal average ROE of 60%.
As always I would remind you that our Board are large shareholders
in the company. We are proud that we are a company run by
shareholders for shareholders, and as one of you, I have never been
more optimistic about our future.
The structure of our markets is favorable to us with interest rates
appearing to have started an upward trend and so too market
volatility. The market valuation of our company is increasing as
new sources of capital start to recognize the growing value of our
franchise. We have continued developing our culture and our efforts
are being recognized in an ever-higher quality of management
personnel. We continue to improve our platform and widen our
menu of services thereby increasing our potential market. We are
developing and constantly increasing our sales tools and sales
efforts. Perhaps most importantly, risk controls are tight and
disciplined and we have a “fortress balance sheet” mentality which
has stood us in good stead.
As we consider these reasons for optimism, let’s also remember that
none of them would be possible without you, our shareholders, and
all the people who deliver value to this company every day.
JOHN RADZIWILL
Chairman
2011
2011
2011
2012
International Assets
Holding Corporation
changed name to
INTL FCStone Inc.
Ambrian Commodities
Limited (“ACL”), was acquired
to provide commodities
execution capabilities in the
key LME market.
The Company acquired the
business of the Metals Division
of MF Global and upgraded to
LME Category One ring dealing
membership.
The Company acquired TRX Futures
Ltd., a London-based brokerage and
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and cocoa customers that also offers
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2012
Online news and
analysis subscription
service Commodity
Network is launched.
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2016 was another solidly positive year for our company, with all of our
segments performing well. Most notably, we achieved record operating
revenues of $671.0 million (up 7%) and record Earnings per Share (EPS)
of $2.90, surpassing last year’s record result.
We achieved a 13.2 % Return on Equity (ROE) for 2016, which is below our long-term target of a 15%
ROE, which we achieved last year, but nonetheless is an encouraging result and, we believe, is a standout
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crisis to expand our capabilities, build our platforms and grow our customer base. We have now grown
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our global customers value-added execution (high-touch and electronic), insightful market intelligence,
and post-trade clearing services in almost all markets and asset classes. We have a broad array of
products and services which should allow us to take advantage of the large and noticeable – and as yet
(cid:88)(cid:81)(cid:250)(cid:79)(cid:79)(cid:72)(cid:71)(cid:3)(cid:214)(cid:3)(cid:3)(cid:89)(cid:82)(cid:76)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:86)(cid:3)(cid:70)(cid:85)(cid:72)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:72)(cid:80)(cid:76)(cid:86)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:79)(cid:68)(cid:85)(cid:74)(cid:72)(cid:85)(cid:3)(cid:250)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:73)(cid:85)(cid:68)(cid:81)(cid:70)(cid:75)(cid:76)(cid:86)(cid:72)(cid:86)(cid:3)(cid:71)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:85)(cid:76)(cid:86)(cid:76)(cid:86)(cid:17)(cid:3)(cid:3)
We believe that we may be entering a more positive market environment for our business, as macro
factors such as rising interest rates and increasing volatility, consolidation among smaller players, and
the renewed focus by larger banks on larger customers at the expense of smaller ones will likely drive
more customers to us.
(cid:54)(cid:76)(cid:81)(cid:70)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:250)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:70)(cid:85)(cid:76)(cid:86)(cid:76)(cid:86)(cid:15)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:76)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:92)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:69)(cid:72)(cid:72)(cid:81)(cid:3)(cid:86)(cid:88)(cid:69)(cid:77)(cid:72)(cid:70)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:88)(cid:81)(cid:83)(cid:85)(cid:72)(cid:70)(cid:72)(cid:71)(cid:72)(cid:81)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:82)(cid:82)(cid:85)(cid:71)(cid:76)(cid:81)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:89)(cid:72)(cid:81)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)
by the world’s central banks to keep interest rates low (and sometimes negative in real terms), which
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in December of 2016 and markets have priced further increases into the yield curve which has broadly
increased market volatility. A return to a more normal level of both interest rates and market volatility
are very positive for our company. With the recent acquisition of our securities clearing capability
(cid:11)(cid:71)(cid:76)(cid:86)(cid:70)(cid:88)(cid:86)(cid:86)(cid:72)(cid:71)(cid:3)(cid:69)(cid:72)(cid:79)(cid:82)(cid:90)(cid:12)(cid:3)(cid:90)(cid:72)(cid:3)(cid:81)(cid:82)(cid:90)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:68)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:3)(cid:251)(cid:82)(cid:68)(cid:87)(cid:3)(cid:68)(cid:83)(cid:83)(cid:85)(cid:82)(cid:68)(cid:70)(cid:75)(cid:76)(cid:81)(cid:74)(cid:3)(cid:7)(cid:23)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:70)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:69)(cid:82)(cid:82)(cid:86)(cid:87)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:53)(cid:50)(cid:40)(cid:3)
earnings by approximately 1% (over time as new rates roll into our earnings) for every 25 basis-point
increase in interest rates.
Shifting from the macro picture to our performance, this year witnessed especially strong growth in our
Securities and Physical Commodities segments. Securities segment income increased 71% over the prior
year (and up 230% from two years ago), primarily due to increases in debt trading revenues following
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(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:70)(cid:82)(cid:81)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:36)(cid:85)(cid:74)(cid:72)(cid:81)(cid:87)(cid:76)(cid:81)(cid:68)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:42)(cid:17)(cid:59)(cid:17)(cid:3)(cid:38)(cid:79)(cid:68)(cid:85)(cid:78)(cid:72)(cid:3)(cid:9)(cid:3)(cid:38)(cid:82)(cid:17)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:72)(cid:91)(cid:70)(cid:72)(cid:72)(cid:71)(cid:72)(cid:71)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
we look forward to further expanding the product offerings and customer base in the coming years.
Physical Commodities increased its segment income by 129% over the prior year. This substantial
growth was largely the result of increased operating revenues from our precious metals business, driven
2012
2013
2013
2013
2014
The institutional
accounts of Tradewire
Securities, LLC. are
acquired.
INTL FCStone
Markets LLC registers
as a swap dealer.
The Company exits
its physical base
metals business.
Accounts of First American
Capital and Trading
Corp. acquired, adding
correspondent clearing
service capabilities.
The Company completes
the consolidation of its
two UK subsidiaries, INTL
FCStone Ltd and INTL Global
Currencies Ltd.
(cid:364)(cid:57)(cid:71)(cid:3)(cid:67)(cid:69)(cid:74)(cid:75)(cid:71)(cid:88)(cid:71)(cid:70)(cid:3)
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(cid:85)(cid:87)(cid:84)(cid:82)(cid:67)(cid:85)(cid:85)(cid:75)(cid:80)(cid:73)(cid:3)(cid:78)(cid:67)(cid:85)(cid:86)(cid:3)
(cid:91)(cid:71)(cid:67)(cid:84)(cid:361)(cid:85)(cid:3)(cid:84)(cid:71)(cid:69)(cid:81)(cid:84)(cid:70)(cid:3)
(cid:84)(cid:71)(cid:85)(cid:87)(cid:78)(cid:86)(cid:16)(cid:365)
by a widening of spreads due to market conditions. In October of
2016, we announced the launch of our online precious metals trading
platform, providing our customers with real-time market access and
automated post-trade transaction processing that we believe is the
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Our Global Payments segment, which continues to be one of our most
valuable businesses, experienced a 37% increase in the number of
payments made in 2016. However, income declined 8% from the prior
year, predominantly due to a tightening of spreads that had been
exceptionally wide in the prior year. In October 2016, we announced
the launch of an upgrade to our proprietary FXecute global payments
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for cross-border payments platform, which we believe marks one of
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We believe that this segment’s unique capabilities, scalability and
excellent margins position it for substantial future growth as it
continues to gain critical mass as a solutions provider to the
banking industry.
Segment net income for Commercial Hedging lagged last year’s
performance by 20%. This was due primarily to a decline in OTC
revenues as a result of lower customer volumes in the Latin American
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in Brazil as well as the effect of lower energy prices and market
volatility. On a positive note, we have begun to see recent increases in
commodity volatility and prices, and domestic agricultural exchange
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Consistent with our strategy to expand our capabilities to better serve
customers and create new market opportunities, we successfully
negotiated two key acquisitions in 2016.
In June, we acquired the correspondent securities clearing business
and the independent wealth management businesses of Sterne Agee,
LLC. This acquisition brought $12 billion in customer assets, more than
120,000 accounts, 50 correspondent clearing relationships and more
than 500 independent advisors to the Company.
By enabling us to clear securities for customers, this acquisition
provides us with a platform for growing our clearing and related
securities activities and allows us to occupy a rapidly evolving space
as a credible, well-capitalized, mid-market clearer. In addition, the
2015
2015
2016
2016
The Company completes the
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institutional dealer in U.S. government
securities, federal agency and
mortgage-backed securities.
INTL FCStone Inc. consolidates
its securities, rates and FCM
businesses into INTL FCStone
Financial Inc.
The Company completes acquisition
of the correspondent securities
clearing business and independent
wealth management business from
Sterne Agee, LLC.
The Company agrees to acquire
the London-based EMEA oils
business of ICAP plc, expanding
the Company’s global energy
capabilities.
(cid:37)(cid:42)(cid:43)(cid:39)(cid:40)(cid:3)(cid:39)(cid:58)(cid:39)(cid:37)(cid:55)(cid:54)(cid:43)(cid:56)(cid:39)(cid:361)(cid:53)(cid:3)(cid:46)(cid:39)(cid:54)(cid:54)(cid:39)(cid:52)
independent wealth management business provides us with an excellent foothold in a segment of
retail wealth management that is expanding rapidly, and should lead to additional opportunities in
that space.
In September, we reached an agreement to acquire the London-based Europe, Middle East and Africa
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across the fuel, crude, middle distillates, futures and options desks with deep-rooted relationships with
more than 200 well-known commercial and institutional customers throughout Europe, the Middle East
and Africa. This addition rounds out the Company’s already extensive EMEA service offering through
our UK subsidiary, INTL FCStone Ltd, and, in addition, broadens and strengthens our energy capabilities
worldwide.
PHILOSOPHY
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focused on under-served customers in niche markets. From the outset, we have had to earn our way
into relationships by means of deep and specialized knowledge of our customers’ markets, high-
touch, value-added service, and a total and unwavering commitment to serving our customers’ best
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embedded in all that we do. Please take the time to read our Corporate Vision statement on our
website, which sets out the deeply held values and principles our organization stands for.
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undergone substantial change. From the original group of fewer than 10 professionals 13 years ago,
we now employ over 1,400 professionals serving more than 20,000 business relationships located in
nearly every country across the globe.
FINANCIAL PERFORMANCE
In 2016, we grew our segment net income by $17.9 million to $206.0 million, an increase of
approximately 10 percent over 2015. Our Securities, Physical Commodities and Clearing and
Execution Services segments achieved growth in net segment income, while Commercial Hedging and
Global Payments lagged last year’s performances.
Our Securities segment increased its segment net income to $69.4 million, or 71% over the prior
year, and has now eclipsed our historically largest segment, Commercial Hedging. This performance
was powered largely by the strong performance of our debt trading business as well as stronger
results in the equities market-making business. While Commercial Hedging earned $68.7 million in
net segment income, down 20% from the prior year, this performance was hindered by challenging
market conditions and the uncertain political climate in Brazil. Our customer base in this segment
continues to grow following the addition of London-based professionals and a renewed global sales
effort. Combined with the growth in our Securities segment, we believe this will lead to a much more
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Customer deposits in our exchange-traded futures and options business increased to average $2.0
billion in the fourth quarter of 2016, up 17% versus the prior year period. The acquisition of the Sterne
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added positive exposure to interest rates. We continued our practice of managing and optimizing
our exposure to interest rates by investing in longer-duration instruments on a laddered basis. This
2016 I ANNUAL REPORT
resulted in an increase in interest earnings of 37% in our Commercial
Hedging and Clearing and Execution Services segments over 2015.
As noted, our Global Payments business achieved a substantial
increase in transaction volume in 2016, but tighter spreads led to an
8% drop in segment net income from the prior year. The strong volume
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segment will continue to enjoy excellent margins and continue to grow
its market share as a solutions provider to the banking industry.
Our Clearing and Execution Services segment grew its segment net
income by $1.9 million to $14.8 million in 2016 – an increase of 15%
over the prior year. We expect this performance to improve as we
integrate and market the capabilities we gained through our Sterne
Agee business acquisitions over the course of 2017. The Sterne Agee
businesses reported a $200,000 pre-tax loss for the fourth quarter,
which was better than expected.
Finally, our Physical Commodities segment experienced strong
segment net income growth of 129% in 2016, increasing to $13.3
million. This increase resulted from growth in Precious Metals of $4.9
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following an important restructuring of this business which we believe
positions it for continued growth in the future.
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in which more than 50% of our total costs are variable and linked to
revenue. For 2016, 58% of our total costs were variable in nature, while
42% were non-variable, which is similar to our 2015 ratio.
Non-variable expenses were $240.0 million, up $22.1 million or 10%
over the prior year. Driving this was the acquisition of Sterne Agee, as
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prior year, which only contributed to non-variable expenses for three
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variable expenses increased 4.7% over the prior year.
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increased our book value per share by 12% to $23.53 a share. During
the year we bought back 750,204 shares at an average price of $26.05.
Through increased support from our existing bankers and by expanding
the bank group to include new relationships, we were able to renew
and expand our parent company credit facility for three years and up
to $247 million. This facility is an important part of our capital structure
and is designed to fund short-term liquidity mismatches through our
settlement processes during its extended three- year term.
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(cid:403)(cid:80)(cid:67)(cid:80)(cid:69)(cid:75)(cid:67)(cid:78)(cid:3)(cid:72)(cid:84)(cid:67)(cid:80)(cid:69)(cid:74)(cid:75)(cid:85)(cid:71)(cid:3)
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(cid:67)(cid:80)(cid:70)(cid:3)(cid:71)(cid:78)(cid:71)(cid:69)(cid:86)(cid:84)(cid:81)(cid:80)(cid:75)(cid:69)(cid:11)(cid:14)(cid:3)
(cid:75)(cid:80)(cid:85)(cid:75)(cid:73)(cid:74)(cid:86)(cid:72)(cid:87)(cid:78)(cid:3)(cid:79)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:3)
(cid:75)(cid:80)(cid:86)(cid:71)(cid:78)(cid:78)(cid:75)(cid:73)(cid:71)(cid:80)(cid:69)(cid:71)(cid:14)(cid:3)(cid:67)(cid:80)(cid:70)(cid:3)
(cid:82)(cid:81)(cid:85)(cid:86)(cid:15)(cid:86)(cid:84)(cid:67)(cid:70)(cid:71)(cid:3)(cid:69)(cid:78)(cid:71)(cid:67)(cid:84)(cid:75)(cid:80)(cid:73)(cid:3)
(cid:85)(cid:71)(cid:84)(cid:88)(cid:75)(cid:69)(cid:71)(cid:85)(cid:3)(cid:75)(cid:80)(cid:3)(cid:67)(cid:78)(cid:79)(cid:81)(cid:85)(cid:86)(cid:3)
(cid:67)(cid:78)(cid:78)(cid:3)(cid:79)(cid:67)(cid:84)(cid:77)(cid:71)(cid:86)(cid:85)(cid:3)(cid:67)(cid:80)(cid:70)(cid:3)
(cid:67)(cid:85)(cid:85)(cid:71)(cid:86)(cid:3)(cid:69)(cid:78)(cid:67)(cid:85)(cid:85)(cid:71)(cid:85)(cid:16)(cid:365)
2016 I ANNUAL REPORT
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In addition, in October 2016 we redeemed in full our $45.5 million in outstanding 8.5% Senior
Unsecured Notes.
Finally, we ended 2016 with nearly $6.0 billion in total assets, a 17% increase over 2015.
LOOKING AHEAD
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(cid:82)(cid:88)(cid:85)(cid:3)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:72)(cid:74)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:82)(cid:81)(cid:250)(cid:85)(cid:80)(cid:72)(cid:71)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:69)(cid:72)(cid:79)(cid:76)(cid:72)(cid:73)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:76)(cid:86)(cid:3)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:72)(cid:71)(cid:3)(cid:88)(cid:81)(cid:76)(cid:84)(cid:88)(cid:72)(cid:79)(cid:92)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:76)(cid:81)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:76)(cid:81)(cid:71)(cid:88)(cid:86)(cid:87)(cid:85)(cid:92)(cid:3)
for future growth. That these results have come largely amid a continuation of historically adverse
market conditions for some of our segments provides even more cause for encouragement.
We continue to see signs that this unprecedented era of low interest rates, low commodities prices
and low volatility may soon end and that the macroeconomic picture will begin to normalize.
In the meantime, however, we have not let this uncertainty deter us from expanding our capabilities
and seeking to grow the Company organically and, where appropriate to our business model and
accretive to our shareholders, through new acquisition opportunities.
Our 2016 acquisitions of the Sterne Agee correspondent securities clearing and independent wealth
management businesses and the ICAP oils brokerage business are prime examples of this strategy.
Both businesses solve real problems for real customers. Both pursue a customer-centric, hands-on,
value-added approach to customers and diversify our offering in complementary ways that enable us
to leverage our customer relationships, expertise and capital to deliver better returns than most of
our peers.
As a result of these acquisitions, we now have a stronger capability than ever before to provide
execution, market intelligence and clearing services across asset classes and in all major markets.
This capability positions us ideally to take advantage of the continued consolidation among smaller
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retreat of the larger banks from serving smaller mid-sized customers requiring a multi-asset execution
capability.
For these reasons, we will continue to build upon our current business model and pursue our strategy
with discipline and a view to the long term.
Finally, the executive management team would like to thank all of our colleagues for their
exceptional contributions during this very productive and record-setting year, our Board and advisors
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capital to us.
SEAN M. O’CONNOR
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2016 I ANNUAL REPORT
OFFICE LOCATIONS
HEADQUARTERS
New York (US)
708 Third Avenue, Suite 1500
New York, NY 10017, USA
Tel: +1 212 485-3500
US OFFICES
Chicago (IL)
+1 800 504-5633
Birmingham (AL)
+1 800 240-1428
(cid:37)(cid:79)(cid:82)(cid:82)(cid:80)(cid:250)(cid:72)(cid:79)(cid:71)(cid:3)(cid:11)(cid:49)(cid:40)(cid:12)
+1 402 861-2522
Bloomington (IL)
+1 800 747-7001
Boca Raton (FL)
+1 561 544-7611
Bowling Green (OH)
+1 800 238-4146
Charlotte (NC)
+1 800 334-1253
Indianapolis (IN)
+1 866 825-7942
Kansas City (MO)
+1 800 255-6381
Lawrence (KS)
+1 785 338-9230
Miami (FL)
+1 305 925-4900
Minneapolis (MN)
+1 800 447-7993
Mobile (AL)
+1 251-295-9432
Nashville (TN)
+1 615 724-2225
New York (NY)
+1 212 766-0100
Omaha (NE)
+1 800 228-2316
Orlando (FL)
+1 800 541-1977
St. Louis (MO)
+1 800 888-4254
Twin Falls (ID)
+1 800 635-0821
West Des Moines (IA)
+1 800 422-3087
Youngstown (OH)
+1 800 589-2023
INTERNATIONAL
OFFICES
Asunción (Paraguay)
+595 21 624 197
Beijing (China)
+86 10 651 30855
Bogota (Colombia)
+57 1 6040021
London (United Kingdom)
+44 20 3580 6000
Maringá (Brazil)
+55 44 3033 6800
Mexico City (Mexico)
+52 55 9171 1526
Passo Fundo (Brazil)
+55 54 2103 0200
Buenos Aires (Argentina)
+54 11 4390 7595
Patrocinio (Brazil)
+55 34 3199 1550
Campinas (Brazil)
+55 19 2102 1300
Ciudad del Este
(Paraguay)
+595 21 624 197
Dubai
(United Arab Emirates)
+971 4 47 8500
Dublin (Ireland)
+353 1 6349140
Goiânia (Brazil)
+55 62 3432 7912
Hong Kong (China)
+852 3469 1900
Recife (Brazil)
+55 81 3040 1900
São Paulo (Brazil)
+55 11 3509 5400
Shanghai (China)
+86 21 5108 1234
Singapore (Singapore)
+65 6309 1000
Sorriso (Brazil)
+55 66 3212 4130
Sydney (Australia)
+61 2 809 42000
2016 I ANNUAL REPORT
Corporate Governance Statement
The Company is committed to high standards of corporate governance and has put in place a framework that fosters
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(cid:87)(cid:82)(cid:83)(cid:76)(cid:70)(cid:86)(cid:3)(cid:70)(cid:82)(cid:89)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:251)(cid:76)(cid:70)(cid:87)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:15)(cid:3)(cid:73)(cid:68)(cid:76)(cid:85)(cid:3)(cid:71)(cid:72)(cid:68)(cid:79)(cid:76)(cid:81)(cid:74)(cid:15)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:79)(cid:76)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:70)(cid:70)(cid:88)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:250)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:17)
Executives
The roles of Chairman and CEO are split. The CEO and CFO make all necessary representations to satisfy regulatory and
listing requirements. Executive compensation is determined by a Compensation Committee composed exclusively of
independent directors.
Board Of Directors
The Company has a Board of Directors consisting of one executive, one non-independent, and seven non-executive
directors, all seven of whom are independent. The Chairman is a non-executive director. The Board oversees the
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additional special meetings when required. The non-executive directors regularly meet independently of the executive
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independent directors. The Audit Committee meets the SEC requirement that at least one of its members should be a
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Financial Reporting And Internal Control
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management is an important aspect of this system of internal controls, and the Risk Committee monitors compliance
with risk policies.
Investor Relations
The Company seeks to provide accurate and timely information to stockholders and other stakeholders to facilitate a
better understanding of the Company and its activities. The Company seeks to distribute such information as widely as
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Forward-Looking Statements
This Annual Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements involve known and
unknown risks and uncertainties, many of which are beyond the Company’s control, including adverse changes in
economic, political and market conditions, losses from the Company’s activities arising from customer or counterparty
failures, changes in market conditions, the possible loss of key personnel, the impact of increasing competition, the
impact of changes in government regulation, the possibility of liabilities arising from violations of laws or regulations
and the impact of changes in technology on our businesses. Although the Company believes that its forward-looking
statements are based upon reasonable assumptions regarding its businesses and future market conditions, there can
be no assurances that the Company’s actual results will not differ materially from any results expressed or implied by
the Company’s forward-looking statements. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned
that any forward-looking statements are not guarantees of future performance.
2016 I ANNUAL REPORT
Stock Listing
The Company’s common stock
trades on NASDAQ under the
symbol “INTL”.
Company Information
To receive Company material,
including additional copies of this
annual report, Forms 10-K or 10-Q,
or to obtain information on other
matters of investor interest, please
contact Group Treasurer Bruce
Fields at the Stockholder Relations
address or visit our website at
www.intlfcstone.com.
Stock Transfer Agent
And Registrar
Computershare is the transfer
agent and registrar for INTL
FCStone Inc. Inquiries about
stockholders’ accounts, address
(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:76)(cid:250)(cid:70)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:86)(cid:75)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:69)(cid:72)(cid:3)
directed to Computershare.
To contact by mail:
211 Quality Circle, Suite 210
College Station, TX 77845
Executive Directors
Sean O’Connor
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:250)(cid:70)(cid:72)(cid:85)(cid:18)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)
(cid:49)(cid:72)(cid:403)(cid:69)(cid:71)(cid:84)(cid:85)
William Dunaway
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:50)(cid:73)(cid:250)(cid:70)(cid:72)(cid:85)
Xuong Nguyen
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:50)(cid:73)(cid:250)(cid:70)(cid:72)(cid:85)
Brian Sephton
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:47)(cid:72)(cid:74)(cid:68)(cid:79)(cid:3)(cid:9)(cid:3)(cid:42)(cid:82)(cid:89)(cid:72)(cid:85)(cid:81)(cid:68)(cid:81)(cid:70)(cid:72)
(cid:3)(cid:50)(cid:73)(cid:250)(cid:70)(cid:72)(cid:85)
Bruce Fields
Group Treasurer
Tricia Harrod
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:53)(cid:76)(cid:86)(cid:78)(cid:3)(cid:50)(cid:73)(cid:250)(cid:70)(cid:72)(cid:85)
Aaron Schroeder
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:36)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:50)(cid:73)(cid:250)(cid:70)(cid:72)(cid:85)
David Bolte
Corporate Secretary
Non-Executive Directors
John Radziwill
Chairman
Member Compensation
Committee
Private Investor
Company Director
Paul G. (Pete) Anderson
Retired Company President
Scott Branch
Retired Company President
John M. Fowler
Chairman Compensation
Committee
(cid:48)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:49)(cid:82)(cid:80)(cid:76)(cid:81)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:9)(cid:3)(cid:3)
Governance Committee
Member Risk Committee
Private Investor
Independent Consultant
(cid:3)(cid:3)
Daryl Henze
Chairman Audit Committee
Member Risk Committee
Independent Consultant
Company Director
Bruce Krehbiel
Member Audit Committee
(cid:48)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:49)(cid:82)(cid:80)(cid:76)(cid:81)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:9)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
Governance Committee
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:250)(cid:70)(cid:72)(cid:85)
Kanza Cooperative Association
(cid:3)(cid:3)(cid:3)(cid:3)
Eric Parthemore
(cid:38)(cid:75)(cid:68)(cid:76)(cid:85)(cid:80)(cid:68)(cid:81)(cid:3)(cid:49)(cid:82)(cid:80)(cid:76)(cid:81)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:9)(cid:3)(cid:3)(cid:3)(cid:3)(cid:3)
Governance
Member Compensation
Committee
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:250)(cid:70)(cid:72)(cid:85)
Heritage Cooperative, Inc.
Edward J. Grzybowski
Chairman Risk Committee
Member Audit Committee
Independent Consultant
Corporate Headquarters
And Stockholder
Relations
708 Third Avenue, Suite 1500
New York, NY 10017, USA
Tel: +1 212 485 3500
2016 I ANNUAL REPORT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2016
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 000-23554
INTL FCSTONE INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
708 Third Avenue, Suite 1500
New York, NY
(Address of principal executive offices)
592921318
(I.R.S. Employer Identification No.)
10017
(Zip Code)
(212) 485-3500
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED UNDER SECTION 12B OF THE ACT:
Title of each class
Common Stock, $0.01 par value
Name of each exchange on which registered
NASDAQ Global Market
SECURITIES REGISTERED UNDER SECTION 12G OF THE ACT:
NONE
Indicate by check mark
YES
NO
(cid:3)(cid:116) if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
(cid:3)(cid:116) if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
(cid:3)(cid:116) whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
(cid:3)(cid:116) whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files).
(cid:3)(cid:116) if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
(cid:3)(cid:116) whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(cid:3)(cid:116) whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
As of March 31, 2016, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $400.8 million.
As of December 12, 2016, there were 18,468,751 shares of the registrant’s common stock outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement for the Registrant’s Annual Meeting of Stockholders to be held on February 23, 2017 are
incorporated by reference into Part III of this Annual Report on Form 10-K.
Table of Contents
PART I
2
ITEM 1
Business ......................................................................................................................................................................................................................................................................................................................................2
ITEM 1A Risk Factors ...................................................................................................................................................................................................................................................................................................................10
ITEM 1B Unresolved Staff Comments........................................................................................................................................................................................................................................................20
ITEM 2
Properties ...........................................................................................................................................................................................................................................................................................................................20
ITEM 3
Legal Proceedings ..............................................................................................................................................................................................................................................................................................20
ITEM 4 Mine Safety Disclosures .......................................................................................................................................................................................................................................................................21
PART II
22
ITEM 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities..................................................................................................................................................................................................................................................22
ITEM 6
Selected Financial Data .........................................................................................................................................................................................................................................................................23
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations......................24
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk .................................................................................................................................48
ITEM 8
Financial Statements and Supplementary Data ....................................................................................................................................................................................50
ITEM 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...................99
ITEM 9A Controls and Procedures.....................................................................................................................................................................................................................................................................99
ITEM 9B Other Information ......................................................................................................................................................................................................................................................................................100
PART III
101
ITEM 10 Directors, Executive Officers and Corporate Governance...........................................................................................................................................101
ITEM 11
Executive Compensation................................................................................................................................................................................................................................................................101
ITEM 12
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.................................................................................................................................................................................................................................................................................102
ITEM 13 Certain Relationships and Related Transactions, and Director Independence...................................................................102
ITEM 14
Principal Accountant Fees and Services ............................................................................................................................................................................................................102
PART IV
103
ITEM 15
Exhibits..............................................................................................................................................................................................................................................................................................................................103
SIGNATURES ....................................................................................................................................................................................................................................................................................................................................................105
EXHIBIT INDEX .......................................................................................................................................................................................................................................................................................................................................E-1
ii
Form 10K
Cautionary Statement about Forward-Looking Statements
Certain statements in this report, other than purely historical
information, including estimates, projections, statements relating to
our business plans, objectives and expected operating results, and the
assumptions upon which those statements are based, are “forward-
looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are based on current expectations and
assumptions that are subject to risks and uncertainties which may cause
actual results to differ materially from the forward-looking statements.
A detailed discussion of these and other risks and uncertainties that
could cause actual results and events to differ materially from such
forward-looking statements is included in the section entitled “Risk
Factors” (refer to Part I, Item 1A). We undertake no obligation to
update or revise publicly any forward-looking statements, whether as
a result of new information, future events or otherwise.
Form 10K 1
PART I
ITEM 1 Business
PART I
ITEM 1 Business
Overview of Business and Strategy
We are a diversified global financial services organization providing
execution, risk management and advisory services, market intelligence
and clearing services across asset classes and markets around the world.
Our global platform has a physical presence in key financial markets
with regulatory approvals to execute both exchange-listed as well as
over-the-counter instruments in the asset classes we are active in. These
businesses are supported by our global infrastructure of regulated
operating subsidiaries, our advanced technology platform and our
team of more than 1,400 employees. Our customer-first approach
differentiates us from large banking institutions, engenders trust,
and has enabled us to establish leadership positions in a number of
complex fields in financial markets around the world.
We serve more than 20,000 predominantly wholesale organizations
located in more than 130 countries. Our customers include
commercial customers, asset managers, introducing broker-dealers,
insurance companies, brokers, institutional investors, commercial
and investment banks and governmental and non-governmental
organizations. We believe our customers value us for our focus
on their needs, our expertise and flexibility, our global reach, our
ability to provide access to liquidity in hard to reach markets and
opportunities, and our status as a well-capitalized and regulatory-
compliant organization. Our recent acquisition of the Sterne Agee
correspondent clearing and independent wealth management
businesses has further expanded our ability to serve customers by
providing us with a clearing capability in securities markets and added
approximately 50 correspondent clearing relationships with more
than 120,000 accounts of which approximately 65,000 are related
to the independent wealth management business. In addition, the
independent wealth management business has over 500 registered
representatives, providing a valuable foothold in this growing market.
Available Information
We believe we are well positioned to capitalize on key trends impacting
the financial services sector. Among others, these trends include the
impact of increased regulation on banking institutions and other
financial services providers; increased consolidation, especially
of smaller sub-scale financial services providers and independent
securities clearing firms; the growing importance and complexity of
conducting secure cross-border transactions; and the demand among
financial institutions to transact with well-capitalized counterparties.
We engage in direct sales efforts to seek new customers, with a strategy
of extending our services to potential customers who are similar in
size and operations to our existing customer base. In executing this
plan, we intend to both target new geographic locations and expand
the services offered in current locations, where there is an unmet
demand for our services particularly in areas where commodity price
controls have been recently lifted. In addition, in select instances
we pursue small to medium sized acquisitions in which we target
customer-centric organizations to expand our product offerings
and/or geographic presence.
Our strategy is to utilize a centralized and disciplined process for
capital allocation, risk management and cost control, while delegating
the execution of strategic objectives and day-to-day management
to experienced individuals. This requires high quality managers, a
clear communication of performance objectives and strong financial
and compliance controls. We believe this strategy will enable us to
build a scalable and significantly larger organization that embraces
an entrepreneurial approach to business, supported and underpinned
by strong central controls.
INTL FCStone Inc. is a Delaware corporation formed in October
1987.
Our internet address is www.intlfcstone.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
statements of changes in beneficial ownership and press releases are available free of charge in the Investor Relations section of this website. Our website
also includes information regarding our corporate governance, including our Code of Ethics, which governs our directors, officers and employees.
2
Form 10K
PART I
ITEM 1 Business
investors with tailored investment products. Through our acquisition
of the Sterne Agee independent wealth management business, we
provide advisory services to the growing retail investor market.
Physical Trading
We trade in a variety of physical commodities, primarily precious
metals, as well as select soft commodities including various agricultural
oils, animal fats and feed ingredients. Through these trading activities,
we have the ability to offer complex hedging structures as part of
each physical contract to provide customers with enhanced price
risk mitigation. We also offer customers efficient off-take or supply
services, as well as logistics management.
OTC / Market-Making
We offer customers access to the over-the-counter (“OTC”)markets
for virtually all traded commodities, foreign currencies and interest
rates, as well as for foreign securities in the U.S. For customers with
commodity price and financial risk, our customized and complex
OTC structures help mitigate those risks by integrating the processes
of product design, execution of the underlying components of the
structured risk product, transaction reporting and valuation.
By providing market-making and execution in a variety of financial
products including commodity options, unlisted American Depository
Receipts (“ADRs”) and Global Depository Receipts (“GDRs”),
foreign ordinary shares, and foreign currencies. In addition, we are an
institutional dealer in fixed income securities including United States
(“U.S.”) Treasury, U.S. government agency, agency mortgage-backed
and asset-backed securities.
Capabilities
Clearing and Execution
We provide competitive and efficient clearing in all major futures
and securities exchanges globally, as well as prime brokerage in all
major foreign currency pairs and swap transactions. We provide “high
touch” execution as well as electronic access through a wide variety of
technology platforms in a number of critically important global markets.
Asset and product types include listed futures and options on futures,
equities, mutual funds, equity options, corporate, government and
municipal bonds and unit investment trusts. We also provide global
payments and treasury services in more than 175 countries to a broad
array of commercial customers, including financial institutions, multi-
national corporations, and governmental and charitable organizations.
Finally, we provide clearing of foreign exchange transactions as well
as for a wide range of over-the-counter products.
Advisory Services
We provide value-added advisory services across a variety of financial
markets, including commodities, foreign currencies, interest rates,
institutional asset management, and independent wealth management.
For commercial customers with exposure to commodities, foreign
currencies and interest rates, we work through our proprietary Integrated
Risk Management Program (“IRMP®”) to systematically identify and
quantify their risks and then develop strategic plans to effectively
manage these risks with a view to protecting their margins and and
ultimately improving their bottom lines.
We also participate in the underwriting and trading of municipal
securities in domestic markets as well as asset-backed securities in our
Argentinean operations. Through our asset management activities, we
leverage our specialist expertise in niche markets to provide institutional
Trading Revenues
In our business, we may act as principal in the purchase and sale of
individual securities, currencies, commodities, or derivative instruments
with our customers. These transactions may be offset simultaneously
with another customer or counterparty, offset with similarly but not
identical positions on an exchange, made from inventory, or aggregated
with other purchases to provide liquidity intra-day, for a number of
days, or in some cases even longer periods (during which fair value
may fluctuate). In addition, in our Clearing and Execution Services
segment, we operate a proprietary foreign exchange desk which
arbitrages the futures and cash markets.
Operating Segments
We organize our business activities into five functional areas: Commercial Hedging, Global Payments, Securities, Physical Commodities and
Clearing and Execution Services.
Commercial Hedging
We serve our commercial customers through our team of risk
management consultants, providing a high-value-added service that
we believe differentiates us from our competitors and maximizes the
opportunity to retain our customers. Our risk management consulting
services are designed to quantify and monitor commercial entities’
exposure to commodity and financial risk. Upon assessing this exposure,
we develop a plan to control and hedge these risks with post-trade
reporting against specific customer objectives. Our customers are
assisted in the execution of their hedging strategies through a wide
range of products from listed exchange-traded futures and options,
to basic OTC instruments that offer greater flexibility and structured
OTC products designed for customized solutions.
Form 10K 3
PART I
ITEM 1 Business
Our services span virtually all traded commodity markets, with the
largest concentrations in agricultural and energy commodities (consisting
primarily of grains, energy and renewable fuels, coffee, sugar, cotton,
and food service) and base metals products listed on the London Metals
Exchange (“LME”). Our base metals business includes a position as a
Category One ring dealing member of the LME, providing execution,
clearing and advisory services in exchange-traded futures and OTC
products. We also provide execution of foreign currency forwards and
options and interest rate swaps as well as a wide range of structured
product solutions to our commercial customers who are seeking cost-
effective hedging strategies. Generally, our customers direct their own
trading activity, and our risk management consultants do not have
discretionary authority to transact trades on behalf of our customers.
Within this segment, our risk management consultants organize their
marketing efforts into customer industry product lines, and currently
serve customers in the following areas:
(cid:116) Financial Agricultural & Energy
– Agricultural —
■ Grain elevator operators, grain merchandisers, traders, processors,
manufacturers and end-users.
■ Livestock production, feeding and processing, dairy and users
of agricultural commodities in the food industry.
■ Coffee, sugar and cocoa producers, processors and end-users.
■ Global fiber, textile and apparel industry.
Global Payments
We provide global payment solutions to banks and commercial
businesses as well as charities and non-governmental organizations
and government organizations. We offer payments services in more
than 175 countries and 140 currencies, which we believe is more
than any other payments solution provider, and provide competitive
and transparent pricing.
Our proprietary FXecute global payments platform is integrated with
a financial information exchange (“FIX”) protocol. This FIX protocol
is an electronic communication method for the real-time exchange of
information, and we believe it represents one of the first FIX offerings
for cross-border payments in exotic currencies. FIX functionality
allows customers to view real time market rates for various currencies,
execute and manage orders in real-time, and view the status of their
payments through the easy-to-use portal.
– Energy and renewable fuels —
■ Producers, refiners, wholesalers, transportation companies,
convenience store chains, automobile and truck fleet operators,
industrial companies, railroads, and municipalities.
■ Consumers of natural gas including some of the largest natural
gas consumers in North America, including municipalities and
large manufacturing firms, as well as major utilities.
■ Ethanol and biodiesel producers and end-users.
– Other —
■ Lumber mills, wholesalers, distributors and end-users.
■ Commercial entities seeking to hedge their foreign exchange
exposures.
(cid:116) LME Metals
– Commercial —
■ Producers, consumers and merchants of copper, aluminum,
zinc, lead, nickel, tin and other ferrous products.
– Institutional —
■ Commodity trading advisors and hedge funds seeking clearing
and execution of LME and NYMEX/COMEX base metal
products.
Additionally, as a member of SWIFT (Society for Worldwide Interbank
Financial Telecommunication), we are able to offer our services to
large money center and global banks seeking more competitive
international payments services.
Through this single comprehensive platform and our commitment
to customer service, we believe we are able to provide simple and fast
execution, ensuring delivery of funds in any of these countries quickly
through our global network of approximately 300 correspondent
banks. In this business, we primarily act as a principal in buying and
selling foreign currencies on a spot basis. We derive revenue from the
difference between the purchase and sale prices.
We believe our customers value our ability to provide exchange rates
that are significantly more competitive than those offered by large
international banks, a competitive advantage that stems from our years
of foreign exchange expertise focused on smaller, less liquid currencies.
Securities
We provide value-added solutions that facilitate cross-border trading and
believe our customers value our ability to manage complex transactions,
including foreign exchange, utilizing our local understanding of market
convention, liquidity and settlement protocols around the world. Our
customers include U.S.-based regional and national broker-dealers and
institutions investing or executing customer transactions in international
markets and foreign institutions seeking access to the U.S. securities
markets. We are one of the leading market makers in foreign securities,
including unlisted ADRs, GDRs and foreign ordinary shares. We make
markets in over 3,600 ADRs, GDRs and foreign ordinary shares, of
which over 2,000 trade in the OTC market. In addition, we will, on
request, make prices in more than 10,000 unlisted foreign securities.
We are a broker-dealer in Argentina where we are active in providing
institutional executions in the local capital markets.
4
Form 10K
PART I
ITEM 1 Business
We act as an institutional dealer in fixed income securities, including
U.S. Treasury, U.S. government agency, agency mortgage-backed and
asset-backed securities to a customer base including asset managers,
commercial bank trust and investment departments, broker-dealers
and insurance companies.
We originate, structure and place debt instruments in the international
and domestic capital markets. These instruments include complex
asset-backed securities (primarily in Argentina) and domestic municipal
securities. On occasion, we may invest our own capital in debt
instruments before selling them. We also actively trade in a variety of
international debt instruments as well as operate an asset management
business in which we earn fees, commissions and other revenues for
management of third party assets and investment gains or losses on
our investments in funds and proprietary accounts managed either
by our investment managers or by independent investment managers.
Physical Commodities
This segment consists of our physical Precious Metals trading and
Physical Agricultural (“Ag”) and Energy commodity businesses. In
Precious Metals, we provide a full range of trading and hedging
capabilities, including OTC products, to select producers, consumers,
and investors. In our trading activities, we act as a principal, committing
our own capital to buy and sell precious metals on a spot and
forward basis.
Our Physical Ag & Energy commodity business provides financing to
commercial commodity-related companies against physical inventories,
including grain, lumber, meats, energy products and renewable fuels.
We use sale and repurchase agreements to purchase commodities
evidenced by warehouse receipts, subject to a simultaneous agreement
to sell such commodities back to the original seller at a later date.
Transactions where the sale and repurchase price are fixed upon
execution, and meet additional required conditions, are accounted for
Clearing and Execution Services (“CES”)
We provide competitive and efficient clearing and execution in all
major futures and securities exchanges globally as well as prime
brokerage in all major foreign currency pairs and swap transactions.
Through our platform, customer orders are accepted and directed to
the appropriate exchange for execution. We then facilitate the clearing
of customers’ transactions. Clearing involves the matching of customer’
trades with the exchange, the collection and management of customer
margin deposits to support the transactions, and the accounting and
reporting of the transactions to customers.
As of September 30, 2016, we held $2.1 billion in required customer
segregated assets, which we believe makes us the third largest
independent futures commission merchant (“FCM”) in the United
States not affiliated with a major financial institution or commodity
intermediary, end-user or producer, as measured by required
customer segregated assets. We seek to leverage our capabilities
and capacity by offering facilities management or outsourcing
solutions to other FCM’s.
Following our acquisition of the Sterne Agee correspondent securities
clearing business, we are an independent full-service provider to
introducing broker-dealers (“IBD’s”) of clearing, custody, research,
as product financing arrangements, and accordingly no commodity
inventory, purchases or sales are recorded. Transactions where the
repurchase price is not fixed upon execution do not meet all the
criteria to be accounted for as product financing arrangements and
therefore are recorded as commodity inventory and purchases and
sales. Additionally, we engage as a principal in physical purchase and
sale transactions related to inputs to the renewable fuels and feed
ingredient industries.
We generally mitigate the price risk associated with commodities
held in inventory through the use of derivatives. We do not elect
hedge accounting under accounting principles generally accepted in
the United States of America (“U.S. GAAP”) in accounting for this
price risk mitigation.
syndicated and security-based lending products and services, including
a proprietary technology platform which offers seamless connectivity
to ensure a positive customer experience through the clearing and
settlement process. Also as part of this transaction, we acquired
Sterne Agee’s independent wealth management business which offers
a comprehensive product suite to retail customers nationwide. As a
result we are one of the leading mid-market clearer’s in the securities
industry, clearing for 50 correspondent clearing customers and in
aggregate over 120,000 underlying individual retail securities accounts
with over $12 billion in assets under management (“AUM”) as of
September 30, 2016.
In addition, we believe we are one of the largest non-bank prime
brokers and swap dealers in the world. Through this offering, we
provide prime brokerage foreign exchange (“FX”) services to financial
institutions and professional traders. We provide our customers with
the full range of OTC products, including 24-hour a day execution
of spot, forwards and options as well as non-deliverable forwards
in both liquid and exotic currencies. We also operate a proprietary
foreign exchange desk that arbitrages the exchange-traded foreign
exchange markets with the cash markets.
Form 10K 5
PART I
ITEM 1 Business
Acquisition during Fiscal Year 2016
Sterne Agee
Effective July 1, 2016, we acquired all of the legacy independent
brokerage and clearing businesses of Sterne Agee, LLC, a wholly-
owned subsidiary of Stifel Financial Corp. Effective August 1, 2016,
we acquired all of the legacy Registered Investment Advisor (“RIA”)
business of Sterne Agee, LLC. Pursuant to the two stock purchase
agreements, we acquired Sterne Agee & Leach, Inc.; Sterne Agee
Clearing, Inc.; Sterne Agee Financial Services, Inc.; Sterne Agee Asset
Management, Inc. and Sterne Agee Investment Advisor Services, Inc.
for cash consideration. The purchase price of $45.0 million represents
a discount to the preliminary allocation of fair value to the net assets of
the Sterne entities acquired. The $6.2 million discount in the purchase
price as compared to the preliminary allocation of fair value to the net
assets at closing has been reflected as a bargain purchase gain on the
transaction within “gain on acquisition” in the Consolidated Income
Statement for the year ended September 30, 2016.
Acquisition and Internal Subsidiary Consolidation during Fiscal Year 2015
G.X. Clarke & Co.
Effective January 1, 2015, we acquired all of the partnership interests
of G.X. Clarke & Co. (“G.X. Clarke”), an SEC registered institutional
dealer in fixed income securities. G.X. Clarke was based in New Jersey,
transacted in U.S. Treasury, U.S. government agency and agency
mortgage-backed securities, and was a member of the Financial Industry
Regulatory Authority (“FINRA”) with an institutional customer base
consisting of asset managers, commercial bank trust and investment
departments, broker-dealers, and insurance companies. The purchase
price was equal to G.X. Clarke’s net tangible book value at closing of
$25.9 million plus a premium of $1.5 million, and up to an additional
$1.5 million over the next three years, subject to the achievement of
certain profitability thresholds. In conjunction with the acquisition,
the name of G.X. Clarke was changed to INTL FCStone Partners
L.P. Our consolidated financial statements include the operating
results of INTL FCStone Partners L.P. from the date of acquisition.
Internal Subsidiary Consolidation
Effective July 1, 2015, we merged three of our wholly-owned regulated
U.S. subsidiaries into our wholly owned regulated U.S. subsidiary,
INTL FCStone Securities Inc., and the surviving entity was renamed
INTL FCStone Financial Inc. and is registered as both a broker-dealer
and a FCM. As such, the assets, liabilities and equity of FCStone,
LLC, INTL FCStone Partners L.P., and FCC Investments, Inc. were
transferred into INTL FCStone Financial.
Disposal during Fiscal Year 2014
Completed Exit of Physical Base Metals Business
During fiscal 2014 we completed our exit of physical base metals
business through the sale and orderly liquidation of then-current
open positions. The remaining open contract positions were fulfilled
during fiscal 2014, at which time we reclassified the physical base
metals activities in the financial statements as discontinued operations.
We continue to operate the component of our base metals business
related to non-physical assets conducted primarily through the LME.
Competition
The international commodities and financial markets are highly
competitive and rapidly evolving. In addition, these markets are
dominated by firms with significant capital and personnel resources
that are not matched by our resources. We expect these competitive
conditions to continue in the future, although the nature of the
competition may change as a result of ongoing changes in the regulatory
environment. We believe that we can compete successfully with other
commodities and financial intermediaries in the markets we seek to
serve, based on our expertise, products and quality of consulting and
execution services.
We compete with a large number of firms in the exchange-traded
futures and options on futures execution sector and in the OTC
derivatives sector. We compete primarily on the basis of diversity
and value of services offered, and to a lesser extent on price. Our
competitors in the exchange-traded futures and options sector
include international, national and regional brokerage firms as
well as local introducing brokers, with competition driven by
price level and quality of service. Many of these competitors also
offer OTC trading programs. In addition, there are a number of
financial firms and physical commodities firms that participate
in the OTC markets, both directly in competition with us and
indirectly through firms like us. We compete in the OTC market
by making specialized OTC transactions available to our customers
in contract sizes that are smaller than those usually available from
major counterparties.
6
Form 10K
PART I
ITEM 1 Business
Investor interest in the markets we serve impact and will continue
to impact our activities. The instruments traded in these markets
compete with a wide range of alternative investment instruments.
We seek to counterbalance changes in demand in specified markets
by undertaking activities in multiple uncorrelated markets.
Technology has increased competitive pressures on commodities and
financial intermediaries by improving dissemination of information,
making markets more transparent and facilitating the development of
alternative execution mechanisms. In certain instances, we compete by
providing technology-based solutions to facilitate customer transactions
and solidify customer relationships.
Administration and Operations
We employ operations personnel to supervise and, for certain products,
complete the clearing and settlement of transactions.
INTL FCStone Financial’s securities transactions are cleared through
Broadcort, a division of Merrill Lynch, Pierce, Fenner & Smith, Inc
and Pershing LLC, a subsidiary of The Bank of New York Mellon
Corporation. In relation to security transactions, INTL FCStone
Financial does not hold customer funds or directly clear or settle
securities transactions.
Sterne, Agee & Leach, Inc. is a self-clearing broker-dealer which
does hold customer funds and maintains deposits with the National
Securities Clearing Corporation, Inc. (“NSCC”), MBS Clearing
Corporation, Inc., Depository Trust & Clearing Corporation, Inc.
(“DTCC”) and the Options Clearing Corporation (“OCC”).
We utilize front-end electronic trading, back office and accounting
systems to process transactions on a daily basis. In some cases these
systems are integrated. The systems provide record keeping, trade
reporting to exchange clearing organizations, internal risk controls, and
reporting to government and regulatory entities, corporate managers,
risk managers and customers. A third-party service bureau located in
Hopkins, MN maintains our futures and options back office system.
It has a disaster recovery site in Salem, NH.
We hold customer funds in relation to certain of our activities.
In regulated entities, these customer funds are segregated, but in
unregulated entities they are not. For a further discussion of customer
segregated funds in our regulated entities, please see the “Customer
Segregated Assets” discussion below.
Our administrative staff manages our internal financial controls,
accounting functions, office services and compliance with regulatory
requirements.
Governmental Regulation and Exchange Membership
Our activities are subject to significant governmental regulation, both in
the U.S. and overseas. Failure to comply with regulatory requirements
could result in administrative or court proceedings, censure, fines,
issuance of cease-and-desist orders, or suspension or disqualification
of the regulated entity, its officers, supervisors or representatives. The
regulatory environment in which we operate is subject to frequent change
and these changes directly impact our business and operating results.
The commodities industry in the U.S. is subject to extensive regulation
under federal law. We are required to comply with a wide range of
requirements imposed by the Commodity Futures Trading Commission
(the “CFTC”), the National Futures Association (the “NFA”) and the
Chicago Mercantile Exchange, which is our designated self-regulatory
organization. We are also a member of the Chicago Mercantile Exchange’s
divisions: the Chicago Board of Trade, the New York Mercantile Exchange
and COMEX, ICE Futures US, ICE Europe Ltd, the New Zealand
Exchange and the Minneapolis Grain Exchange. These regulatory
bodies protect customers by imposing requirements relating to capital
adequacy, licensing of personnel, conduct of business, protection of
customer assets, record-keeping, trade-reporting and other matters.
The securities industry in the U.S. is subject to extensive regulation under
federal and state securities laws. We must comply with a wide range of
requirements imposed by the Securities and Exchange Commission
(the “SEC”), state securities commissions, the Municipal Securities
Rulemaking Board (“MSRB”) and FINRA. These regulatory bodies
safeguard the integrity of the financial markets and protect the interests
of investors in these markets. They also impose minimum capital
requirements on regulated entities.
The Financial Conduct Authority (“FCA”), the regulator of the
financial services industry in the United Kingdom, regulates our
subsidiary, INTL FCStone Ltd, as a Financial Services Firm under part
IV of the Financial Services and Markets Act 2000. The regulations
impose regulatory capital, as well as conduct of business, governance,
and other requirements. The conduct of business rules include those
that govern the treatment of customer money and other assets which,
under certain circumstances for certain classes of customers must be
segregated from the firm’s own assets. INTL FCStone Ltd is a member
of the LME, ICE Europe Ltd, LCH Enclear, Euronext, the European
Energy Exchange, Eurex and Norexco ASA.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Dodd-Frank Act”) created a comprehensive new regulatory
regime governing over-the-counter derivatives (“swaps”) and further
regulations on listed derivatives. The Dodd-Frank Act also created a
registration regime for new categories of market participants, such as
“swap dealers”, among others. Our wholly owned subsidiary, INTL
FCStone Markets, LLC is a CFTC provisionally registered swap dealer,
whose business is overseen by the National Futures Association (“NFA”),
the self-regulatory organization for the U.S. derivatives industry.
The Dodd-Frank Act generally introduced a framework for (i) swap data
reporting and recordkeeping on counterparties and data repositories;
(ii) centralized clearing for swaps, with limited exceptions for end-users;
(iii) the requirement to execute swaps on regulated swap execution
facilities; (iv) imposition on swap dealers to exchange margin on
uncleared swaps with counterparties; and (v) the requirement to
comply with new capital rules.
Form 10K 7
PART I
ITEM 1 Business
Effective September 2016, CFTC margin rules came into effect,
imposing new requirements to exchange initial and variation margin,
depending upon aggregate daily notional transactions outstanding,
with an implementation period ending in 2020. CFTC capital rules
have not been finalized and therefore it is too early to predict with
any degree of certainty how we will be affected. We will continue to
monitor all applicable developments in the ongoing implementation
of the Dodd-Frank Act. The legislation and implementing regulations
affect not only us, but also our customers and counterparties.
The European Markets Infrastructure Regulation (“EMIR”) is the
European regulations on OTC derivatives, central counterparties and
trade repositories. The EMIR has been implemented across the European
Economic Area member states by the European Securities and Markets
Authority (“ESMA”). The EMIR has imposed new requirements on
our European operations, including (a) reporting derivatives to a trade
repository; (b) putting in place certain risk management procedures
for OTC derivative transactions that are not cleared; (c) changes to our
clearing account models and increased central counterparty margin
requirements. Reporting requirements came into effect in February
2014 and most risk mitigation procedures were set at the end of 2013.
Implementation of collateral obligations applicable to non-cleared
OTC transactions will begin to come into force in 2017. ESMA is
continuing to evaluate and set clearing obligations for certain OTC
derivatives. INTL FCStone Ltd complies with the enacted provisions
and will do so when pending EMIR provisions are finalized as relevant
to its activities.
In addition to the EMIR, the FCA will be enforcing additional European
Union issued regulations such as the Markets in Financial Instruments
Directive II (“MIFID II”), for which implementation is scheduled for
2018, and the Markets in Financial Instruments Regulation (“MIFIR”).
Principal areas of impact related to this directive will involve oversight
of organized trade facilities (“OTF’s”) for trading OTC non-equity
products, customer type re-assessment, investor protection, enhanced
conflict of interest and execution policies and extended transaction
reporting requirements.
The USA PATRIOT Act contains anti-money laundering and financial
transparency laws and mandates the implementation of various
regulations applicable to broker-dealers and other financial services
companies. The USA PATRIOT Act seeks to promote cooperation
among financial institutions, regulators and law enforcement entities
in identifying parties that may be involved in terrorism or money
laundering. Anti-money laundering laws outside of the U.S. contain
similar provisions. We believe that we have implemented, and that we
maintain, appropriate internal practices, procedures and controls to
enable us to comply with the provisions of the USA PATRIOT Act
and other anti-money laundering laws.
The U.S. maintains various economic sanctions programs administered
by the U.S. Treasury Department’s Office of Foreign Assets Control
(“OFAC”). The OFAC administered sanctions take many forms, but
generally prohibit or restrict trade and investment in and with sanctions
targets, and in some cases require blocking of the target’s assets. Violations
of any of the OFAC-administered sanctions are punishable by civil
fines, criminal fines, and imprisonment. We established policies and
procedures designed to comply with applicable OFAC requirements.
Although we believe that our policies and procedures are effective, there
can be no assurance that our policies and procedures will effectively
prevent us from violating the OFAC-administered sanctions in every
transaction in which we may engage.
Net Capital Requirements
INTL FCStone Financial is a dually registered broker-dealer/FCM and
is subject to minimum capital requirements under Section 4(f ) (b) of
the Commodity Exchange Act, Part 1.17 of the rules and regulations
of the CFTC and the SEC Uniform Net Capital Rule 15c3-1 under
the Securities Exchange Act of 1934. These rules specify the minimum
amount of capital that must be available to support our customers’ open
trading positions, including the amount of assets that INTL FCStone
Financial must maintain in relatively liquid form, and are designed
to measure general financial integrity and liquidity. Net capital and
the related net capital requirement may fluctuate on a daily basis.
Compliance with minimum capital requirements may limit our
operations if we cannot maintain the required levels of capital and
restrict the ability of INTL FCStone Financial to make distributions
to us. Moreover, any change in these rules or the imposition of new
rules affecting the scope, coverage, calculation or amount of capital
we are required to maintain could restrict our ability to operate our
business and adversely affect our operations.
Sterne, Agee & Leach, Inc., Sterne Agee Clearing, Inc. and Sterne Agee
Financial Services, Inc. are subject to the SEC Uniform Net Capital
Rule 15c3-1 under the Securities Exchange Act of 1934.
INTL FCStone Ltd, a Financial Services Firm regulated by the FCA
is subject to a net capital requirement.
The Australian Securities and Investment Commission regulates INTL
FCStone Pty. Ltd. It is subject to a net tangible asset capital requirement.
The Brazilian Central Bank and Securities and Exchange Commission
of Brazil regulates INTL FCStone DTVM Ltda. (“INTL FCStone
DTVM”). It is a registered broker-dealer and is subject to a capital
adequacy requirement.
The Comision Nacional de Valores regulates INTL Gainvest S.A.
and INTL CIBSA S.A. and they are subject to net capital and capital
adequacy requirements. The Rosario Futures Exchange and the General
Inspector of Justice regulate INTL Capital, S.A. It is subject to a capital
adequacy requirement.
Certain of our other non-U.S. subsidiaries are also subject to capital
adequacy requirements promulgated by authorities of the countries
in which they operate.
All of our subsidiaries are in compliance with all of their capital regulatory
requirements as of September 30, 2016. Additional information on
these net capital and minimum net capital requirements can be found
in Note 12 to the Consolidated Financial Statements.
8
Form 10K
Segregated Customer Assets
INTL FCStone Financial maintains customer segregated deposits
from its customers relating to their trading of futures and options on
futures on U.S. commodities exchanges held with INTL FCStone
Financial, making it subject to CFTC regulation 1.20, which
specifies that such funds must be held in segregation and not
commingled with the firm’s own assets. INTL FCStone Financial
maintains acknowledgment letters from each depository at which
it maintains customer segregated deposits in which the depository
acknowledges the nature of funds on deposit in the account. In
addition, CFTC regulations require filing of a daily segregation
calculation which compares the assets held in customers segregated
depositories (“segregated assets”) to the firm’s total segregated assets
held on deposit from customers (“segregated liabilities”). The amount
of customer segregated assets must be in excess of the segregated
liabilities owed to customers and any shortfall in such assets must
be immediately communicated to the CFTC. As of September
30, 2016, INTL FCStone Financial maintained $51.5 million in
segregated assets in excess of its segregated liabilities.
In addition, INTL FCStone Financial is subject to CFTC regulation
1.25, which governs the acceptable investment of customer segregated
assets. This regulation allows for the investment of customer segregated
assets in readily marketable instruments including U.S. Treasury
Secured Customer Assets
PART I
ITEM 1 Business
securities, municipal securities, government sponsored enterprise
securities, certificates of deposit, commercial paper and corporate
notes or bonds which are guaranteed by the U.S. under the Temporary
Liquidity Guarantee Program, interest in money market mutual funds,
and repurchase transactions with unaffiliated entities in otherwise
allowable securities. INTL FCStone Financial predominately invests
its customer segregated assets in U.S. Treasury securities and money
market mutual funds.
Sterne, Agee & Leach, Inc. maintains deposits from its customers
related to its status as a self-clearing broker-dealer registered with
the SEC and FINRA making it subject to Rule 15c3-3 under the
Securities Exchange Act of 1934, which specifies that under certain
circumstances a broker-dealer must maintain cash or qualified
securities in a segregated reserve account for the exclusive benefit
of its customers. As of September 30, 2016, Sterne, Agee & Leach,
Inc. did not have a segregated reserve account requirement.
INTL FCStone Ltd is subject to certain business rules, including
those that govern the treatment of customer money and other assets
which under certain circumstances for certain classes of customer
must be segregated from the firm’s own assets. As of September 30,
2016, INTL FCStone Ltd was in compliance with the applicable
segregated funds requirements.
INTL FCStone Financial maintains customer secured deposits from
its customers funds relating to their trading of futures and options
on futures traded on, or subject to the rules of, a foreign board of
trade held with INTL FCStone Financial, making it subject to CFTC
Regulation 30.7, which requires that such funds must be carried
in separate accounts in an amount sufficient to satisfy all of INTL
FCStone Financial’s current obligations to customers trading foreign
futures and foreign options on foreign commodity exchanges or
boards of trade, which are designated as secured customers’ accounts.
As of September 30, 2016, INTL FCStone Financial maintained
$16.4 million in secured assets in excess of its secured liabilities.
Foreign Operations
We operate in a number of foreign jurisdictions, including Canada,
Ireland, the United Kingdom, Argentina, Brazil, Colombia, Uruguay,
Paraguay, Mexico, Nigeria, Dubai, China, South Korea, Hong Kong,
Australia and Singapore. We established wholly owned subsidiaries
in Uruguay and Nigeria but do not have offices or employees in
those countries.
INTL FCStone Ltd is domiciled in the United Kingdom, and subject
to regulation by the FCA.
In Argentina, the activities of INTL Gainvest S.A. and INTL CIBSA
S.A. are subject to regulation by the Comision Nacional de Valores
and the activities of INTL Capital, S.A. are subject to regulation by
the Rosario Futures Exchange and the General Inspector of Justice.
In Brazil, the activities of FCStone do Brasil are subject to regulation
by BM&F Bovespa, and the activities of INTL FCStone DTVM
Ltda. are regulated by the Brazilian Central Bank and Securities and
Exchange Commission of Brazil.
The activities of INTL Commodities DMCC are subject to regulation
by the Dubai Multi Commodities Centre.
INTL FCStone Pte. Ltd. is subject to regulation by the Monetary
Authority of Singapore.
INTL FCStone Pty. Ltd. is subject to regulation by the Australian
Securities and Investments Commission.
INTL FCStone (Hong Kong) Limited holds a type 2 derivatives license
and is subject to regulation by the Securities & Futures Commission
of Hong Kong.
Form 10K 9
PART I
ITEM 1A Risk Factors
Business Risks
We seek to mitigate the market and credit risks arising from our
financial trading activities through an active risk management program.
The principal objective of this program is to limit trading risk to an
acceptable level while maximizing the return generated on the risk
assumed.
We have a defined risk policy administered by our risk management
committee, which reports to the risk committee of our board of
directors. We established specific exposure limits for inventory positions
in every business, as well as specific issuer limits and counterparty
limits. We designed these limits to ensure that in a situation of
unexpectedly large or rapid movements or disruptions in one or more
markets, systemic financial distress, the failure of a counterparty or
the default of an issuer, the potential estimated loss will remain within
acceptable levels. The risk committee of our board of directors reviews
the performance of the risk management committee on a quarterly
basis to monitor compliance with the established risk policy.
Employees
As of September 30, 2016, we employed 1,464 people globally: 1,014 in the U.S., 204 in the United Kingdom, 95 in Brazil, 68 in Argentina,
38 in Singapore, 12 in Dubai, 10 in Australia, 8 in Paraguay, 8 in China, 4 in Hong Kong and 3 in Mexico. None of our employees operate
under a collective bargaining agreement, and we have not suffered any work stoppages or labor disputes. Many of our employees are subject
to employment agreements, certain of which contain non-competition provisions.
ITEM 1A Risk Factors
We face a variety of risks that could adversely impact our financial
condition and results of operations, including the following:
Our ability to achieve consistent profitability is subject
to uncertainty due to the nature of our businesses and
the markets in which we operate.
During the fiscal year ended September 30, 2016 we recorded net
income of $54.7 million, compared to net income of $55.7 million
in fiscal 2015 and $19.3 million in fiscal 2014.
Our revenues and operating results may fluctuate significantly in the
future because of the following factors:
(cid:116) Market conditions, such as price levels and volatility in the
commodities, securities and foreign exchange markets in which
we operate;
(cid:116) Changes in the volume of our market-making and trading activities;
(cid:116) Changes in the value of our financial instruments, currency and
commodities positions and our ability to manage related risks;
(cid:116) The level and volatility of interest rates;
(cid:116) The availability and cost of funding and capital;
(cid:116) Our ability to manage personnel, overhead and other expenses;
(cid:116) Changes in execution and clearing fees;
(cid:116) The addition or loss of sales or trading professionals;
(cid:116) Changes in legal and regulatory requirements; and
(cid:116) General economic and political conditions.
Although we continue our efforts to diversify the sources of our
revenues, it is likely that our revenues and operating results will
continue to fluctuate substantially in the future and such fluctuations
could result in losses. These losses could have a material adverse effect
on our business, financial condition and operating results.
10
Form 10K
The manner in which we account for certain of our
precious metals commodities inventory may increase
the volatility of our reported earnings.
Our net income is subject to volatility due to the manner in which we
report our precious metals commodities inventory held by subsidiaries
that are not broker-dealers. Our precious metals inventory held in
subsidiaries which are not broker-dealers is stated at the lower of cost or
market value. We generally mitigate the price risk associated with our
commodities inventory through the use of derivatives. We do not elect
hedge accounting under U.S. GAAP for this price risk mitigation. In
such situations, any unrealized gains in our precious metals inventory
in our non-broker-dealer subsidiaries are not recognized under U.S.
GAAP, but unrealized gains and losses in related derivative positions
are recognized under U.S. GAAP. As a result, our reported earnings
from these business segments are subject to greater volatility than the
earnings from our other business segments.
Our indebtedness could adversely affect our financial
condition.
As of September 30, 2016, our total consolidated indebtedness was
$228.3 million, and we may increase our indebtedness in the future
as we continue to expand our business. Our indebtedness could have
important consequences, including:
(cid:116) increasing our vulnerability to general adverse economic and industry
conditions;
(cid:116) requiring that a portion of our cash flow from operations be used
for the payment of interest on our debt, thereby reducing our ability
to use our cash flow to fund working capital, capital expenditures,
acquisitions and general corporate requirements;
(cid:116) limiting our ability to obtain additional financing to fund future
working capital, capital expenditures, acquisitions and general
corporate requirements;
(cid:116) limiting our flexibility in planning for, or reacting to, changes in
our business and the securities industry; and
(cid:116) restricting our ability to pay dividends or make other payments.
We may be able to incur additional indebtedness in the future, including
secured indebtedness. If new indebtedness is added to our current
indebtedness levels, the related risks that we now face could intensify.
Committed credit facilities currently available to us
might not be renewed.
We currently have four committed credit facilities under which we
may borrow up to $447.0 million, consisting of:
(cid:116) a $247.0 million facility available to INTL FCStone Inc., for general
working capital requirements, committed until March 18, 2019.
(cid:116) a $75.0 million facility available to our wholly owned subsidiary,
INTL FCStone Financial, for short-term funding of margin to
commodity exchanges, committed until April 6, 2017.
(cid:116) a $100.0 million committed facility available to our wholly owned
subsidiary, FCStone Merchant Services, LLC, for commodity
financing arrangements and commodity repurchase agreements,
committed until May 1, 2018.
(cid:116) a $25.0 million facility available to our wholly owned subsidiary,
INTL FCStone Ltd, for short-term funding of margin to commodity
exchanges, committed until October 27, 2017.
During fiscal 2017, $75 million of our committed credit facilities are
scheduled to expire. There is no guarantee that we will be successful
in renewing, extending or rearranging these facilities.
It is possible that these facilities might not be renewed at the end of
their commitment periods and that we will be unable to replace them
with other facilities. If our credit facilities are unavailable or insufficient
to support future levels of business activities, we may need to raise
additional funds externally, either in the form of debt or equity. If
we cannot raise additional funds on acceptable terms, we may not
be able to develop or enhance our business, take advantage of future
opportunities or respond to competitive pressure or unanticipated
requirements, leading to reduced profitability.
Our failure to successfully integrate the operations of
businesses acquired by us in the last twelve months
could have a material adverse effect on our business,
financial condition and operating results.
Since September 30, 2015, we have acquired the Sterne Agee
correspondent securities clearing and independent wealth management
businesses. We will need to meet challenges to realize the expected
benefits and synergies of this acquisition, including:
(cid:116) integrating the management teams, strategies, cultures, technologies
and operations of the acquired companies;
(cid:116) retaining and assimilating the key personnel of acquired companies;
(cid:116) retaining existing customers of the acquired companies;
(cid:116) creating uniform standards, controls, procedures, policies and
information systems; and
(cid:116) achieving revenue growth because of risks involving (1) the ability
to retain customers, (2) the ability to sell the services and products
PART I
ITEM 1A Risk Factors
of the acquired companies to the existing customers of our other
business segments, and (3) the ability to sell the services and products
of our other business segments to the existing customers of the
acquired companies.
The accomplishment of these objectives will involve considerable
risk, including:
(cid:116) the potential disruption of each company’s ongoing business and
distraction of their respective management teams;
(cid:116) unanticipated expenses related to technology integration; and
(cid:116) potential unknown liabilities associated with the acquisition.
It is possible that the integration process could result in the loss of
the technical skills and management expertise of key employees, the
disruption of the ongoing businesses or inconsistencies in standards,
controls, procedures and policies due to possible cultural conflicts
or differences of opinions on technical decisions and product road
maps that adversely affect our ability to maintain relationships with
customers, counterparties, and employees or to achieve the anticipated
benefits of the acquisition.
We face risks associated with our market-making and
trading activities.
We conduct our market-making and trading activities predominantly
as a principal, which subjects our capital to significant risks. These
activities involve the purchase, sale or short sale for customers and
for our own account of financial instruments, including equity and
debt securities, commodities and foreign exchange. These activities are
subject to a number of risks, including risks of price fluctuations, rapid
changes in the liquidity of markets and counterparty creditworthiness.
These risks may limit our ability to either resell financial instruments we
purchased or to repurchase securities we sold in these transactions. In
addition, we may experience difficulty borrowing financial instruments
to make delivery to purchasers to whom we sold short, or lenders
from whom we have borrowed. From time to time, we have large
position concentrations in securities of a single issuer or issuers in
specific countries and markets. This concentration could result in
higher trading losses than would occur if our positions and activities
were less concentrated.
The success of our market-making activities depends on:
(cid:116) the price volatility of specific financial instruments, currencies and
commodities,
(cid:116) our ability to attract order flow;
(cid:116) the skill of our personnel;
(cid:116) the availability of capital; and
(cid:116) general market conditions.
To attract market-trading, market-making and trading business, we
must be competitive in:
(cid:116) providing enhanced liquidity to our customers;
(cid:116) the efficiency of our order execution;
(cid:116) the sophistication of our trading technology; and
(cid:116) the quality of our customer service.
Form 10K 11
PART I
ITEM 1A Risk Factors
In our role as a market maker and trader, we attempt to derive a
profit from the difference between the prices at which we buy and
sell financial instruments, currencies and commodities. However,
competitive forces often require us to:
(cid:116) match the quotes other market makers display; and
(cid:116) hold varying amounts of financial instruments, currencies and
commodities in inventory.
By having to maintain inventory positions, we are subject to a high
degree of risk. We cannot ensure that we will be able to manage our
inventory risk successfully or that we will not experience significant
losses, either of which could materially adversely affect our business,
financial condition and operating results.
We operate as a principal in the OTC derivatives
markets which involves the risks associated with
commodity derivative instruments.
We offer OTC derivatives to our customers in which we act as a principal
counterparty. We endeavor to simultaneously offset the commodity
price risk of the instruments by establishing corresponding offsetting
positions with commodity counterparties, or alternatively we may
offset those transactions with similar but not identical positions on
an exchange. To the extent that we are unable to simultaneously offset
an open position or the offsetting transaction is not fully effective to
eliminate the commodity derivative risk, we have market risk exposure
on these unmatched transactions. Our exposure varies based on the
size of the overall positions, the terms and liquidity of the instruments
brokered, and the amount of time the positions remain open.
To the extent an unhedged position is not disposed of intra-day,
adverse movements in the commodities underlying these positions
or a downturn or disruption in the markets for these positions could
result in a substantial loss. In addition, any principal gains and losses
resulting from these positions could on occasion have a disproportionate
effect, positive or negative, on our financial condition and results of
operations for any particular reporting period.
Transactions involving OTC derivative contracts may be adversely
affected by fluctuations in the level, volatility, correlation or relationship
between market prices, rates, indices and/or other factors. These types
of instruments may also suffer from illiquidity in the market or in
a related market.
OTC derivative transactions are subject to unique
risks.
OTC derivative transactions are subject to the risk that, as a result
of mismatches or delays in the timing of cash flows due from or to
counterparties in OTC derivative transactions or related hedging,
trading, collateral or other transactions, we or our counterparty may
not have adequate cash available to fund its current obligations.
We could incur material losses pursuant to OTC derivative transactions
because of inadequacies in or failures of our internal systems and controls
for monitoring and quantifying the risk and contractual obligations
associated with OTC derivative transactions and related transactions
or for detecting human error, systems failure or management failure.
12
Form 10K
OTC derivative transactions may be modified or terminated only by
mutual consent of the original parties and subject to agreement on
individually negotiated terms. Accordingly it may not be possible
to modify, terminate or offset obligations or exposure to the risk
associated with a transaction prior to its scheduled termination date.
We may have difficulty managing our growth.
We have experienced significant growth in our business. Our operating
revenues grew from $448.1 million in fiscal 2012 to $671.0 million
in fiscal 2016.
This growth required, and will continue to require, us to increase our
investment in management personnel, financial and management
systems and controls, and facilities. In the absence of continued revenue
growth, the costs associated with our expected growth would cause
our operating margins to decline from current levels. In addition,
as is common in the financial industry, we are and will continue to
be highly dependent on the effective and reliable operation of our
communications and information systems.
The scope of procedures for assuring compliance with applicable rules
and regulations changes as the size and complexity of our business
increases. In response, we have implemented and continue to revise
formal compliance procedures.
It is possible that we will not be able to manage our growth successfully.
Our inability to do so could have a material adverse effect on our
business, financial condition and operating results.
Our risk management policies and procedures may
leave us exposed to unidentified or unanticipated risk,
which could harm our business.
We have devoted significant resources to develop our risk management
policies and procedures and expect to continue to do so in the
future. However, our risk management policies and procedures may
not be fully effective in mitigating our risk exposure in all market
environments or against all types of risk, including risks that are
unidentified or unanticipated. Our risk management policies and
procedures require, among other things, that we properly record and
verify many thousands of transactions and events each day, and that
we continuously monitor and evaluate the size and nature of our or
our customers’ positions and the associated risks. In light of the high
volume of transactions, it is impossible for us to review and assess
every single transaction or to monitor at every moment in time our
or our customers’ positions and the associated risks.
Our policies and procedures used to identify, monitor and control a
variety of risks, including risks related to human error, customer defaults,
market movements, fraud and money-laundering, are established and
reviewed by the Risk Committee of our Board of Directors. Some of
our methods for managing risk are discretionary by nature and are
based on internally developed controls and observed historical market
behavior, and also involve reliance on standard industry practices. These
methods may not adequately prevent losses, particularly as they relate
to extreme market movements, which may be significantly greater than
historical fluctuations in the market. Our risk management policies
and procedures also may not adequately prevent losses due to technical
errors if our testing and quality control practices are not effective in
preventing software or hardware failures. In addition, we may elect
to adjust our risk management policies and procedures to allow for
an increase in risk tolerance, which could expose us to the risk of
greater losses. Our risk management policies and procedures rely on
a combination of technical and human controls and supervision that
are subject to error and failure. These policies and procedures may not
protect us against all risks or may protect us less than anticipated, in
which case our business, financial condition and results of operations
and cash flows may be materially adversely affected.
We are exposed to the credit risk of our customers and
counterparties and their failure to meet their financial
obligations could adversely affect our business.
We have substantial credit risk in both our securities and commodities
businesses. As a market-maker of OTC and listed securities and a
dealer in fixed income securities, we conduct the majority of our
securities transactions as principal with institutional counterparties.
We clear our principal securities transactions through unaffiliated
clearing brokers. Substantially all of our principal equity and debt
securities are held by these clearing brokers. Our clearing brokers
have the right to charge us for losses that result from a counterparty’s
failure to fulfill its contractual obligations. We borrow securities from,
and lend securities to, other broker-dealers, and may also enter into
agreements to repurchase and agreements to resell securities. A sharp
change in the security market values utilized in these transactions may
result in losses if counterparties to these transactions fail to honor
their commitments.
In our correspondent securities clearing and independent wealth
management businesses, we permit customers to purchase securities on
margin, subject to various regulatory and internal margin requirements.
During periods of significant price declines, the value of collateral
securing the customer’s margin loan may decline below the customers
obligation to us. In the event, the customer is unable to deposit
additional collateral for these margin loans, we may incur credit
losses on these transactions or additional costs in attempting to secure
additional collateral. While introducing broker-dealers and independent
representatives are generally responsible for the credit losses of their
customers, we may incur losses if they do not fulfill their obligations.
As a clearing broker in futures and option transactions, we act on
behalf of our customers for all trades consummated on exchanges.
We must pay initial and variation margin to the exchanges before
we receive the required payments from our customers. Accordingly,
we are responsible for our customers’ obligations with respect to
these transactions, including margin payments, which exposes us to
significant credit risk. Customer positions which represent a significant
percentage of open positions in a given market or concentrations in
illiquid markets may expose us to the risk that we are not able to
liquidate a customer’s position in a manner which does not result in
a deficit in that customers account. A substantial part of our working
capital is at risk if customers default on their obligations to us and
their account balances and security deposits are insufficient to meet
all of their obligations.
PART I
ITEM 1A Risk Factors
We act as a principal for OTC commodity and foreign exchange
derivative transactions, which exposes us to both the credit risk of our
customers and the counterparties with which we offset the customer’s
position. 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. In addition, with OTC transactions, there is a risk that
a counterparty will fail to meet its obligations when due. We would
then be exposed to the risk that a settlement of a transaction which is
due a customer will not be collected from the respective counterparty
with which the transaction was offset. Customers and counterparties
that owe us money, securities or other assets may default on their
obligations to us due to bankruptcy, lack of liquidity, operational
failure or other reasons.
We act as a principal in our physical commodities trading activities
which exposes us to the credit risk of our counterparties and customers
in these activities. Any metals or other physical commodities positions
are held by third party custodians.
Although we have procedures for reviewing credit exposures to specific
customers and counterparties to address present credit concerns, default
risk may arise from events or circumstances that are difficult to detect
or foresee, including rapid changes in securities, commodity and foreign
exchange price levels. Some of our risk management methods depend
upon the evaluation of information regarding markets, customers or
other matters that are publicly available or otherwise accessible by
us. That information may not, in all cases, be accurate, complete,
up-to-date or properly evaluated. In addition, concerns about, or a
default by, one institution could lead to significant liquidity problems,
losses or defaults by other institutions, which in turn could adversely
affect us. We may be materially and adversely affected in the event of
a significant default by our customers and counterparties.
In our securities and commodities businesses we rely on the ability
of our clearing brokers to adequately discharge their obligations on a
timely basis. We also depend on the solvency of our clearing brokers
and custodians. Any failure by a clearing broker to adequately discharge
its obligations on a timely basis, or insolvency of a clearing broker
or custodian, or any event adversely affecting our clearing brokers
or custodians, could have a material adverse effect on our business,
financial condition and operating results.
As a clearing member firm of commodities clearing houses in the
U.S. and abroad, we are also exposed to clearing member credit risk.
Commodities clearing houses require member firms to deposit cash
and/or government securities to a clearing fund. If a clearing member
defaults in its obligations to the clearing house in an amount larger than
its own margin and clearing fund deposits, the shortfall is absorbed
pro rata from the deposits of the other clearing members. Several
clearing houses of which we are members also have the authority
to assess their members for additional funds if the clearing fund is
depleted. A large clearing member default could result in a substantial
cost to us if we are required to pay such assessments.
Form 10K 13
PART I
ITEM 1A Risk Factors
Our net operating revenues may decrease due to
changes in market volume, prices or liquidity.
Declines in the volume of securities, commodities and foreign exchange
transactions and in market liquidity generally may result in lower
revenues from market-making and trading activities. Changes in price
levels of securities and commodities and foreign exchange rates also
may result in reduced trading activity and reduce our revenues from
market-making transactions. Changed price levels also can result in
losses from changes in the fair value of securities and commodities
held in inventory. Sudden sharp changes in fair values of securities
and commodities can result in:
(cid:116) illiquid markets;
(cid:116) fair value losses arising from positions held by us;
(cid:116) the failure of buyers and sellers of securities and commodities to
fulfill their settlement obligations,
(cid:116) redemptions from funds managed in our asset management business
segment and consequent reductions in management fees;
(cid:116) reductions in accrued performance fees in our asset management
business segment; and
(cid:116) increases in claims and litigation.
Any change in market volume, price or liquidity or any other of these
factors could have a material adverse effect on our business, financial
condition and operating results.
Our net operating revenues may decrease due to
changes in customer trading volumes which are
dependent in large part on commodity prices and
commodity price volatility.
Customer trading volumes are largely driven by the degree of volatility—
the magnitude and frequency of fluctuations—in prices of commodities.
Higher volatility increases the need to hedge contractual price risk and
creates opportunities for arbitrage trading. Energy and agricultural
commodities markets periodically experience significant price volatility.
In addition to price volatility, increases in commodity prices generally
lead to increased trading volume. As prices of commodities rise,
especially energy prices, new participants enter the markets to address
their growing risk-management needs or to take advantage of greater
trading opportunities. Sustained periods of stability in the prices of
commodities or generally lower prices could result in lower trading
volumes and, potentially, lower revenues. Lower volatility and lower
volumes could lead to lower customer balances held on deposit,
which in turn may reduce the amount of interest revenue based on
these deposits.
Factors that are particularly likely to affect price volatility and price
levels of commodities include:
(cid:116) supply and demand of commodities;
(cid:116) weather conditions affecting certain commodities;
(cid:116) national and international economic and political conditions;
(cid:116) perceived stability of commodities and financial markets;
(cid:116) the level and volatility of interest rates and inflation; and
(cid:116) financial strength of market participants.
14
Form 10K
Any one or more of these factors may reduce price volatility or price
levels in the markets for commodities trading, which in turn could
reduce trading activity in those markets. Moreover, any reduction in
trading activity could reduce liquidity which in turn could further
discourage existing and potential market participants and thus
accelerate any decline in the level of trading activity in these markets.
Our net operating revenues may be impacted by
diminished market activity due to adverse economic,
political and market conditions.
The amount of our revenues depends in part on the level of activity
in the securities, foreign exchange and commodities markets in which
we conduct business. The level of activity in these markets is directly
affected by numerous national and international factors that are
beyond our control, including:
(cid:116) economic, political and market conditions;
(cid:116) the availability of short-term and long-term funding and capital;
(cid:116) the level and volatility of interest rates;
(cid:116) legislative and regulatory changes; and
(cid:116) currency values and inflation.
Any one or more of these factors may reduce the level of activity in
these markets, which could result in lower revenues from our market-
making and trading activities. Any reduction in revenues or any loss
resulting from these factors could have a material adverse effect on
our business, financial condition and operating results.
We depend on our management team.
Our future success depends, in large part, upon our management
team who possess extensive knowledge and management skills with
respect to securities, commodities and foreign exchange businesses
we operate. The unexpected loss of services of any of our executive
officers could adversely affect our ability to manage our business
effectively or execute our business strategy. Although some of these
officers have employment contracts with us, they are generally not
required to remain with us for a specified period of time.
We depend on our ability to attract and retain key
personnel.
Competition for key personnel and other highly qualified management,
sales, trading, compliance and technical personnel is significant. It
is possible that we will be unable to retain our key personnel and to
attract, assimilate or retain other highly qualified personnel in the
future. The loss of the services of any of our key personnel or the
inability to identify, hire, train and retain other qualified personnel
in the future could have a material adverse effect on our business,
financial condition and operating results.
From time to time, other companies in the financial sector have
experienced losses of sales and trading professionals. The level of
competition to attract these professionals is intense. It is possible
that we will lose professionals due to increased competition or other
factors in the future. The loss of a sales and trading professional,
particularly a senior professional with broad industry expertise, could
have a material adverse effect on our business, financial condition
and operating results.
In the event of employee misconduct or error, our
business may be harmed.
There have been a number of highly publicized cases involving fraud
or other misconduct by employees of financial services firms in recent
years. Employee misconduct or error could subject us to legal liability,
financial losses and regulatory sanctions and could seriously harm our
reputation and negatively affect our business. Misconduct by employees
could include engaging in improper or unauthorized transactions or
activities, failing to properly supervise other employees or improperly
using confidential information. Employee errors, including mistakes
in executing, recording or processing transactions for customers, could
cause us to enter into transactions that customers may disavow and
refuse to settle, which could expose us to the risk of material losses
even if the errors are detected and the transactions are unwound or
reversed. If our customers are not able to settle their transactions on
a timely basis, the time in which employee errors are detected may
be increased and our risk of material loss could be increased. The risk
of employee error or miscommunication may be greater for products
that are new or have non-standardized terms. It is not always possible
to deter employee misconduct or error, and the precautions we take
to detect and prevent this activity may not be effective in all cases.
Internal or third party computer systems failures,
capacity constraints and breaches of security could
increase our operating costs and/or credit losses, decrease
net operating revenues and cause us to lose customers.
We are heavily dependent on the capacity and reliability of the
computer and communications systems supporting our operations,
whether owned and operated internally or by third parties, including
those used for execution and clearance of our customer’s trades
and our market making activities. We receive and process a large
portion of our trade orders through electronic means, such as through
public and private communications networks. These computer and
communications systems and networks are subject to performance
degradation or failure from any number of reasons, including loss of
power, acts of war or terrorism, human error, natural disasters, fire,
sabotage, hardware or software malfunctions or defects, computer
viruses, intentional acts of vandalism, customer error or misuse,
lack of proper maintenance or monitoring and similar events. Our
systems, or those of our third party providers, may fail or operate
slowly, causing one or more of the following:
(cid:116) unanticipated disruptions in service to our customers;
(cid:116) slower response times;
(cid:116) delays in our customers’ trade execution;
(cid:116) failed settlement of trades;
(cid:116) decreased customer satisfaction with our services;
(cid:116) incomplete, untimely or inaccurate accounting, recording, reporting
or processing of trades;
(cid:116) financial losses;
(cid:116) litigation or other customer claims; and
(cid:116) regulatory sanctions.
The occurrence of degradation or failure of the communications
and computer systems on which we rely may lead to financial losses,
litigation or arbitration claims filed by or on behalf of our customers
PART I
ITEM 1A Risk Factors
and regulatory investigations and sanctions, including by the CFTC,
which require that our trade execution and communications systems
be able to handle anticipated present and future peak trading volumes.
Any such degradation or failure could also have a negative effect on
our reputation, which in turn could cause us to lose existing customers
to our competitors or make it more difficult for us to attract new
customers in the future. Further, any financial loss that we suffer as
a result of such degradations or failures could be magnified by price
movements of contracts involved in transactions impacted by the
degradation or failure, and we may be unable to take corrective action
to mitigate any losses we suffer.
We are subject to extensive government regulation.
The securities and commodities futures industries are subject to
extensive regulation under federal, state and foreign laws. In addition,
the SEC, the CFTC, FINRA, MSRB, the NFA, the CME Group and
other self-regulatory organizations, commonly referred to as SROs,
state securities commissions, and foreign regulators require compliance
with their respective rules and regulations. These regulatory bodies
are responsible for safeguarding the integrity of the financial markets
and protecting the interests of participants in those markets.
As participants in various financial markets, we may be subject to
regulation concerning certain aspects of our business, including:
(cid:116) trade practices;
(cid:116) the way we communicate with, and disclose risks to customers;
(cid:116) financial and reporting requirements and practices;
(cid:116) customer identification and anti-money laundering requirements;
(cid:116) capital structure;
(cid:116) record retention; and
(cid:116) the conduct of our directors, officers and employees.
Failure to comply with any of these laws, rules or regulations could result
in adverse consequences. We and certain of our officers and employees
have, in the past, been subject to claims arising from acts that regulators
asserted were in contravention of these laws, rules and regulations.
These claims resulted in the payment of fines and settlements. It is
possible that we and our officers and other employees will be subject
to similar claims in the future. An adverse ruling against us or our
officers and other employees could result in our or our officers and
other employees being required to pay a substantial fine or settlement
and could result in a suspension or revocation of required registrations
or memberships. Such sanctions could have a material adverse effect
on our business, financial condition and operating results.
The regulatory environment in which we operate is subject to change. In
November 2013, the CFTC finalized new rules known as “Enhancing
Customer Protections Rules”. These provisions, among other things,
require enhanced customer protections, risk management programs,
internal monitoring and controls, capital and liquidity standards,
customer disclosures, and auditing and examination programs for
FCMs. These rule changes, additional legislation or regulations,
changes required under the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”) and any new
or revised regulation by the SEC, the CFTC, other U.S. or foreign
governmental regulatory authorities, SROs, MSRB or FINRA could
have a material adverse effect on our business, financial condition
Form 10K 15
PART I
ITEM 1A Risk Factors
and operating results. Changes in the interpretation or enforcement
of existing laws and rules by these governmental authorities, SROs,
MSRB and FINRA could also have a material adverse effect on our
business, financial condition and operating results. Failure to comply
with current or future legislation or regulations that apply to our
operations could subject us to fines, penalties, or material restrictions
on our business in the future.
Additional regulation, changes in existing laws and rules, or changes
in interpretations or enforcement of existing laws and rules often
directly affect financial services firms. We cannot predict what effect
any such changes might have. Our business, financial condition and
operating results may be materially affected by both regulations that
are directly applicable to us and regulations of general application.
Our level of trading and market-making activities can be affected not
only by such legislation or regulations of general applicability, but
also by industry-specific legislation or regulations.
We have incurred significant additional operational
and compliance costs to meet the requirements of recent
legislation and related regulations. This legislation
and the related regulations may significantly affect our
business in the future.
Recent market and economic conditions have led to legislation and
regulation affecting the financial services industry. These changes could
eventually have an effect on our revenue and profitability, limit our
ability to pursue certain business opportunities, impact the value of assets
that we hold, require us to change certain business practices, impose
additional costs on us, and otherwise adversely affect our business.
Accordingly, we cannot provide assurance that new legislation and
regulation will not eventually have an adverse effect on our business,
results of operations, cash flows and financial condition.
The principal legislation is the Dodd-Frank Act which creates a
comprehensive new regulatory regime governing the OTC and
listed derivatives markets and their participants by requiring, among
other things: centralized clearing of standardized derivatives (with
certain stated exceptions); the trading of clearable derivatives on swap
execution facilities or exchanges; and registration and comprehensive
regulation of new categories of market participants as “swap dealers”
and swap “introducing brokers.” The Dodd-Frank Act grants regulatory
authorities, such as the CFTC and the SEC, broad rule-making
authority to implement various provisions of the Dodd-Frank Act,
including comprehensive regulation of the OTC derivatives market.
These regulators will continue to exercise, their expanded rule-making
powers in ways that will affect how we conduct our business.
We have incurred and expect to continue to incur significant costs to
comply with these regulatory requirements. We have also incurred and
expect to continue to incur significant costs related to the development,
operation and enhancement of our technology relating to trade
execution, trade reporting, surveillance, record keeping and data
reporting obligations, compliance and back-up and disaster recovery
plans designed to meet the requirements of the regulators.
Changes that will be required in our OTC and clearing businesses may
adversely impact our results of operations. Following the implementation
of all of the rules contemplated by the Dodd-Frank Act, the markets
for cleared and non-cleared swaps may be less robust, there may be less
volume and liquidity in these markets and there may be less demand
16
Form 10K
for our services. Certain banks and other institutions will be limited
in their conduct of proprietary trading and will be further limited or
prohibited from trading in certain derivatives. The new rules, including
the restrictions on the trading activities for certain banks and large
institutions, could impact transaction volumes and liquidity in these
markets and our revenues would be adversely impacted as a result.
Changes that will be required in our OTC and clearing businesses
may also adversely impact our cash flows and financial condition.
Registration will impose substantial new requirements upon
these entities including, among other things, capital and margin
requirements, business conduct standards and record keeping and
data reporting obligations. Increased regulatory oversight could also
impose administrative burdens on us related to, among other things,
responding to regulatory examinations or investigations. Effective
September 2016, CFTC margin rules came into effect, imposing new
requirements to exchange initial and variation margin, depending
upon aggregate daily notional transactions outstanding, with an
implementation period ending in 2020. CFTC Capital rules have
not been finalized and therefore it is too early to predict with any
degree of certainty how we will be affected.
The EMIR is the European regulations on OTC derivatives, central
counterparties and trade repositories. The EMIR has been implemented
across the European Economic Area member states by the ESMA. The
EMIR has imposed new requirements on our European operations,
including (a) reporting derivatives to a trade repository; (b) putting
in place certain risk management procedures for OTC derivative
transactions that are not cleared; (c) changes to our clearing account
models and increased central counterparty margin requirements.
Reporting requirements came into effect in February 2014 and most risk
mitigation procedures were set at the end of 2013. Implementation of
collateral obligations applicable to non-cleared OTC transactions will
begin to come into force in 2017. ESMA is continuing to evaluate and
set clearing obligations for certain OTC derivatives. INTL FCStone
Ltd complies with the enacted provisions and will do so when pending
EMIR provisions are finalized as relevant to its activities.
In addition to the EMIR, the FCA will be enforcing additional
European Union issued regulations such as MIFID II, for which
implementation is scheduled for 2018, and MIFIR. Principal areas
of impact related to this directive will involve oversight of OTFs for
trading OTC non-equity products, customer type re-assessment,
investor protection, enhanced conflict of interest and execution policies
and extended transaction reporting requirements.
The increased costs associated with compliance, and the changes that
will be required in our OTC and clearing businesses, may adversely
impact our results of operations, cash flows, and/or financial condition.
We are subject to net capital requirements.
The SEC, FINRA and the CFTC require our dually registered broker-
dealer/FCM subsidiary, INTL FCStone Financial to maintain specific
levels of net capital. Failure to maintain the required net capital may
subject this subsidiary to suspension or revocation of registration by
the SEC, and suspension or expulsion by FINRA and other regulatory
bodies and may subject this subsidiary to limitations on its activities,
including suspension or revocation of its registration by the CFTC
and suspension or expulsion by the NFA and various exchanges of
which it is a member.
Sterne, Agee & Leach, Inc., Sterne Agee Clearing, Inc. and Sterne
Agee Financial Services, Inc. are subject to the SEC Uniform Net
Capital Rule 15c3-1 under the Securities Exchange Act of 1934.
The FCA requires our U.K. subsidiary, INTL FCStone Ltd to maintain
specific levels of net capital. Failure to maintain the required net
capital may subject INTL FCStone Ltd to suspension or revocation
of its registration by the FCA.
Ultimately, any failure to meet capital requirements by our dually
registered broker-dealer/FCM subsidiary, our broker-dealer subsidiaries
or our U.K. subsidiary could result in liquidation of the subsidiary.
Failure to comply with the net capital rules could have material and
adverse consequences such as limiting their operations, or restricting
us from withdrawing capital from these subsidiaries.
In addition, a change in the net capital rules, the imposition of new
rules or any unusually large charge against net capital could limit
our operations that require the intensive use of capital. They could
also restrict our ability to withdraw capital from these subsidiaries.
Any limitation on our ability to withdraw capital could limit our
ability to pay cash dividends, repay debt and repurchase shares of
our outstanding stock. A significant operating loss or any unusually
large charge against net capital could adversely affect our ability
to expand or even maintain our present levels of business, which
could have an adverse effect on our business, financial condition
and operating results.
We are subject to margin funding requirements on
short notice.
Our business involves establishment and carrying of substantial
open positions for customers on futures exchanges and in the OTC
derivatives markets. We are required to post and maintain margin
or credit support for these positions. Although we collect margin or
other deposits from our customers for these positions, significant
adverse price movements can occur which will require us to post
margin or other deposits on short notice, whether or not we are able
to collect additional margin or credit support from our customers.
We maintain borrowing facilities for the purpose of funding margin
and credit support and have systems to endeavor to collect margin
and other deposits from customers on a same-day basis, there can
be no assurance that these facilities and systems will be adequate to
eliminate the risk of margin calls in the event of severe adverse price
movements affecting open positions of our customers. Generally, if
a customer is unable to meet its margin call, we promptly liquidate
the customer’s account. However, there can be no assurance that in
each case the liquidation of the account will not result in a loss to us
or that liquidation will be feasible, given market conditions, size of
the account and tenor of the positions.
Low short-term interest rates negatively impact our
profitability.
The level of prevailing short-term interest rates affects our profitability
because we derive a portion of our revenue from interest earned from
the investment of funds deposited with us by our customers. As of
September 30, 2016, we had $2.2 billion in customer segregated assets,
the majority of which are generally invested in U.S. Treasury securities
and money market mutual funds. In addition, in our correspondent
securities clearing business, we earn interest on customer cash held
PART I
ITEM 1A Risk Factors
in money market mutual funds and FDIC sweep accounts. Our
financial performance generally benefits from rising interest rates.
Higher interest rates increase the amount of interest income earned
from these customer deposits. If short-term interest rates remain low
or continue to fall, our revenues derived from interest will decline
which would negatively impact our profitability.
Short-term interest rates are highly sensitive to factors that are beyond
our control, including general economic conditions and the policies
of various governmental and regulatory authorities. In particular,
decreases in the federal funds rate by the Board of Governors of the
Federal Reserve System usually lead to decreasing interest rates in the
U.S., which generally lead to a decrease in short-term interest rates.
We may issue additional equity securities.
The issuance of additional common stock or securities convertible into
our common stock could result in dilution of the ownership interest in
us held by existing stockholders. We are authorized to issue, without
stockholder approval, a significant number of additional shares of
our common stock and securities convertible into either common
stock or preferred stock.
We are subject to risks relating to litigation and
potential securities and commodities law liability.
We face significant legal risks in our businesses, including risks
related to currently pending litigation involving the Company. Many
aspects of our business involve substantial risks of liability, including
liability under federal and state securities and commodities laws, other
federal, state and foreign laws and court decisions, as well as rules and
regulations promulgated by the SEC, the CFTC, FINRA, MSRB, the
NFA, the FCA and other regulatory bodies. Substantial legal liability
or significant regulatory action against us and our subsidiaries could
have adverse financial effects or cause significant reputational harm
to us, which in turn could seriously harm our business prospects.
Any such litigation could lead to more volatility of our stock price.
For a further discussion of litigation risks, see Item 3—Legal
Proceedings below and Note 11 - Commitments and Contingencies
in the Consolidated Financial Statements.
We are subject to intense competition.
We derive a significant portion of our revenues from market-making
and trading activities involving securities and commodities. The
market for these services, particularly market-making services through
electronic communications gateways, is rapidly evolving and intensely
competitive. We expect competition to continue and intensify in the
future. We compete primarily with wholesale, national, and regional
broker-dealers and FCMs, as well as electronic communications
networks. We compete primarily on the basis of our expertise and
quality of service.
We also derive a significant portion of our revenues from commodities
risk management services. The commodity risk management industry
is very competitive and we expect competition to continue to intensify
in the future. Our primary competitors in this industry include both
large, diversified financial institutions and commodity-oriented
businesses, smaller firms that focus on specific products or regional
markets and independent FCMs.
Form 10K 17
PART I
ITEM 1A Risk Factors
A number of our competitors have significantly greater financial,
technical, marketing and other resources than we have. Some of
them may:
(cid:116) offer alternative forms of financial intermediation as a result of
superior technology and greater availability of information;
(cid:116) offer a wider range of services and products than we offer;
(cid:116) be larger and better capitalized;
(cid:116) have greater name recognition; and
(cid:116) have more extensive customer bases.
These competitors may be able to respond more quickly to new or
evolving opportunities and customer requirements. They may also
be able to undertake more extensive promotional activities and offer
more attractive terms to customers. Recent advances in computing
and communications technology are substantially changing the means
by which market-making services are delivered, including more direct
access on-line to a wide variety of services and information. This has
created demand for more sophisticated levels of customer service.
Providing these services may entail considerable cost without an
offsetting increase in revenues. In addition, current and potential
competitors have established or may establish cooperative relationships
or may consolidate to enhance their services and products. New
competitors or alliances among competitors may emerge and they
may acquire significant market share.
We cannot assure you that we will be able to compete effectively with
current or future competitors or that the competitive pressures we face
will not have an adverse effect on our business, financial condition
and operating results.
Our business could be adversely affected if we are unable
to retain our existing customers or attract new customers.
The success of our business depends, in part, on our ability to maintain
and increase our customer base. Customers in our market are sensitive
to, among other things, the costs of using our services, the quality of
the services we offer, the speed and reliability of order execution and
the breadth of our service offerings and the products and markets
to which we offer access. We may not be able to continue to offer
the pricing, service, speed and reliability of order execution or the
service, product and market breadth that customers desire. In addition,
once our risk management consulting customers have become better
educated with regard to sources of risk and the tools available to
facilitate the management of this risk and we have provided them with
recommended hedging strategies, they may no longer continue paying
monthly fees for these services. Furthermore, our existing customers,
including IRMP customers, are not generally obligated to use our
services and can switch providers of clearing and execution services
or decrease their trading activity conducted through us at any time.
As a result, we may fail to retain existing customers or be unable to
attract new customers. Our failure to maintain or attract customers
could have an adverse effect on our business, financial condition and
operating results.
18
Form 10K
We rely on relationships with introducing brokers for
obtaining some of our customers.
The failure to maintain these relationships could adversely affect our
business. We have relationships with introducing brokers who assist
us in establishing new customer relationships and provide marketing
and customer service functions for some of our customers. These
introducing brokers receive compensation for introducing customers
to us. Many of our relationships with introducing brokers are non-
exclusive or may be canceled on relatively short notice. In addition,
our introducing brokers have no obligation to provide new customer
relationships or minimum levels of transaction volume. Our failure
to maintain these relationships with these introducing brokers or
the failure of these introducing brokers to establish and maintain
customer relationships would result in a loss of revenues, which could
adversely affect our business.
Certain provisions of Delaware law and our charter
may adversely affect the rights of holders of our common
stock and make a takeover of us more difficult.
We are organized under the laws of the State of Delaware. Certain
provisions of Delaware law may have the effect of delaying or preventing
a change in control. In addition, certain provisions of our certificate
of incorporation may have anti-takeover effects and may delay, defer
or prevent a takeover attempt that a stockholder might consider in its
best interest. Our certificate of incorporation authorizes the board to
determine the terms of our unissued series of preferred stock and to
fix the number of shares of any series of preferred stock without any
vote or action by our stockholders. As a result, the board can authorize
and issue shares of preferred stock with voting or conversion rights
that could adversely affect the voting or other rights of holders of our
common stock. In addition, the issuance of preferred stock may have
the effect of delaying or preventing a change of control, because the
rights given to the holders of a series of preferred stock may prohibit
a merger, reorganization, sale, liquidation or other extraordinary
corporate transaction.
Our stock price is subject to volatility.
The market price of our common stock has been and can be expected
to be subject to fluctuation as a result of a variety of factors, many of
which are beyond our control, including:
(cid:116) actual or anticipated variations in our results of operations;
(cid:116) announcements of new products by us or our competitors;
(cid:116) technological innovations by us or our competitors;
(cid:116) changes in earnings estimates or buy/sell recommendations by
financial analysts;
(cid:116) the operating and stock price performance of other companies;
(cid:116) general market conditions or conditions specific in specific markets;
(cid:116) conditions or trends affecting our industry or the economy generally;
(cid:116) announcements relating to strategic relationships or acquisitions; and
(cid:116) risk factors and uncertainties set forth elsewhere in this Form 10-K.
Because of this volatility, we may fail to meet the expectations of our
stockholders or of securities analysts, and the trading prices of our
common stock could decline as a result. In addition, any negative
change in the public perception of the securities industry could depress
our stock price regardless of our operating results.
Future sales by existing stockholders could depress the market price
of our common stock. If our stockholders sell substantial amounts
of our common stock in the public market, the market price of our
common stock could fall. Such sales also might make it more difficult
for us to sell equity securities in the future at a time and price that
we deem appropriate.
Our international operations involve special challenges
that we may not be able to meet, which could adversely
affect our financial results.
We engage in a significant amount of business with customers in the
international markets. Certain additional risks are inherent in doing
business in international markets, particularly in a regulated industry.
These risks include:
(cid:116) the inability to manage and coordinate the various regulatory
requirements of multiple jurisdictions that are constantly evolving
and subject to unexpected change;
(cid:116) tariffs and other trade barriers;
(cid:116) difficulties in recruiting and retaining personnel, and managing
international operations;
(cid:116) difficulties of debt collection in foreign jurisdictions;
(cid:116) potentially adverse tax consequences; and
(cid:116) reduced protection for intellectual property rights.
Our operations are subject to the political, legal and
economic risks associated with politically unstable and
less developed regions of the world, including the risk
of war and other international conflicts and actions by
governmental authorities, insurgent groups, terrorists
and others.
Specifically, we conduct business in countries whose currencies may
be unstable. Future instability in such currencies or the imposition
of governmental or regulatory restrictions on such currencies could
impede our foreign business and our ability to collect on collateral
held in such currencies.
Our operations are required to comply with the laws
and regulations of foreign governmental and regulatory
authorities of each country in which we conduct
business, and if we violate these regulations, we may be
subject to significant penalties.
The financial services industry is subject to extensive laws, rules and
regulations in every country in which we operate. Firms that engage
in commodity futures brokerage, securities and derivatives trading and
PART I
ITEM 1A Risk Factors
investment banking must comply with the laws, rules and regulations
imposed by the governing country, state, regulatory bodies and self-
regulatory bodies with governing authority over such activities. Such
laws, rules and regulations cover all aspects of the financial services
business, including, but not limited to, sales and trading methods, trade
practices, use and safekeeping of customers’ funds and securities, capital
structure, anti-money laundering and anti-bribery and corruption efforts,
recordkeeping and the conduct of directors, officers and employees.
Each of our regulators supervises our business activities to monitor
compliance with such laws, rules and regulations in the relevant
jurisdiction. In addition, if there are instances in which our regulators
question our compliance with laws, rules, and regulations, they may
investigate the facts and circumstances to determine whether we have
complied. At any moment in time, we may be subject to one or more
such investigation or similar reviews. At this time, we believe all such
investigations, and similar reviews are insignificant in scope and immaterial
to us. However, there can be no assurance that, in the future, the operations
of our businesses will not violate such laws, rules, and regulations and
that related investigations and similar reviews could result in adverse
regulatory requirements, regulatory enforcement actions and/or fines.
Additional legislation, changes in rules, changes in the interpretation or
enforcement of existing laws and rules, or the entering into businesses
that subject us to new rules and regulations may directly affect our
business, results of operations and financial condition.
We are reviewing the regulatory changes that will be introduced by
MIFID II and MIFIR to assess the impact this legislation is likely to
have on our U.K. business which is expected to be implemented in 2017.
Among other things, the legislation will impose additional transaction
and position reporting requirements, disclosure obligations, as well as
requiring certain over-the-counter derivatives to be traded on OTFs.
The U.K.’s proposed withdrawal from the European
Union could have an adverse effect on our business and
financial results.
On June 23, 2016, a referendum was held in the U.K. to determine
whether the country should remain a member of the European
Union, with voters approving withdrawal from the E.U. (commonly
referred to as “Brexit”). Following the results of this referendum, the
U.K. government is expected to begin discussions with the E.U. on
the terms and conditions of the proposed withdrawal from the E.U.
Current uncertainty over whether the U.K. will ultimately leave the
E.U., as well as the final outcome of the negotiations between the
U.K. and E.U., could have an adverse effect on our business and
financial results. The long-term effects of Brexit will depend on the
terms negotiated between the U.K. and the E.U., which may take
years to complete. Our operations in the U.K. as well as our global
operations could be impacted by the global economic uncertainty
caused by Brexit.
If we are unable to manage any of these risks effectively, our business
could be adversely affected.
Form 10K 19
PART I
ITEM 1B Unresolved Staff Comments
ITEM 1B Unresolved Staff Comments
We have received no written comments regarding our periodic or current reports from the staff of the SEC that were issued 180 days or more
preceding the end of our fiscal year 2016 that remain unresolved.
ITEM 2 Properties
The Company maintains offices in New York, New York; Winter
Park, Florida; West Des Moines, Iowa; Chicago, Illinois; Kansas
City, Missouri; St. Louis, Missouri; Bloomfield, Nebraska; Omaha,
Nebraska; Minneapolis, Minnesota; Bloomington, Illinois; Miami,
Florida; Indianapolis, Indiana; Bowling Green, Ohio; Nashville,
Tennessee; Lawrence, Kansas; Mobile, Alabama; Boca Raton, Florida;
Twin Falls, Idaho; Birmingham, Alabama; Charlotte, North Carolina;
Youngstown, Ohio; Mexico City, Mexico; Buenos Aires, Argentina;
Campinas, Brazil; Sao Paulo, Brazil; Maringa, Brazil; Passo Fundo,
Brazil; Goiania, Brazil; Recife, Brazil; Sorriso, Brazil; Patrocinio, Brazil;
Asuncion and Ciudad del Este, Paraguay; Bogota, Colombia; London,
United Kingdom; Dublin, Ireland; Dubai, United Arab Emirates;
Singapore, Singapore; Beijing and Shanghai, China; Hong Kong,
and Sydney, Australia. All of our offices and other principal business
properties are leased, except for the space in Buenos Aires, which we
own. We believe that our leased and owned facilities are adequate
to meet anticipated requirements for our current lines of business.
ITEM 3 Legal Proceedings
In addition to the matters discussed below, from time to time and
in the ordinary course of business, we are involved in various legal
actions and proceedings, including tort claims, contractual disputes,
employment matters, workers’ compensation claims and collections.
We carry insurance that provides protection against certain types of
claims, up to the policy limits of our insurance. In the opinion of
management, possible exposure from loss contingencies in excess of
the amounts accrued, and in addition to the possible losses discussed
below, is not material to our earnings, financial position or liquidity.
The following is a summary of a significant legal matter.
Sentinel Litigation
Prior to the July 1, 2015 merger into INTL FCStone Financial, our
subsidiary, FCStone, LLC, had a portion of its excess segregated funds
invested with Sentinel Management Group Inc. (“Sentinel”), a registered
futures commission merchant (“FCM”) and an Illinois-based money
manager that provided cash management services to other FCMs.
In August 2007, Sentinel halted redemptions to customers and sold
certain of the assets it managed to an unaffiliated third party at a
significant discount. On August 17, 2007, subsequent to Sentinel’s sale
of certain assets, Sentinel filed for bankruptcy protection. In aggregate,
$15.5 million of FCStone, LLC’s $21.9 million in invested funds
were returned to it before and after Sentinel’s bankruptcy petition.
In August 2008, the bankruptcy trustee of Sentinel filed adversary
proceedings against FCStone, LLC, and a number of other FCMs
in the Bankruptcy Court for the Northern District of Illinois. The
case was subsequently reassigned to the U.S. District Court, for the
Northern District of Illinois. In the complaint, the trustee sought
avoidance of alleged transfers or withdrawals of funds received by
20
Form 10K
FCStone, LLC and other FCMs within 90 days prior to the filing of
the Sentinel bankruptcy petition, as well as avoidance of post-petition
distributions and disallowance of the proof of claim filed by FCStone,
LLC. The trustee sought recovery of pre- and post-petition transfers
totaling approximately $15.5 million.
The trial of this matter took place, as a test case, during October
2012. The trial court entered a judgment against FCStone, LLC on
January 4, 2013. On January 17, 2013, the trial court entered an
agreed order, staying execution and enforcement, pending an appeal
of the judgment. On March 19, 2014, the appeal court ruled in
favor of FCStone, LLC. In April 2014, the trustee filed a petition
for rehearing of the appeal. In May 2014, the U.S. Court of Appeals
for the Seventh Circuit denied the petition. The trustee did not file
a writ for certiorari with the U.S. Supreme Court during the time
allotted to do so.
On February 10, 2015, based on a new theory, the trustee filed a
motion for judgment against FCStone, LLC in the U.S. District
Court, for the Northern District of Illinois, seeking to claw back the
post-petition transfer of $14.5 million and to recover the funds held
in reserve in the name of FCStone, LLC. FCStone, LLC filed its
opposition brief and an associated motion for judgment on March
17, 2015. The trustee filed its reply briefs on April 7, 2015 and we
filed our reply briefs on April 22, 2015.
On March 28, 2016, the U.S. District Court for the Northern District
of Illinois entered an order in favor of FCStone, LLC (now INTL
FCStone Financial Inc.) and against the trustee on the trustee’s post-
petition claim, in light of the Seventh Circuit’s opinion. The same
court ruled against INTL FCStone Financial and in favor of the
trustee with respect to the funds held in reserve accounts.
On April 25, 2016, INTL FCStone Financial filed a notice of appeal
to the U.S. Court of Appeals for the Seventh Circuit relating to
the portion of the final judgment dated March 28, 2016 of the
district court and INTL FCStone Financial’s claim to funds in reserve
accounts. On April 26, 2016, the trustee filed its notice of appeal
from the March 28, 2016 final judgment of the district court. On
April 27, 2016, the court consolidated the two appeals and directed
the trustee to file an opening brief. On June 27, 2016 the trustee
filed his appellate brief. On August 31, 2016, the Futures Industry
Association, Inc. filed an amicus curiae brief in support of INTL
FCStone Financial’s cross-appeal.
PART I
ITEM 4 Mine Safety Disclosures
We have determined that losses related to the trustee’s appeal are
neither probable nor reasonably possible.
Our assessments are based on estimates and assumptions that
have been deemed reasonable by management, but that may later
prove to be incomplete or inaccurate, and unanticipated events
and circumstances may occur that might cause us to change those
estimates and assumptions.
ITEM 4 Mine Safety Disclosures
Not applicable.
Form 10K 21
PART II
ITEM 5 Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock is listed on The NASDAQ Stock Market LLC (“NASDAQ”) under the symbol ‘INTL’. Our common stock trades on
the NASDAQ Global Select Market. As of September 30, 2016, there were approximately 325 registered holders of record of our common
stock. The high and low sales prices per share of our common stock for each full quarterly period during fiscal 2016 and 2015 were as follows:
Price Range
High
Low
$
$
$
$
$
$
$
$
39.48 $
28.64 $
32.67 $
36.02 $
35.22 $
37.15 $
30.44 $
20.70 $
26.38
25.17
24.87
25.15
24.50
29.74
19.25
16.96
Value over 5 years of $100 invested on September 30, 2011 in each
of the company's stock ("INTL"), S&P 500 Index and NYSE/Arca Securities Broker/Dealer Index
2016:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2015:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
250
200
150
100
50
0
2011
INTL
2012
2013
2014
2015
2016
S&P 500 Index
NYSE/Arca Securities Broker/Dealer Index
We have never declared any cash dividends on our common stock, and do not currently have any plans to pay dividends on our common
stock. The payment of cash dividends in the future is subject to the discretion of the Board of Directors and will depend on our earnings,
financial condition, capital requirements, contractual restrictions and other relevant factors. Our credit agreements currently prohibit the
payment of cash dividends by us.
22
Form 10K
On August 18, 2016, our Board of Directors authorized for fiscal 2017, the repurchase of up to 1.0 million shares of our outstanding common
stock from time to time in open market purchases and private transactions, commencing on October 1, 2016 and ending on September 30,
2017, subject to the discretion of the senior management team to implement our stock repurchase plan, and subject to market conditions
and as permitted by securities laws and other legal, regulatory and contractual requirements and covenants.
Our common stock repurchase program activity for the three months ended September 30, 2016 was as follows:
PART II
ITEM 6 Selected Financial Data
Total Number
of Shares
Purchased
Total Number of Shares
Purchased as Part of Publicly
Announced Program
Maximum Number of Shares
Remaining to be Purchased
Under the Program(1)
Period
July 1, 2016 to July 31, 2016
August 1, 2016 to August 31, 2016
September 1, 2016 to September 30, 2016
Total
(1) The maximum number of shares remaining to be purchased under the program was reestablished to 1.0 million shares effective October 1, 2016.
— $
—
—
— $
—
—
—
—
Average Price
Paid per Share
—
—
—
—
249,796
249,796
249,796
Information relating to compensation plans under which our equity securities are authorized for issuance is set forth in Part III, Item 12 of our
Annual Report on Form 10-K.
ITEM 6 Selected Financial Data
The following selected financial and operating data are derived from our consolidated financial statements and should be read in conjunction with
Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in Item 7 and our Consolidated Financial
Statements included in Item 8.
SELECTED SUMMARY FINANCIAL INFORMATION
(in millions, except share and per share amounts)
Revenues:
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting and management fees
Interest income
Other income
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Compensation and other expenses:
Compensation and benefits
Communication and data services
Occupancy and equipment rental
Professional fees
Travel and business development
Depreciation and amortization
Bad debts and impairments
Other
Total compensation and other expenses
Gain on acquisition
Income from continuing operations, before tax
Income tax expense
Net income from continuing operations
(Loss) income from discontinued operations, net of tax
Net income
Add: Net loss attributable to noncontrolling interests
Net income attributable to INTL FCStone Inc. common
stockholders
2016
2015
2014
2013
2012
Year Ended September 30,
$
14,112.0
321.2
224.3
42.0
55.2
0.2
14,754.9
14,083.9
671.0
129.9
68.9
28.3
443.9
$
34,089.9
328.6
192.5
42.5
39.4
0.3
34,693.2
34,068.9
624.3
122.7
52.7
17.1
431.8
$
$
33,546.4
244.5
180.7
42.1
8.0
0.7
34,022.4
33,531.5
490.9
108.5
49.9
10.5
322.0
$
42,031.2
244.0
173.3
35.1
8.9
0.9
42,493.4
42,025.2
468.2
110.1
40.5
7.9
309.7
66,249.4
246.8
161.0
27.9
8.0
0.3
66,693.4
66,245.3
448.1
105.3
31.0
5.6
306.2
263.9
32.7
13.3
14.0
11.5
8.2
4.4
29.4
377.4
6.2
72.7
18.0
54.7
—
54.7
—
251.1
28.1
13.5
12.5
10.5
7.2
7.3
23.5
353.7
—
78.1
22.4
55.7
—
55.7
—
201.9
25.8
12.3
14.9
9.9
7.3
5.5
18.4
296.0
—
26.0
6.4
19.6
(0.3)
19.3
—
198.7
23.1
12.0
12.4
10.4
8.0
0.8
23.1
288.5
—
21.2
2.6
18.6
0.7
19.3
—
197.2
22.4
11.0
12.6
10.4
7.2
1.5
21.4
283.7
—
22.5
5.5
17.0
(4.3)
12.7
0.1
$
54.7
$
55.7
$
19.3
$
19.3
$
12.8
Form 10K 23
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
(in millions, except share and per share amounts)
Earnings per share:
Basic
Diluted
Number of shares:
Basic
Diluted
Selected Balance Sheet Information:
Total assets
Lenders under loans
Senior unsecured notes
Stockholders’ equity
Other Data:
2016
2015
2014
2013
2012
Year Ended September 30,
$
$
$
$
$
$
2.94
2.90
18,410,561
18,625,372
5,951.3
182.8
45.5
433.8
$
$
$
$
$
$
2.94
2.87
18,525,374
18,932,235
5,070.0
41.6
45.5
397.1
$
$
$
$
$
$
1.01
0.98
18,528,302
19,132,302
3,039.7
22.5
45.5
345.4
$
$
$
$
$
$
1.01
0.97
$
$
0.67
0.64
18,443,233
19,068,497
18,282,939
19,156,899
2,848.0
61.0
45.5
335.4
$
$
$
$
2,953.0
218.2
—
313.2
13.2%
15.0%
5.8%
5.7%
5.6%
Return on average stockholders’ equity
(from continuing operations)(a)
EBITDA(b) (in millions)
Employees, end of period
Compensation and benefits as a percentage of operating revenues
35.3
1,074
44.0%
(a) For all periods presented, the return on average stockholders’ equity (from continuing operations) excludes the effects of discontinued operations and net loss attributable to
102.4
1,231
40.2 %
43.8
1,141
41.1%
109.2
1,464
37.1
1,094
42.4%
39.3%
$
$
$
$
$
noncontrolling interests, if any.
(b) See “Non-GAAP Financial Measure” below.
Non-GAAP Financial Measure
EBITDA consists of net income from continuing operations before
interest expense, income tax expense and depreciation and amortization.
We have included EBITDA in our Form 10-K because we use it as
an important supplemental measure of our performance and believe
that it is frequently used by securities analysts, investors and other
interested persons in the evaluation of companies in our industry,
some of which present EBITDA when reporting their financial results.
EBITDA is a financial measure that is not recognized by U.S. GAAP,
and should not be considered as an alternative to operating revenues,
net operating revenues, net income from continuing operations, net
income or stockholders’ equity calculated under U.S. GAAP or as an
alternative to any other measures of performance derived in accordance
with U.S. GAAP. The following table reconciles EBITDA with our
net income from continuing operations.
(in millions)
Net income from continuing operations
Plus: interest expense
Plus: depreciation and amortization
Plus: income taxes
EBITDA
Year Ended September 30,
2016
2015
2014
2013
2012
$
$
54.7
28.3
8.2
18.0
109.2
$
$
55.7
17.1
7.2
22.4
102.4
$
$
19.6
10.5
7.3
6.4
43.8
$
$
18.6 $
7.9
8.0
2.6
37.1 $
17.0
5.6
7.2
5.5
35.3
ITEM 7 Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion should be read together with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this
Annual Report on Form 10-K. Certain statements in “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” are forward-looking statements that involve known and
unknown risks and uncertainties, many of which are beyond our
control. Words such as “may”, “will”, “should”, “would”, “anticipates”,
“expects”, “intends”, “plans”, “believes”, “seeks”, “estimates” and
similar expressions identify such forward-looking statements. The
forward-looking statements contained herein are based on current
expectations and entail various risks and uncertainties that could cause
actual results to differ materially from those expressed in such forward-
looking statements. Factors that might cause such a difference include,
among other things, those set forth under “Risk Factors” and those
appearing elsewhere in this Form 10-K. Readers are cautioned not
to place undue reliance on these forward-looking statements, which
reflect management’s analysis only as of the date hereof. We assume
no obligation to update these forward-looking statements to reflect
actual results or changes in factors or assumptions affecting forward-
looking statements. Readers are cautioned that any forward-looking
statements are not guarantees of future performance.
24
Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
INTL FCStone Inc. is a diversified global financial services organization
providing execution, risk management and advisory services, market
intelligence, and clearing services across assets classes and markets
around the world. We help our customers access market liquidity,
maximize profits and manage risk. We are a leader in the development
of specialized financial services in commodities, securities, global
payments, foreign exchange and other markets. Our revenues are
derived primarily from financial products and advisory services that
fulfill our customers’ real needs and provide bottom-line benefits
to their businesses. We create added value for our customers by
providing access to global financial markets using our industry and
financial expertise, deep partner and network relationships, insight
and guidance, and integrity and transparency. Our customer-first
approach differentiates us from large banking institutions, engenders
trust, and has enabled us to establish leadership positions in a number
of complex fields in financial markets around the world.
Our leadership positions span markets such as commodity risk
management advisory services; global payments; market-making in
international equities and other securities; fixed income; correspondent
securities clearing and independent wealth management; physical
trading and hedging of precious metals and select other commodities;
execution of listed futures and options on futures contracts on all
major commodity exchanges and foreign currency trading, among
others. These businesses are supported by our global infrastructure of
regulated operating subsidiaries, advanced technology platform and
team of more than 1,400 employees. We currently serve more than
20,000 predominantly wholesale organizations, located in more than
130 countries. Our recent acquisition of the Sterne Agee correspondent
clearing and independent wealth management businesses added
approximately 50 correspondent clearing relationships with more than
120,000 accounts of which 65,000 are related to the independent
wealth management business acquired.
Our customers include producers, processors and end-users of nearly
all widely traded physical commodities; commercial counterparties
who are end-users of our products and services; governmental and non-
governmental organizations; and commercial banks, asset managers,
introducing broker-dealers, insurance companies, brokers, institutional
investors and major investment banks. We believe our customers
value us for our focus on their needs, our expertise and flexibility, our
global reach, our ability to provide access to hard-to-reach markets
and opportunities, and our status as a well-capitalized and regulatory-
compliant organization.
We believe we are well positioned to capitalize on key trends impacting
the financial services sector. Among others, these trends include the
impact of increased regulation on banking institutions and other
financial services providers; increased consolidation, especially of
smaller sub-scale financial services providers and independent securities
clearing firms; the growing importance and complexity of conducting
secure cross-border transactions; and the demand among financial
institutions to transact with well-capitalized counterparties.
We focus on mitigating exposure to market risk, ensuring adequate
liquidity to maintain daily operations and making non-interest
expenses variable, to the greatest extent possible. We report our
operating segments based on services provided to customers. Our
business activities are managed as operating segments and organized
into reportable segments consisting of Commercial Hedging, Global
Payments, Securities, Physical Commodities, and Clearing and
Execution Services (“CES”). See Segment Information for a listing
of our operating segment components.
Recent Events Affecting the Financial Services Industry
The Dodd-Frank Act created a comprehensive new regulatory regime
governing the OTC and listed derivatives markets. Most of the rules
related to this regime have came into effect, however some important
rules, such as those setting capital and margin requirements, have not
been finalized or fully implemented. Effective September 2016, CFTC
margin rules came into effect, imposing new requirements to exchange
initial and variation margin, depending upon aggregate daily notional
transactions outstanding, with an implementation period ending in
2020. CFTC capital rules have not been finalized and therefore it
is too early to predict with any degree of certainty how we will be
affected. We will continue to monitor all applicable developments in
the ongoing implementation of the Dodd-Frank Act. The legislation
and implementing regulations affect not only us, but also our customers
and counterparties.
The European Markets Infrastructure Regulation (“EMIR”) is the
European regulations on OTC derivatives, central counterparties
and trade repositories. The EMIR has been implemented across the
European Economic Area member states by the European Securities and
Markets Authority (“ESMA”). Implementation of collateral obligations
applicable to non-cleared OTC transactions will begin to come into force
in 2017. ESMA is continuing to evaluate and set clearing obligations
for certain OTC derivatives. We will continue to monitor all applicable
developments in the ongoing implementation of EMIR.
In addition to the EMIR, the FCA will be enforcing additional European
Union issued regulations such as the Markets in Financial Instruments
Directive II (“MIFID II”), for which implementation is scheduled for
2018, and the Markets in Financial Instruments Regulation (“MIFIR”).
Principal areas of impact related to this directive will involve oversight
of organized trade facilities (“OTF’s”) for trading OTC non-equity
products, customer type re-assessment, investor protection, enhanced
conflict of interest and execution policies and extended transaction
reporting requirements. We will continue to monitor all applicable
developments in the ongoing implementation of MIFID II.
Form 10K 25
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Fiscal 2016 Highlights
(cid:116) Overall operating revenues, grew 7% to $671.0 million, including
record operating revenues in our Securities segment.
(cid:116) Completed the acquisition of the Sterne Agee correspondent securities
clearing and independent wealth management businesses in the
fourth fiscal quarter of 2016.
(cid:116) Renewed and expanded our parent company three-year syndicated
committed loan facility to $247.0 million and on September 15,
2016 notified the trustee of our intention to redeem our 8.5%
Senior Notes.
Executive Summary
We achieved 7% growth in operating revenues in fiscal 2016, with strong
growth in our Securities, Physical Commodities and CES segments
partially offset by lower Commercial Hedging and Global Payments
operating revenues. Overall, segment income increased 10% while net
income from continuing operations declined 7% to $72.7 million in
fiscal 2016. Our Securities segment income increased $28.9 million,
while Physical Commodities and CES segments added $7.5 million and
$1.9 million in segment income, respectively. Segment income in the
Commercial Hedging and Global Payments declined $16.9 million
and $3.5 million, respectively.
Our Securities segment’s strong growth in operating performance was
a result of a 87% increase in debt trading operating revenues primarily
as a result of the January 1, 2015 acquisition of G.X. Clarke as well as
strong performance in our Argentina operations. Operating revenues
in our Physical Commodities segment increased both as a result of
a $9.7 million increase in precious metals as well as a $3.6 million
increase in our Physical Agricultural & Energy business. CES operating
revenues increased primarily as a result of the fourth quarter acquisition
of the Sterne Agee correspondent securities clearing and independent
wealth management businesses which collectively added $24.1 million
incremental operating revenues.
The decline in our core Commercial Hedging segment income was
primarily the result of a 17% decline in OTC volumes which drove a
$28.8 million decline in operating revenues which was partially offset
Selected Summary Financial Information
Discontinued Operations
(cid:116) Launched a financial information exchange (“FIX”) protocol for
cross-border payments platform in our Global Payments segment,
which we believe marks one of the first FIX offerings for cross-border
payments in exotic currencies.
(cid:116) Reached an agreement with ICAP plc to acquire their Europe,
Middle East and Africa (“EMEA”) oil voice brokerage business.
(cid:116) Realized a 13.2% return on equity for fiscal 2016 and grew net asset
value per share to $23.56 per common share.
by higher exchange traded commission and clearing fee revenues and
interest income.
Our Global Payments segment grew the number of payments made
by 37%, however a narrowing of spreads per payment as a result of
a continuing increase in lower dollar value per payment transaction
volume from financial institutions more than offset the volume gains
leading to the decline in operating revenues.
In the fiscal fourth quarter of 2016, the Company completed its
acquisition of the correspondent securities clearing and independent
wealth management businesses of Sterne Agee and recognized a
$6.2 million bargain purchase gain on the transaction within net
income from continuing operations in fiscal 2016.
In connection with the merger of our wholly owned U.S. subsidiaries in
the prior year, we transferred available-for-sale securities to the trading
category during the fourth quarter of fiscal 2015. The transfer resulted
in $3.3 million, net of tax, of unrealized gains not previously recognized
in earnings. See further discussion in our Results of Operations.
On the expense side, we continue to focus on maintaining our variable
cost model and limiting the growth of our non-variable expenses. To
that end, variable expenses were 58% of total expenses in fiscal 2016
compared to 59% in the fiscal 2015. Non-variable expenses increased
10% year-over-year, primarily as a result of incremental expenses from
the acquisition of G.X. Clarke and Sterne Agee.
During fiscal 2014, we completed the exit of the physical base metals business, that began in fiscal 2013, through the sale and orderly liquidation
of then-current open positions. The physical base metals activities in the financial statements for fiscal 2014 are presented as discontinued
operations. We continue to operate the portion of our base metals business related to non-physical assets, conducted primarily through the
LME in our Commercial Hedging segment.
Results of Operations
Set forth below is our discussion of the results of our operations, as viewed by management, for the fiscal years ended September 30, 2016,
2015, and 2014.
The discussion below relates only to continuing operations. All revenues and expenses, including income tax expense, relating to discontinued
operations have been removed from disclosures of total revenues and expenses for the applicable periods, and are reported net in our consolidated
income statements in “loss from discontinued operations, net of tax”.
26
Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Overview
The following table shows an overview of our financial results:
FINANCIAL OVERVIEW UNAUDITED
(in millions)
Revenues:
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting and management fees
Interest income
Other income
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Compensation and other expenses
Gain on acquisition
Income from continuing operations, before tax
2016
$ 14,112.0
321.2
224.3
42.0
55.2
0.2
14,754.9
14,083.9
671.0
129.9
68.9
28.3
443.9
377.4
6.2
72.7
$
Year Ended September 30,
2015
% Change
% Change
2014
(59)% $
(2)%
17%
(1)%
40%
(33)%
(57)%
(59)%
7%
6%
31%
65%
3%
7%
n/m
(7)% $
34,089.9
328.6
192.5
42.5
39.4
0.3
34,693.2
34,068.9
624.3
122.7
52.7
17.1
431.8
353.7
—
78.1
2% $ 33,546.4
244.5
34%
180.7
7%
42.1
1%
8.0
393%
0.7
(57)%
34,022.4
2%
33,531.5
2%
490.9
27%
108.5
13%
49.9
6%
10.5
63%
322.0
34%
296.0
19%
—
—%
26.0
200% $
The selected data table below reflects key operating metrics used by management in evaluating our product lines, for the periods indicated:
Volumes and Other Data:
Exchange-traded - futures and options (contracts, 000’s)
OTC (contracts, 000’s)
Global Payments (# of payments, 000’s)
Gold equivalent ounces traded (000’s)
Equity Market-Making (gross dollar volume, millions)
Debt Trading (gross dollar volume, millions)
FX Prime Brokerage volume (U.S. notional, millions)
Average assets under management in Argentina (U.S. dollar, millions)
Average customer equity - futures and options (millions)
2016
99,667.4
1,380.8
444.9
92,073.7
$
88,518.8
$ 107,747.4
$ 580,426.9
562.4
$
1,878.7
$
Year Ended September 30,
2015
% Change
% Change
2014
99,879.2
—%
1,670.0
(17)%
325.4
37%
126,365.5
(27)%
98,604.3
(10)% $
70% $
63,502.6
29% $ 449,344.1
572.1
(2)% $
1,788.2
5% $
7%
24%
70%
60%
42% $
1,243% $
93,566.6
1,342.1
191.5
79,127.1
69,435.1
4,727.8
45% $ 310,297.5
530.9
8% $
1,789.9
—% $
Operating Revenues
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
Operating revenues for fiscal 2016 and fiscal 2015 were $671.0 million
and $624.3 million, respectively. Operating revenue growth was driven
by strong growth in our Securities segment, which added $45.4 million
over the prior year, while the CES segment added $27.7 million in
operating revenue, driven by the acquisition of the Sterne Agee businesses
which added an incremental $24.1 million. In addition, the Physical
Commodities segment added $13.5 million over the prior year. This
growth was partially offset by $26.3 million and $3.9 million declines in
operating revenues in our Commercial Hedging and Global Payments
segments, respectively.
Operating revenues in our Commercial Hedging segment decreased
10% in fiscal 2016 to $236.1 million with a $2.2 million increase in
exchange-traded revenues to $131.6 million being more than offset by a
$28.8 million decline in OTC revenues to $82.2 million in fiscal 2016.
Growth in the domestic grain markets and in our London operations
drove a 10% increase in exchange-traded volumes. Lower OTC revenues
were a result of a 17% decline in volumes, primarily as a result of lower
customer volumes in the domestic and Latin American agricultural
markets as well as the effect of lower energy prices and volatility.
Operating revenues in our Securities segment increased 35% in fiscal
2016 to $175.2 million, primarily as a result of a $42.3 million
increase in our Debt Trading product line, primarily as a result of
the acquisition of G.X. Clarke which was effective January 1, 2015
and thus only contributed operating revenues beginning in the second
quarter of fiscal 2015. In addition, the business acquired showed
strong growth in fiscal 2016, outperforming the similar period in
the prior year. Strong performance in our Argentine operations also
contributed to growth in debt trading operating revenues as well as in
asset management. Investment banking operating revenues declined
$5.8 million following management’s decision to exit the domestic
investment banking business.
Operating revenues in our Global Payments segment declined 5%
in fiscal 2016 to $73.2 million compared to the prior year, as a 37%
increase in the number of global payments made was more than offset
by a narrowing of spreads as a result of a continuing increase in lower
dollar value per payment transaction volume from financial institutions.
Form 10K 27
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Physical Commodity segment operating revenues increased 58% to
$36.6 million in fiscal 2016 as a result of a $9.7 million increase in
Precious Metals operating revenues, as well as a $3.6 million increase
in Physical Ag & Energy operating revenues.
Operating revenues in our CES segment increased 22% in fiscal 2016 to
$151.1 million. Exchange-traded Futures & Options operating revenues
increased $4.2 million to $106.1 million, while Foreign Exchange Prime
Brokerage operating revenues declined $0.6 million to $20.9 million.
The addition of the Sterne Agee correspondent securities clearing and
independent wealth management businesses added $24.1 million in
incremental operating revenues.
Interest income increased $15.8 million to $55.2 million in fiscal 2016
compared to fiscal 2015, primarily driven by a $14.9 million increase
in our Debt Trading business. In addition, average customer equity in
the exchange traded futures and options portions of our Commercial
Hedging and CES segments increased 5% to $1.9 billion in fiscal 2016
compared to fiscal 2015, which combined with an increase in short term
interest rates and the continued implementation of our interest rate
management program, resulted in an aggregate $2.9 million increase
in interest income in the exchange traded futures and options portions
of these segments.
The July 1, 2015 transfer of securities from available-for-sale investments,
at fair value, to the trading category resulted in a $5.4 million of pre-tax
unrealized gains not previously recognized in earnings being included
in operating revenues during the fourth quarter of fiscal 2015. See the
discussion of operating revenues for the Year Ended September 30, 2015
Compared to Year Ended September 30, 2014 for details of this transfer.
In addition, operating revenues for fiscal 2015 included a $1.2 million
pre-tax gain on the sale of common stock held in the Intercontinental
Exchange, Inc.
See Segment Information below for additional information on activity
in each of the segments.
Year Ended September 30, 2015 Compared to
Year Ended September 30, 2014
Operating revenues for fiscal 2015 and fiscal 2014 were $624.3 million
and $490.9 million, respectively. All of our business segments
experienced operating revenue growth compared to the prior year,
led by our Securities and Commercial Hedging segments which
increased $49.5 million and $38.4 million, respectively. In addition,
operating revenues in our Global Payments segment increased
$21.6 million, while our CES and Physical Commodities segments
increased $9.7 million and $2.6 million, respectively.
Operating revenues in our Commercial Hedging segment increased
17% in fiscal 2015 to $262.4 million, as exchange-traded revenues
increased $20.1 million to $129.4 million and OTC revenues
increased $16.1 million to $111.0 million in fiscal 2015. Strong
growth in our LME Metals business combined with improved market
conditions in the domestic agricultural markets, drove a 16% increase
in exchange-traded volumes. OTC revenues increased as a result of a
24% increase in volumes while the average rate per contract declined
6% compared to the prior year. Growth in agricultural commodity
OTC revenues and the addition of interest rate OTC derivatives to
our customer offering helped to drive the growth in OTC revenues.
Operating revenues in our Securities segment increased 62% in fiscal
2015 to $129.8 million, primarily as a result of a $17.5 million
28
Form 10K
increase in our equity market-making product line, as well as the
acquisition of G.X. Clarke which added $31.4 million in incremental
revenues to our Debt Trading product line.
Operating revenues in our Global Payments segment increased 39%
in fiscal 2015 to a record $77.0 million compared to the prior year,
driven by a 70% increase in the number of global payments made,
however spreads have narrowed in this business due to a continuing
increase in lower dollar value per payment transaction volume from
financial institutions.
Physical Commodity segment operating revenues increased 13%
to $23.2 million in fiscal 2015 as a result of a 60% increase in the
number of ounces traded in precious metals, which was partially
offset by a decrease of customer activity in the Physical Ag & Energy
commodity product line.
Operating revenues in our CES segment increased 9% in fiscal 2015
to $123.4 million. Exchange-traded Futures & Options operating
revenues increased 2% to $101.9 million, while operating revenues
in our Foreign Exchange Prime Brokerage product line increased
$7.4 million to $21.5 million in fiscal 2015 as a result of increased
market volatility in foreign exchange markets.
Interest income increased $31.4 million to $39.4 million in fiscal
2015 compared to fiscal 2014, and was significantly impacted by the
acquisition of G.X. Clarke, which added $19.6 million in interest income
during the nine months following the acquisition effective January 1,
2015. In addition, while average customer equity was relatively flat
with the prior year, the continued implementation of our interest rate
management program, resulted in an aggregate $5.2 million increase
in interest income in our Commercial Hedging and CES segments.
On July 1, 2015, the Company merged three of its wholly owned
U.S. subsidiaries (FCStone, LLC, INTL FCStone Partners L.P.,
and FCC Investments, Inc.) into its wholly owned subsidiary,
INTL FCStone Securities Inc., and renamed the surviving subsidiary
INTL FCStone Financial Inc. INTL FCStone Financial is registered as
a broker-dealer with FINRA and is registered as a futures commission
merchant with the CFTC and NFA.
In connection with the merger of wholly owned subsidiaries, the
Company transferred its remaining available-for-sale investments, at
fair value, to the trading category in accordance with the accounting
requirements for broker-dealers. The July 1, 2015 transfer of securities
resulted in $5.4 million of pre-tax unrealized gains not previously
recognized in earnings being included in operating revenues during
the fourth quarter of fiscal 2015. In addition, operating revenues
for fiscal 2015 included a $1.2 million pre-tax gain on the sale of
common stock held in the Intercontinental Exchange, Inc.
Interest and Transactional Expenses
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
Transaction-based clearing expenses: Transaction-based clearing
expenses increased 6% to $129.9 million in fiscal 2016 compared to
$122.7 million in fiscal 2015, and were 19% of operating revenues in
fiscal 2016 compared to 20% in fiscal 2015. The increase in expense
is primarily related to increased activity across our Exchange-traded
Futures & Options, Debt Trading, LME Metals and Global Payments
components, as well as higher operational costs associated with required
regulatory transactional reporting.
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introducing broker commissions: Introducing broker commissions
increased 31% to $68.9 million in fiscal 2016 compared to $52.7 million
in fiscal 2015, and were 10% of operating revenues in fiscal 2016 compared
to 8% in fiscal 2015. The increase in expense is primarily related to our
acquisition of the independent wealth management business of Sterne Agee
at the beginning of our fourth fiscal quarter, which added an incremental
$14.7 million. Also, introducing broker commissions increased in our Debt
Trading business in Argentina, and we had higher broker commissions
in our Investment Banking component as we completed our exit of the
domestic investment banking business. These increases were partially
offset by lower costs in our Global Payments segment activity.
Interest expense: Interest expense increased 65% to $28.3 million
in fiscal 2016 compared to $17.1 million in fiscal 2015. The increase
in interest expense is primarily related to the fixed income trading
activities from our Rates Division, acquired on January 1, 2015, which
resulted in higher interest expense of $7.4 million. Additionally, higher
average borrowings outstanding on the credit facilities available for
working capital needs and financing of physical commodities resulted
in increased expense.
Year Ended September 30, 2015 Compared to
Year Ended September 30, 2014
Transaction-based clearing expenses: Transaction-based clearing
expenses increased 13% to $122.7 million in fiscal 2015 compared to
$108.5 million in fiscal 2014, and were 20% of operating revenues in
fiscal 2015 compared to 22% in fiscal 2014. The increase in expense
is primarily related to higher exchange clearing costs in our CES and
LME Metals activities resulting from increased contract volumes.
Additionally, increases in our Global Payments and Equity Market-
Making operating revenues resulted in higher transactional charges.
Introducing broker commissions: Introducing broker commissions
increased 6% to $52.7 million in fiscal 2015 compared to $49.9 million in
fiscal 2014, and were 8% of operating revenues in fiscal 2015 compared to
10% in fiscal 2014. The increase in expense is primarily due to increased
activity in our Financial Ag & Energy and Global Payments components,
while the decrease in the percentage of introducing broker commissions
to operating revenues is a result of increased non-introducing broker
sourced revenues, including interest income.
Interest expense: Interest expense increased to $17.1 million in fiscal
2015 compared to $10.5 million in fiscal 2014. The increase in interest
expense is primarily related to $5.8 million of incremental expense
from the acquisition of G.X. Clarke. Additionally, higher average
borrowings outstanding on the corporate credit facility available for
working capital needs resulted in increased expense.
Net Operating Revenues
Net operating revenues is one of the key measures used by management
to assess the performance of our operating segments. Net operating
revenue is calculated as operating revenue less transaction-based
clearing expenses, introducing broker commissions and interest
expense. Transaction-based clearing expenses represent variable
expenses paid to executing brokers, exchanges, clearing organizations
and banks in relation to our transactional volumes. Introducing
broker commissions include commission paid to non-employee
third parties that have introduced customers to us. Net operating
revenues represent revenues available to pay variable compensation
to risk management consultants and traders and direct non-variable
expenses, as well as variable and non-variable expenses of operational
and administrative employees.
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
Net operating revenues increased $12.1 million, or 3%, to
$443.9 million in fiscal 2016 compared to $431.8 million in fiscal 2015.
Year Ended September 30, 2015 Compared to
Year Ended September 30, 2014
Net operating revenues increased $109.8 million, or 34%, to
$431.8 million in fiscal 2015 compared to $322.0 million in fiscal 2014.
Compensation and Other Expenses
The following table shows a summary of expenses, other than interest and transactional expenses.
(in millions)
COMPENSATION AND BENEFITS:
Fixed compensation and benefits
Variable compensation and benefits
OTHER NONCOMPENSATION EXPENSES:
Communication and data services
Occupancy and equipment rental
Professional fees
Travel and business development
Depreciation and amortization
Bad debts and impairments
Other expense
Total compensation and other expenses
Year Ended September 30,
2016
% Change
2015
% Change
2014
$
$
126.5
137.4
263.9
32.7
13.3
14.0
11.5
8.2
4.4
29.4
113.5
377.4
10% $
1%
5%
16%
(1)%
12%
10%
14%
(40)%
25%
11%
7% $
115.3
135.8
251.1
28.1
13.5
12.5
10.5
7.2
7.3
23.5
102.6
353.7
7% $
45%
24%
9%
10%
(16)%
6%
(1)%
33%
28%
9%
19% $
108.0
93.9
201.9
25.8
12.3
14.9
9.9
7.3
5.5
18.4
94.1
296.0
Form 10K 29
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
Compensation and Other Expenses: Compensation and other
expenses increased $23.7 million, or 7%, to $377.4 million in fiscal
2016 compared to $353.7 million in fiscal 2015.
Compensation and Benefits: Total compensation and benefits
expenses increased 5% to $263.9 million in fiscal 2016 compared
to $251.1 million in fiscal 2015. Total compensation and benefits
were 39% of operating revenues in fiscal 2016 compared to 40% of
operating revenues in fiscal 2015. The variable portion of compensation
and benefits increased 1% to $137.4 million in fiscal 2016 compared
to $135.8 million in fiscal 2015. Variable compensation and benefits
were 31% of net operating revenues in fiscal 2016 compared to 31%
in fiscal 2015. Administrative, centralized operations and executive
incentive compensation was $28.7 million in fiscal 2016 compared
to $25.1 million in fiscal 2015, primarily related to incremental
expense from a full year of cost in regard to the acquisition of the
Rates Division in January 2015 and one quarter of cost related to the
acquired correspondent clearing and independent wealth management
businesses of Sterne Agee in July 2016.
The fixed portion of compensation and benefits increased 10% to
$126.5 million in fiscal 2016 compared to $115.3 million in fiscal
2015. Non-variable salaries increased $6.4 million, or 7%, primarily
due to incremental costs from the acquisitions of the Rates Division
and businesses of Sterne Agee, and additional headcount increases
across certain front office and administrative departments. Employee
benefits, excluding share-based compensation, increased $3.2 million
in fiscal 2016, primarily due to higher employer payroll, health care
and retirement costs, as well as higher temporary personnel costs.
Share-based compensation is a component of the fixed portion,
and includes stock option and restricted stock expense. Share-based
compensation was $5.1 million in fiscal 2016 compared to $3.6 million
in fiscal 2015. The number of employees increased 19% to 1,464 at
the end of fiscal 2016 compared to 1,231 at the end of fiscal 2015.
Other Non-Compensation Expenses: Other non-compensation
expenses increased by 11% to $113.5 million in fiscal 2016 compared
to $102.6 million in fiscal 2015. Communication and data services
expenses increased $4.6 million, primarily due to increases in market
information and trade system expenses across various business
activities, as well as incremental costs from the acquisition of the
Sterne businesses. Professional fees increased $1.5 million, primarily
due to higher consultancy costs related to direct business, operational
and administrative activities, partially offset by lower legal service
costs. Travel and business development fees increased $1.0 million,
primarily within our Commercial Hedging and Securities segments as
well as incremental costs from the acquired businesses. Depreciation
and amortization increased $1.0 million, primarily related to higher
software depreciation. Other expense increased $5.9 million, primarily
as a result of the costs of holding our internal bi-annual global sales
meeting in fiscal 2016 as well as higher non-trading hardware costs,
hosted customer conference costs, recruiting costs and incremental
costs from the acquired businesses.
Bad debts and impairments decreased $2.9 million year-over-year.
During fiscal 2016, bad debts were $4.4 million, primarily related to
$3.6 million of customer deficits in our Commercial Hedging segment,
$0.4 million of uncollectible customer receivables in our Physical Ag
& Energy component of our Physical Commodities segment and
$0.4 million of uncollectible service fees and notes in our Securities
segment. During fiscal 2015, bad debts were $7.3 million, primarily
related to $2.8 million of customer receivables in our Physical Ag
& Energy component, $2.3 million of OTC customer deficits and
$0.6 million of LME Metals customer deficits in our Commercial
Hedging segment, $0.5 million of uncollectible service fees and notes
in our Securities segment, and $1.1 million of notes receivable related
to loans pertaining to a former acquisition.
Gain on Acquisition: In the fiscal fourth quarter of 2016, the Company
completed its acquisition of the correspondent securities clearing
and independent wealth management businesses of Sterne Agee.
The purchase price of $45.0 million represents a discount to the
preliminary allocation of fair value to the net assets of the Sterne
entities. The $6.2 million discount in the purchase price as compared
to the preliminary allocation of fair value to the net assets at closing
has been reflected as a gain on acquisition in the Consolidated Income
Statement for fiscal 2016.
Provision for Taxes: The effective income tax rate on income from
continuing operations was 25% in fiscal 2016 compared to 29%
in fiscal 2015, and was impacted by the bargain purchase gain on
the acquired businesses from Sterne Agee during fiscal 2016. The
effective income tax rate can vary from period to period depending
on, among other factors, the geographic and business mix of our
earnings. Generally, when the percentage of pretax earnings generated
from the U.S. increases, our effective income tax rate increases. Our
effective income tax rate during both periods was lower than the U.S.
federal statutory rate primarily due to a higher mix of earnings taxed
at lower rates in foreign jurisdictions.
Year Ended September 30, 2015 Compared to
Year Ended September 30, 2014
Compensation and Other Expenses: Compensation and other
expenses increased $57.7 million, or 19%, to $353.7 million in fiscal
2015 compared to $296.0 million in fiscal 2014.
Compensation and Benefits: Total compensation and benefits
expenses increased 24% to $251.1 million in fiscal 2015 compared
to $201.9 million in fiscal 2014. Total compensation and benefits
were 40% of operating revenues in fiscal 2015 compared to 41% of
operating revenues in fiscal 2014. The variable portion of compensation
and benefits increased 45% to $135.8 million in fiscal 2015 compared
to $93.9 million in fiscal 2014. Variable compensation and benefits
were 31% of net operating revenues in fiscal 2015 compared to 29%
in fiscal 2014, as the front office compensation, as a percentage of
net operating revenues, increased modestly and also due to higher
administrative and executive incentive compensation. Administrative
and executive incentive compensation was $25.1 million in fiscal
2015 compared to $12.2 million in fiscal 2014, primarily related to
incremental expense from the acquisition of G.X. Clarke, as well as
our significantly improved financial performance.
The fixed portion of compensation and benefits increased 7% to
$115.3 million in fiscal 2015 compared to $108.0 million in fiscal 2014.
Non-variable salaries increased $8.0 million, or 10%, primarily due to
incremental costs from the acquisition of G.X. Clarke, and additional
headcount increases across certain front office and administrative
departments. Employee benefits, excluding share-based compensation,
increased $2.3 million in fiscal 2015, primarily due to higher employer
health care and retirement costs. Share-based compensation is a
30
Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
component of the fixed portion, and includes stock option and
restricted stock expense. Stock option expense was $1.6 million in
fiscal 2015 compared to $1.4 million in fiscal 2014. Restricted stock
expense was $2.0 million in fiscal 2015 compared to $2.9 million
in fiscal 2014. The number of employees increased 8% to 1,231 at
the end of fiscal 2015 compared to 1,141 at the end of fiscal 2014.
Other Non-Compensation Expenses: Other non-compensation
expenses increased by 9% to $102.6 million in fiscal 2015 compared
to $94.1 million in fiscal 2014. Communication and data services
expenses increased $2.3 million, primarily due to increases in market
information expenses related to incremental costs from the acquisition
of G.X. Clarke and expansion of our Financial Ag & Energy business
activities. Professional fees decreased $2.4 million, primarily due to
lower legal, consultancy, and service costs.
Bad debts and impairments increased $1.8 million year-over-year.
During fiscal 2015, bad debts were $7.3 million, primarily related
to $2.8 million of customer receivables in our Physical Ag & Energy
component of our Physical Commodities segment, $2.3 million of
OTC customer deficits and $0.6 million of LME customer deficits
in our Commercial Hedging segment, $0.5 million of uncollectible
service fees and notes in our Securities segment, and $1.1 million of
notes receivable related to loans pertaining to a former acquisition.
During fiscal 2014, bad debts were $5.5 million, net of recoveries of
$0.2 million, including $3.8 million in our Commercial Hedging
segment, primarily related to account deficits from a Hong Kong
commercial LME customer and Brazilian OTC Financial Ag & Energy
customers. Additionally, we recorded bad debts of $0.9 million in
our Physical Commodities segment related to renewable fuels activity
in our Physical Ag & Energy component, and $0.7 million in our
Securities segment primarily related to a charge-off of uncollectible
service fees.
Other expense increased $5.1 million, primarily as a result of the
change in the revaluation of contingent liabilities related to certain
business combinations. During fiscal 2015, we recorded $1.8 million
of additional consideration related to the acquisition of G.X. Clarke
and Tradewire Securities. During fiscal 2014, we revised downward the
additional consideration to be paid for the transfer of accounts from
Tradewire Securities, partially offset by an increase in the additional
consideration paid for the acquisition of Hencorp Futures, netting to
an expense recovery of $2.0 million - See Note 11 to the Consolidated
Financial Statements.
Provision for Taxes: The effective income tax rate on income from
continuing operations was 29% in fiscal 2015 compared to 25%
in fiscal 2014. The effective income tax rate can vary from period
to period depending on, among other factors, the geographic and
business mix of our earnings. Generally, when the percentage of pretax
earnings generated from the U.S. increases, our effective income tax
rate increases. Our effective income tax rate during both periods was
lower than the U.S. federal statutory rate primarily due to a higher
mix of earnings taxed at lower rates in foreign jurisdictions.
Unallocated Costs and Expenses
The following table is a breakout of our unallocated costs and expenses from the total costs and expenses shown above. The unallocated costs
and expenses include certain shared services such as information technology, accounting and treasury, credit and risk, legal and compliance,
and human resources and other activities.
(in millions)
COMPENSATION AND BENEFITS:
Fixed compensation and benefits
Variable compensation and benefits
OTHER NONCOMPENSATION EXPENSES:
Communication and data services
Occupancy and equipment rental
Professional fees
Travel and business development
Depreciation and amortization
Bad debts and impairments
Other expense
Total compensation and other expenses
2016
45.4
26.5
71.9
6.0
13.2
7.8
2.4
6.7
—
19.7
55.8
127.7
$
$
Year Ended September 30,
2015
% Change
% Change
24% $
15%
20%
33%
(1)%
3%
4%
16%
(100)%
11%
6%
14% $
36.7
23.1
59.8
4.5
13.4
7.6
2.3
5.8
1.1
17.8
52.5
112.3
5% $
89%
27%
5%
10%
(20)%
5%
(6)%
n/m
35%
10%
19% $
2014
34.8
12.2
47.0
4.3
12.2
9.5
2.2
6.2
—
13.2
47.6
94.6
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
Total unallocated costs and other expenses increased $15.4 million
to $127.7 million in fiscal 2016 compared to $112.3 million in fiscal
2015. Compensation and benefits increased $12.1 million, or 20% to
$71.9 million in fiscal 2016 compared to $59.8 million in fiscal 2015.
During fiscal 2016, the increase in fixed and variable compensation
and benefits is primarily related to the incremental costs from the
acquisitions of G.X. Clarke and the correspondent clearing and
independent wealth management businesses from Sterne Agee, higher
management incentives earned in Argentina and expansion of our
information technology department. The increase in communication
and data services is primarily due to increased market information costs.
Form 10K 31
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The increase in other expense is primarily related to higher centralized
operations costs and costs of holding our internal bi-annual global sales
meeting during fiscal 2016. Excluding the incremental unallocated
costs from the acquisitions of G.X. Clarke and the correspondent
clearing and independent wealth management businesses from
Sterne Agee, total compensation and other expenses increased 10%
over the prior year.
Year Ended September 30, 2015 Compared to
Year Ended September 30, 2014
Total unallocated costs and other expenses increased $17.7 million
to $112.3 million in fiscal 2015 compared to $94.6 million in fiscal
2014. Compensation and benefits increased $12.8 million, or 27% to
$59.8 million in fiscal 2015 compared to $47.0 million in fiscal 2014.
During fiscal 2015, the increase in variable compensation and benefits
was primarily related to our improved financial performance over the
prior year and the incremental costs from the acquisition of G.X.
Clarke. The decrease in professional fees was primarily due to lower
legal and consultancy costs related to legal and regulatory matters over
the prior year. The increase in other expense was primarily related to the
previously discussed change in the revaluation of contingent liabilities
related to certain business combinations. Excluding the impacts of the
revaluation of contingent liabilities and the incremental unallocated
costs from the acquisition of G.X. Clarke, total compensation and
other expenses increased 7% over the prior year.
Variable vs. Fixed Expenses
(in millions)
Variable compensation and benefits
Transaction-based clearing expenses
Introducing broker commissions
Total variable expenses
Fixed compensation and benefits
Other fixed expenses
Bad debts and impairments
Total non-variable expenses
Total non-interest expenses
2016
% of Total
2015
% of Total
2014
% of Total
Year Ended September 30,
$
$
137.4
129.9
68.9
336.2
126.5
109.1
4.4
240.0
576.2
24% $
23%
11%
58%
22%
19%
1%
42%
100% $
135.8
122.7
52.7
311.2
115.3
95.3
7.3
217.9
529.1
26% $
23%
10%
59%
22%
18%
1%
41%
100% $
93.9
108.5
49.9
252.3
108.0
88.6
5.5
202.1
454.4
21%
24%
11%
56%
24%
19%
1%
44%
100%
We seek to make our non-interest expenses variable to the greatest
extent possible, and to keep our fixed costs as low as possible. The
table above shows an analysis of our variable expenses and non-variable
expenses as a percentage of total non-interest expenses for the years
ended September 30, 2016, 2015, and 2014.
Our variable expenses consist of variable compensation paid to traders
and risk management consultants, bonuses paid to operational,
administrative and executive employees, transaction-based clearing
expenses and introducing broker commissions. As a percentage of
total non-interest expenses, variable expenses were 58% in fiscal 2016,
59% in fiscal 2015 and 56% in fiscal 2014.
Segment Information
Our business activities are managed as operating segments and organized into reportable segments as follows:
INTL FCStone Inc.
Commercial Hedging
Components:
- Financial Ag
& Energy
- LME Metals
Global Payments
Securities
Physical
Commodities
Clearing and
Execution Services
Component:
Components:
Components:
Components:
- Global Payments
- Equity Market-
- Precious Metals
Making
- Debt Trading
- Investment Banking
- Asset Management
- Physical Ag &
Energy
- Exchange-traded
Futures & Options
- FX Prime Brokerage
- Correspondent
Clearing
- Independent
Wealth Management
32
Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
We report our operating segments based on services provided to
customers. Net contribution is one of the key measures used by
management to assess the performance of each segment and for
decisions regarding the allocation of our resources. Net contribution
is calculated as revenues less direct cost of sales, interest expense,
transaction-based clearing expenses, introducing broker commissions
and variable compensation. Variable compensation paid to risk
management consultants and traders generally represents a fixed
percentage of an amount equal to revenues generated, and in some
cases, revenues produced less transaction-based clearing expense and
related charges, base salaries and an overhead allocation.
Segment income is calculated as net contribution less non-variable
direct expenses of the segment. These non-variable direct expenses
include trader base compensation and benefits, operational employee
compensation and benefits, communication and data services, business
development, professional fees, bad debt expense, trade errors and
direct marketing expenses.
Total Segment Results
The following table shows summary information concerning all of our business segments combined.
(in millions)
Revenues:
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting and management fees
Interest income
Other
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Variable direct compensation and benefits
Net contribution
Non-variable direct expenses
Segment income
% of
Operating
Revenues
Year Ended September 30,
% of
Operating
Revenues
2015
$
$
34,089.9
322.3
192.5
42.5
37.5
—
34,684.7
34,068.9
615.8
121.0
52.7
10.8
431.3
110.7
320.6
132.5
188.1
100%
19%
10%
3%
16%
21%
100%
20%
9%
2%
18%
22%
% of
Operating
Revenues
100%
22%
10%
1%
17%
24%
2014
33,546.4
244.7
180.7
42.1
11.4
0.2
34,025.5
33,531.5
494.0
107.8
49.9
5.4
330.9
81.7
249.2
120.4
128.8
$
$
2016
$ 14,112.0
318.7
224.2
41.0
60.2
—
14,756.1
14,083.9
672.2
126.8
68.9
20.8
455.7
108.7
347.0
141.0
206.0
$
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
The net contribution of all our business segments increased 8%
to $347.0 million in fiscal 2016 compared to $320.6 million in
fiscal 2015. Segment income increased 10% to $206.0 million in
fiscal 2016 compared to $188.1 million in fiscal 2015.
Year Ended September 30, 2015 Compared to
Year Ended September 30, 2014
The net contribution of all our business segments increased 29%
to $320.6 million in fiscal 2015 compared to $249.2 million in
fiscal 2014. Segment income increased 46% to $188.1 million in
fiscal 2015 compared to $128.8 million in fiscal 2014.
Commercial Hedging
We serve our commercial customers through our team of risk
management consultants, providing a high-value-added service that
we believe differentiates us from our competitors and maximizes the
opportunity to retain our customers. Our risk management consulting
services are designed to quantify and monitor commercial entities’
exposure to commodity and financial risk. Upon assessing this exposure,
we develop a plan to control and hedge these risks with post-trade
reporting against specific customer objectives. Our customers are
assisted in the execution of their hedging strategies through a wide
range of products from listed exchange-traded futures and options,
to basic OTC instruments that offer greater flexibility, to structured
OTC products designed for customized solutions.
Our services span virtually all traded commodity markets, with
the largest concentrations in agricultural and energy commodities
(consisting primarily of grains, energy and renewable fuels, coffee,
sugar, cotton, and food service) and base metals products listed on
the LME. Our base metals business includes a position as a Category
One ring dealing member of the LME, providing execution, clearing
and advisory services in exchange-traded futures and OTC products.
We also provide execution of foreign currency forwards and options
and interest rate swaps as well as a wide range of structured product
solutions to our commercial customers who are seeking cost-effective
hedging strategies. Generally, our customers direct their own trading
activity, and our risk management consultants do not have discretionary
authority to transact trades on behalf of our customers.
Form 10K 33
2014
—
124.3
79.9
15.7
4.1
—
224.0
—
224.0
25.0
18.2
0.3
180.5
47.9
132.6
65.3
67.3
2014
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table provides the financial performance for Commercial Hedging for the periods indicated.
(in millions)
Revenues:
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting and management fees
Interest income
Other
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Variable direct compensation and benefits
Net contribution
Non-variable direct expenses
Segment income
2016
—
118.7
95.1
13.8
8.5
—
236.1
—
236.1
27.9
19.6
0.4
188.2
53.8
134.4
65.7
68.7
$
$
Year Ended September 30,
2015
% Change
% Change
$
—
(22)%
8%
(9)%
21%
—
(10)%
—
(10)%
1%
(2)%
100%
(12)%
(15)%
(11)%
(1)%
(20)% $
—
152.3
88.0
15.1
7.0
—
262.4
—
262.4
27.6
19.9
0.2
214.7
63.0
151.7
66.1
85.6
$
—
23%
10%
(4)%
71%
—
17%
—
17%
10%
9%
(33)%
19%
32%
14%
1%
27% $
The following tables set forth transactional revenues and selected data for Commercial Hedging for the periods indicated.
Transactional revenues (in millions):
Agricultural
Energy and renewable fuels
LME metals
Other
Selected data:
Futures and options (contracts, 000’s)
Average rate per contract
Average customer equity - futures and options (millions)
Transactional revenues (in millions):
Agricultural
Energy and renewable fuels
Other
Selected data:
Volume (contracts, 000’s)
Average rate per contract
$
$
$
$
$
$
$
Exchange-traded
Year Ended September 30,
2015
% Change
% Change
12% $
(16)%
(6)%
(13)%
2% $
62.0
6.8
52.8
7.8
129.4
10%
(8)% $
9% $
20,686.1
6.16
844.8
7% $
19%
37%
10%
18% $
57.9
5.7
38.6
7.1
109.3
16%
2% $
(4)% $
17,827.2
6.04
878.2
OTC
Year Ended September 30,
2015
% Change
% Change
(23)% $
(42)%
5%
(26)% $
68.3
33.3
9.4
111.0
24%
3%
24%
17%
2014
54.9
32.4
7.6
94.9
2016
69.6
5.7
49.5
6.8
131.6
22,810.2
5.66
923.6
2016
52.9
19.4
9.9
82.2
1,380.8
57.50
(17)%
(10)% $
1,670.0
64.19
24%
(6)% $
1,342.1
68.25
For information about the assets of this segment, see Note 22 to the Consolidated Financial Statements.
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
metals and energy markets. Overall exchange-traded contract volume
increased 10%, while the average rate per contract decreased to $5.66.
Operating revenues decreased 10% to $236.1 million in fiscal 2016
compared to $262.4 million in fiscal 2015. Exchange-traded revenues
increased 2% to $131.6 million in fiscal 2016, resulting primarily
from growth in the domestic grain markets as well as growth in our
London operations. Those increases were tempered by declines in LME
OTC revenues decreased 26% to $82.2 million in fiscal 2016 as
OTC volumes decreased 17% to 1.4 million contracts in fiscal 2016
compared to 1.7 million in fiscal 2015. The OTC volume decline
was primarily driven by lower customer volumes in the domestic
and Latin American agricultural markets. In addition, the effect of
34
Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
lower energy prices and volatility resulted in a decline in energy and
renewable fuels OTC revenues. In addition, we experienced lower
spreads across virtually all commodity sectors leading to a 10% decline
in the average rate per contract.
our interest rate management program which includes an extension of
the duration of our U.S. Treasury investments and the utilization of
interest rate swaps to manage a portion of our interest rate position,
which was partially offset by a 4% decrease in average customer equity.
Consulting and management fees decreased 9% to $13.8 million in
fiscal 2016 compared to $15.1 million in fiscal 2015 while interest
income, which remains constrained by low short-term interest rates,
increased 21%, to $8.5 million in fiscal 2016 compared to $7.0 million
in fiscal 2015. The increase in interest income is driven by a 9%
increase in average customer equity as well as an increase in short
term interest rates.
Segment income decreased 20% to $68.7 million in fiscal 2016
compared to $85.6 million in fiscal 2015, driven by the decline in
operating revenues. Variable expenses, excluding interest, expressed
as a percentage of operating revenues increased to 43% in fiscal 2016
compared to 42% in fiscal 2015.
Year Ended September 30, 2015 Compared to
Year Ended September 30, 2014
Operating revenues increased 17% to $262.4 million in fiscal 2015
compared to $224.0 million in fiscal 2014. Exchange-traded revenues
increased 18% to $129.4 million in fiscal 2015, resulting primarily
from strong growth in LME metals revenues, driven by increased
customer activity and expansion activities in the Far East. In addition,
agricultural commodity exchange- traded revenues increased as a result
of increased volatility and an increase in customer hedging activity
related to the large domestic crop in calendar 2014 being purchased
by our customers. Overall exchange-traded contract volume increased
16% and the average rate per contract increased to $6.16.
OTC revenues increased 17% to $111.0 million in fiscal 2015,
primarily driven by strong performance in agricultural commodities,
in particular grains, coffee, dairy and sugar. Energy and renewable
fuels OTC revenues increased modestly compared to the prior year.
OTC volumes increased 24% to 1.7 million contracts in fiscal 2015
compared to 1.3 million in fiscal 2014, while the average rate per
contract declined 6% compared to the prior year.
Consulting and management fees decreased 4% to $15.1 million in
fiscal 2015 compared to fiscal 2014 while interest income, which
was constrained by low short-term interest rates, increased 71%, to
$7.0 million in fiscal 2015 compared to $4.1 million in fiscal 2014.
The increase in interest income is driven by the implementation of
Segment income increased 27% to $85.6 million in fiscal 2015
compared to $67.3 million in fiscal 2014, driven by the increase in
operating revenues. Variable expenses, excluding interest, expressed
as a percentage of operating revenues increased to 42% in fiscal 2015
compared to 41% in fiscal 2014.
Global Payments
We provide global payment solutions to banks and commercial
businesses as well as charities and non-governmental organizations
and government organizations. We offer payments services in more
than 175 countries and 140 currencies, which we believe is more
than any other payments solution provider, and provide competitive
and transparent pricing.
Our proprietary FXecute global payments platform is integrated with
a financial information exchange (“FIX”) protocol. This FIX protocol
is an electronic communication method for the real-time exchange of
information, and we believe it represents one of the first FIX offerings
for cross-border payments in exotic currencies. FIX functionality
allows customers to view real time market rates for various currencies,
execute and manage orders in real-time, and view the status of their
payments through the easy-to-use portal.
Additionally, as a member of SWIFT (Society for Worldwide Interbank
Financial Telecommunication), we are able to offer our services to
large money center and global banks seeking more competitive
international payments services.
Through this single comprehensive platform and our commitment
to customer service, we believe we are able to provide simple and fast
execution, ensuring delivery of funds in any of these countries quickly
through our global network of approximately 300 correspondent
banks. In this business, we primarily act as a principal in buying and
selling foreign currencies on a spot basis. We derive revenue from the
difference between the purchase and sale prices.
We believe our customers value our ability to provide exchange rates
that are significantly more competitive than those offered by large
international banks, a competitive advantage that stems from our years
of foreign exchange expertise focused on smaller, less liquid currencies.
Form 10K 35
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table provides the financial performance and selected data for Global Payments for the periods indicated.
(in millions)
Revenues:
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting and management fees
Interest income
Other
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Variable direct compensation and benefits
Net contribution
Non-variable direct expenses
Segment income
Selected data:
Global Payments (# of payments, 000’s)
Average revenue per trade
$
$
$
2016
—
71.1
2.1
—
—
—
73.2
—
73.2
4.3
3.5
0.1
65.3
13.1
52.2
12.4
39.8
Year Ended September 30,
2015
% Change
% Change
$
—
(6)%
31%
—
(100)%
—
(5)%
—
(5)%
23%
(30)%
—%
(5)%
(6)%
(4)%
11%
(8)% $
—
75.4
1.6
—
0.1
—
77.1
—
77.1
3.5
5.0
0.1
68.5
14.0
54.5
11.2
43.3
$
—
40%
23%
—
—%
—
39%
—
39%
35%
16%
(67)%
42%
32%
45%
20%
53% $
2014
—
54.0
1.3
—
0.1
—
55.4
—
55.4
2.6
4.3
0.3
48.2
10.6
37.6
9.3
28.3
444.9
164.53
37%
(31)% $
325.4
236.94
70%
(18)% $
191.5
289.30
For information about the assets of this segment, see Note 22 to the Consolidated Financial Statements.
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
Operating revenues decreased 5% to $73.2 million in fiscal 2016
compared to $77.1 million in fiscal 2015. The volume of payments
made increased by 37%, as we continued to benefit from an increase
in financial institutions and other customers utilizing our electronic
transaction order system, however this was more than offset by a 31%
decrease in the average revenue per trade.
Segment income decreased 8% to $39.8 million in fiscal 2016
compared to $43.3 million in fiscal 2015. The decrease primarily
resulted from the lower operating revenues as well as a $1.2 million
increase in non-variable expenses including compensation and related
benefits as well as trade system costs. Variable expenses, excluding
interest, expressed as a percentage of operating revenues was 29% in
fiscal 2016 which was flat with fiscal 2015.
Year Ended September 30, 2015 Compared to
Year Ended September 30, 2014
Operating revenues increased 39% to $77.1 million in fiscal 2015
compared to $55.4 million in fiscal 2014. The operating revenue
growth was driven by a 70% increase in the volume of payments
made. An increase in volumes from financial institutions resulted in
a lower average size of payment made, producing an 18% decrease
in the average revenue per trade.
Segment income increased 53% to $43.3 million in fiscal 2015
compared to $28.3 million in fiscal 2014. The increase primarily
resulted from the higher operating revenues partially offset by a
$1.9 million increase in non-variable expenses. Variable expenses,
excluding interest, expressed as a percentage of operating revenues
decreased to 29% in fiscal 2015 compared to 32% in fiscal 2014.
36
Form 10K
Securities
We provide value-added solutions that facilitate cross-border trading and
believe our customers value our ability to manage complex transactions,
including foreign exchange, utilizing our local understanding of
market convention, liquidity and settlement protocols around the
world. Our customers include U.S.-based regional and national
broker-dealers and institutions investing or executing customer
transactions in international markets and foreign institutions seeking
access to the U.S. securities markets. We are one of the leading market
makers in foreign securities, including unlisted ADRs, GDRs and
foreign ordinary shares. We make markets in over 3,600 ADRs,
GDRs and foreign ordinary shares, of which over 2,000 trade in the
OTC market. In addition, we will, on request, make prices in more
than 10,000 unlisted foreign securities. We are a broker-dealer in
Argentina where we are active in providing institutional executions
in the local capital markets.
We act as an institutional dealer in fixed income securities, including
U.S. Treasury, U.S. government agency, agency mortgage-backed and
asset-backed securities to a customer base including asset managers,
commercial bank trust and investment departments, broker-dealers
and insurance companies.
We originate, structure and place debt instruments in the international
and domestic capital markets. These instruments include complex
asset-backed securities (primarily in Argentina) and domestic municipal
securities. On occasion, we may invest our own capital in debt
instruments before selling them. We also actively trade in a variety of
international debt instruments as well as operate an asset management
business in which we earn fees, commissions and other revenues for
management of third party assets and investment gains or losses on
our investments in funds and proprietary accounts managed either
by our investment managers or by independent investment managers.
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table provides the financial performance for Securities for the periods indicated.
(in millions)
Revenues:
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting and management fees
Interest income
Other
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Variable direct compensation and benefits
Net contribution
Non-variable direct expenses
Segment income
2016
—
108.6
10.7
17.5
38.4
—
175.2
—
175.2
26.1
11.8
15.4
121.9
24.4
97.5
28.1
69.4
$
$
Year Ended September 30,
2015
% Change
% Change
— $
43%
81%
(27)%
61%
—
35%
—
35%
10%
39%
71%
38%
15%
45%
4%
71% $
—
76.1
5.9
24.0
23.8
—
129.8
—
129.8
23.7
8.5
9.0
88.6
21.2
67.4
26.9
40.5
$
—
44%
127%
12%
644%
(100)%
62%
—
62%
37%
49%
233%
62%
55%
65%
35%
93% $
The following table sets forth operating revenues by product line and selected data for Securities for the periods indicated.
2014
—
52.8
2.6
21.5
3.2
0.2
80.3
—
80.3
17.3
5.7
2.7
54.6
13.7
40.9
19.9
21.0
2014
Operating revenues by product line (in millions):
Equity Market-Making
Debt Trading
Investment Banking
Asset Management
Selected data:
Equity Market-Making (gross dollar volume, millions)
Equity Market-Making revenue per $1,000 traded
Debt Trading (principal dollar volume, millions)
Debt Trading revenue per $1,000 traded
Average assets under management in Argentina (millions)
2016
$
$
62.4
90.9
3.7
18.2
175.2
$ 88,518.8
$
0.70
$ 107,747.4
0.84
$
562.4
$
Year Ended September 30,
2015
% Change
% Change
8% $
87%
(61)%
30%
35% $
(10)% $
19% $
70% $
9% $
(2)% $
57.7
48.6
9.5
14.0
129.8
98,604.3
0.59
63,502.6
0.77
572.1
44% $
191%
1%
—%
62% $
40.2
16.7
9.4
14.0
80.3
42% $
2% $
1,243% $
(78)% $
8% $
69,435.1
0.58
4,727.8
3.53
530.9
For information about the assets of this segment, see Note 22 to the Consolidated Financial Statements.
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
Operating revenues increased 35% to $175.2 million in fiscal 2016
compared to $129.8 million in fiscal 2015.
Operating revenues from Equity Market-Making increased 8%,
to $62.4 million in fiscal 2016 compared to fiscal 2015, despite a
10% decline in the gross dollar volume traded, as favorable market
conditions drove an increase in the average revenue per $1,000 traded.
Operating revenues from Debt Trading increased 87% to $90.9 million
in fiscal 2016 compared to fiscal 2015. The increase in operating
revenues was a result of the acquisition of G.X. Clarke, which was
effective on January 1, 2015 and thus only contributed operating
revenues beginning in the second quarter of fiscal 2015, as well as
strong performance in Argentina as the result of the market conditions
following the devaluation of the Argentine peso. Investment Banking
operating revenues declined 61% in fiscal 2016 compared to fiscal
2015, resulting primarily from management’s decision to exit the
domestic investment banking business. Asset Management revenues
in fiscal 2016 increased 30% to $18.2 million in fiscal 2016 versus
$14.0 million in fiscal 2015. Average assets under management were
$562.4 million in fiscal 2016 compared to $572.1 million in fiscal 2015.
Segment income increased 71% to $69.4 million in fiscal 2016
compared to $40.5 million in fiscal 2015 primarily as a result of the
increase in operating revenues. Variable expenses, excluding interest,
expressed as a percentage of operating revenues decreased to 36%
in fiscal 2016 compared to 41% in fiscal 2015, as the G.X. Clarke
business has a relatively low level of transaction-based clearing expenses.
Form 10K 37
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Year Ended September 30, 2015 Compared to
Year Ended September 30, 2014
Operating revenues increased 62% to $129.8 million in fiscal 2015
compared to $80.3 million in fiscal 2014.
Operating revenues from Equity Market-Making increased 44%, to
$57.7 million in fiscal 2015 compared to fiscal 2014, as favorable
market conditions drove a 42% increase in the gross dollar volume
traded, while the average revenue per $1,000 traded was relatively
flat with the prior year.
Operating revenues from Debt Trading increased 191% to $48.6 million
in fiscal 2015 compared to fiscal 2014. The increase in operating
revenues resulted from the acquisition of G.X. Clarke, which added
an incremental $31.4 million in operating revenues. Investment
Banking operating revenues increased 1% in fiscal 2015 compared
to fiscal 2014, while Asset Management revenues in fiscal 2015 were
flat compared to fiscal 2014. Average assets under management were
$572.1 million in fiscal 2015 compared to $530.9 million in fiscal 2014.
Segment income increased 93% to $40.5 million in fiscal 2015
compared to $21.0 million in fiscal 2014 primarily as a result of the
strong performance in equity market making and the acquisition
of G.X. Clarke. Variable expenses, excluding interest, expressed as
a percentage of operating revenues decreased to 41% in fiscal 2015
compared to 46% in fiscal 2014, as G.X. Clarke has relatively low
transaction-based clearing expenses.
Physical Commodities
This segment consists of our physical Precious Metals trading and
Physical Ag & Energy commodity businesses. In Precious Metals, we
provide a full range of trading and hedging capabilities, including
OTC products, to select producers, consumers, and investors. In our
trading activities, we act as a principal, committing our own capital
to buy and sell precious metals on a spot and forward basis.
Our Physical Ag & Energy commodity business provides financing to
commercial commodity-related companies against physical inventories,
including grain, lumber, meats, energy products and renewable fuels.
We use sale and repurchase agreements to purchase commodities
evidenced by warehouse receipts, subject to a simultaneous agreement
to sell such commodities back to the original seller at a later date.
Transactions where the sale and repurchase price are fixed upon
execution, and meet additional required conditions, are accounted for
as product financing arrangements, and accordingly no commodity
inventory, purchases or sales are recorded. Transactions where the
repurchase price is not fixed at execution do not meet all the criteria to
be accounted for as product financing arrangements, and therefore are
recorded as commodity inventory, purchases and sales. Additionally,
we engage as a principal in physical purchase and sale transactions
related to inputs to the renewable fuels and feed ingredient industries.
During 2015, we transitioned the portion of our Precious Metals
business conducted through our unregulated domestic subsidiary,
INTL Commodities Inc., to our U.K. based broker-dealer subsidiary,
INTL FCStone Ltd, which is regulated by the Financial Conduct
Authority (“FCA”), the regulator of the financial services industry in
the U.K. This transfer resulted in a change in the valuation of precious
metals inventory held by INTL FCStone Ltd, as well as a change in
the presentation of INTL FCStone Ltd’s precious metals sales and
cost of sales to a net basis. See Note 1 of the Consolidated Financial
Statements for further information.
Precious metals inventory held by our subsidiaries that are not
broker-dealers continues to be valued at the lower of cost or market
value. Precious metals sales and cost of sales for subsidiaries that are
not broker-dealers continue to be recorded on a gross basis. In our
Physical Ag and Energy commodity business, we value our inventory
at net realizable value, which approximates fair value less disposal costs.
The agricultural inventories have reliable, readily determinable and
realizable market prices, have relatively insignificant costs of disposal
and are available for immediate delivery. Revenues generated from
our Physical Ag and Energy commodity business are recorded on a
gross basis.
Operating revenues and losses from our Precious Metals commodities
derivatives activities are included in ‘trading gains, net’ in the
consolidated income statements. Operating revenues and losses
from our Physical Ag and Energy commodity business are included
in ‘cost of sales of physical commodities’ in the consolidated income
statements. We generally mitigate the price risk associated with
commodities held in inventory through the use of derivatives. We do
not elect hedge accounting under U.S. GAAP in accounting for this
price risk mitigation. Management continues to evaluate performance
and allocate resources on an operating revenue basis.
38
Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table provides the financial performance for Physical Commodities for the periods indicated.
(in millions)
Revenues:
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting and management fees
Interest income
Other
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Variable direct compensation and benefits
Net contribution
Non-variable direct expenses
Segment income
2016
$ 14,112.0
(0.7)
1.0
1.2
7.0
—
14,120.5
14,083.9
36.6
0.7
0.5
3.9
31.5
8.1
23.4
10.1
13.3
$
Year Ended September 30,
2015
% Change
% Change
(59)% $
(77)%
100%
(33)%
150%
—
(59)%
(59)%
58%
75%
67%
225%
49%
88%
38%
(9)%
129% $
34,089.9
(3.0)
0.5
1.8
2.8
—
34,092.0
34,068.9
23.1
0.4
0.3
1.2
21.2
4.3
16.9
11.1
5.8
2% $
500%
(17)%
(42)%
12%
—
2%
2%
12%
(33)%
(25)%
(29)%
18%
13%
20%
35%
(2)% $
2014
33,546.4
(0.5)
0.6
3.1
2.5
—
33,552.1
33,531.5
20.6
0.6
0.4
1.7
17.9
3.8
14.1
8.2
5.9
The following tables set forth operating revenue by product line and selected data for Physical Commodities for the periods indicated.
Total revenues
Cost of sales of physical commodities
Operating revenues
Selected data:
Gold equivalent ounces traded (000’s)
Average revenue per ounce traded
Total revenues
Cost of sales of physical commodities
Operating revenues
2016
$ 13,674.2
13,650.3
23.9
$
92,073.7
0.26
$
2016
446.3
433.6
12.7
$
$
% Change
% Change
Precious Metals
Year Ended September 30,
2015
33,816.4
33,802.2
14.2
(60)% $
(60)%
68% $
9% $
9%
28% $
2014
31,142.5
31,131.4
11.1
(27)%
136% $
126,365.5
0.11
60%
(21)% $
79,127.1
0.14
Physical Ag & Energy
Year Ended September 30,
2015
% Change
% Change
62% $
63%
41% $
275.6
266.6
9.0
(18)% $
(19)%
(5)% $
2014
337.7
328.2
9.5
For information about the assets of this segment, see Note 22 to the Consolidated Financial Statements.
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
2015. The increase in operating revenues is primarily due an increase
in volumes in our physical fats & oils, energy and coal activities.
Operating revenues increased 58% to $36.6 million in fiscal 2016
compared to $23.1 million in fiscal 2015.
Precious metals operating revenues increased 68% to $23.9 million
in fiscal 2016 compared to $14.2 million in fiscal 2015. Operating
revenues increased despite a 27% decline in the number of ounces
traded, as market volatility increased, partially as a result of the
Brexit vote, drove a widening of spreads.
Operating revenues in Physical Ag & Energy increased 41% to
$12.7 million in fiscal 2016 compared to $9.0 million in fiscal
Segment income increased 129% to $13.3 million in fiscal 2016
compared to $5.8 million in fiscal 2015, primarily as a result of
the increase in operating revenues as well a $1.0 million decline
in non-variable direct expenses which includes both fixed expenses
and bad debt expense. Bad debt expense declined $2.4 million in
fiscal 2016 as compared to fiscal 2015, which was partially offset by
a $0.8 million increase in operational expenses. Variable expenses
expressed as a percentage of operating revenues increased to 25%
in fiscal 2016 compared to 22% in fiscal 2015, primarily drive by
higher variable compensation.
Form 10K 39
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Year Ended September 30, 2015 Compared to
Year Ended September 30, 2014
margin deposits to support the transactions, and the accounting and
reporting of the transactions to customers.
Operating revenues increased 12% to $23.1 million in fiscal 2015
compared to $20.6 million in fiscal 2014.
Precious metals operating revenues increased 28% to $14.2 million
in fiscal 2015 compared to $11.1 million in fiscal 2014. The increase
in operating revenues is a result of a 60% increase in the number of
ounces traded, primarily in the Far Eastern markets, however this was
partially offset by a narrowing of spreads due to market conditions.
Operating revenues in Physical Ag & Energy decreased 5% to
$9.0 million in fiscal 2015 compared to $9.5 million in fiscal 2014.
The decrease in operating revenues is primarily due to a decline in
commercial commodity-related financing transactions.
Segment income decreased 2% to $5.8 million in fiscal 2015 compared
to $5.9 million in fiscal 2014, and primarily resulted from the decline
in operating revenues and a $2.8 million increase in bad debt expense
in Physical Ag & Energy, related to a customer in the renewable fuels
industry. Variable expenses expressed as a percentage of operating
revenues decreased to 22% in fiscal 2015 compared to 23% in
fiscal 2014.
Clearing and Execution Services
We provide competitive and efficient clearing and execution in all
major futures and securities exchanges globally as well as prime
brokerage in all major foreign currency pairs and swap transactions.
Through our platform, customer orders are accepted and directed to
the appropriate exchange for execution. We then facilitate the clearing
of customer transactions. Clearing involves the matching of customer
trades with the exchange, the collection and management of customer
As of September 30, 2016, we held $2.1 billion in required customer
segregated assets, which we believe makes us the third largest
independent futures commission merchant (“FCM”) in the United
States not affiliated with a major financial institution or commodity
intermediary, end-user or producer, as measured by required customer
segregated assets. We seek to leverage our capabilities and capacity by
offering facilities management or outsourcing solutions to other FCM’s.
Following our acquisition of the Sterne Agee correspondent securities
clearing business, we are an independent full-service provider to
introducing broker-dealers (“IBD’s”) of clearing, custody, research,
syndicated and security-based lending products and services, including
a proprietary technology platform which offers seamless connectivity
to ensure a positive customer experience through the clearing and
settlement process. Also as part of this transaction, we acquired
Sterne Agee’s independent wealth management business which offers
a comprehensive product suite to retail customers nationwide. As a
result we are one of the leading mid-market clearers in the securities
industry, clearing for 50 correspondent clearing customers and in
aggregate over 120,000 underlying individual retail securities accounts
with over $12 billion in AUM as of September 30, 2016.
In addition, we believe we are one of the largest non-bank prime
brokers and swap dealers in the world. Through this offering, we
provide prime brokerage foreign exchange (“FX”) services to financial
institutions and professional traders. We provide our customers with
the full range of OTC products, including 24-hour a day execution
of spot, forwards and options as well as non-deliverable forwards
in both liquid and exotic currencies. We also operate a proprietary
foreign exchange desk that arbitrages the exchange-traded foreign
exchange markets with the cash markets.
The following table provides the financial performance and selected data for Clearing and Execution Services for the periods indicated.
2016
—
21.0
115.3
8.5
6.3
—
151.1
—
151.1
67.8
33.5
1.0
48.8
9.3
39.5
24.7
14.8
$
$
(in millions)
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting and management fees
Interest income
Other
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Variable direct compensation and benefits
Net contribution
Non-variable direct expenses
Segment income
40
Form 10K
Year Ended September 30,
2015
% Change
% Change
$
—
(2)%
19%
431%
66%
—
22%
—
22%
3%
76%
233%
27%
13%
31%
44%
15% $
—
21.5
96.5
1.6
3.8
—
123.4
—
123.4
65.8
19.0
0.3
38.3
8.2
30.1
17.2
12.9
$
—
52%
—%
(11)%
153%
—
9%
—
9%
6%
(11)%
(25)%
29%
44%
25%
(3)%
105% $
2014
—
14.1
96.3
1.8
1.5
—
113.7
—
113.7
62.3
21.3
0.4
29.7
5.7
24.0
17.7
6.3
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table sets forth operating revenues by product line and selected data for Clearing and Execution Services for the periods indicated.
Operating revenues by product line (in millions):
Exchange-traded Futures and Options
FX Prime Brokerage
Correspondent Clearing
Independent Wealth Management
Selected data:
Exchange-traded futures and options (contracts, 000’s)
Exchange-traded futures and options average rate per contract
Average customer equity - futures and options (millions)
FX Prime Brokerage volume (U.S. notional, millions)
2016
$
$
106.1
20.9
5.6
18.5
151.1
76.9
1.21
$
$
955.1
$ 580,426.9
Year Ended September 30,
2015
% Change
% Change
2014
4% $
(3)%
n/m
n/m
22% $
101.9
21.5
—
—
123.4
79.2
(3)%
1.15
5% $
1% $
943.4
29% $ 449,344.1
2% $
52%
—%
—%
9% $
99.6
14.1
—
—
113.7
5%
(5)% $
3% $
75.7
1.21
911.7
45% $ 310,297.5
For information about the assets of this segment, see Note 22 to the Consolidated Financial Statements.
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
Year Ended September 30, 2015 Compared to
Year Ended September 30, 2014
Operating revenues increased 22% to $151.1 million in fiscal 2016
compared to $123.4 million in fiscal 2015.
Operating revenues increased 9% to $123.4 million in fiscal 2015
compared to $113.7 million in fiscal 2014.
Operating revenues in our Exchange-traded Futures and Options
business increased 4% to $106.1 million in fiscal 2016 compared
to $101.9 million in fiscal 2015, despite a 3% decline in exchange-
traded volumes as the average rate per contract increased 5% and
interest income increased $1.3 million compared to fiscal 2015. The
average level of customer equity increased 1% to $955.1 million in
fiscal 2016 compared to $943.4 million in fiscal 2015.
Operating revenues in our FX Prime Brokerage declined 3% to
$20.9 million in fiscal 2016 compared to $21.5 million in fiscal
2015, despite a 29% increase in foreign exchange volumes driven by
a narrowing of margins compared to the prior year period.
During the fourth fiscal quarter of 2016, we acquired the correspondent
securities clearing and independent wealth management businesses
of Sterne Agee. During the fourth fiscal quarter, the correspondent
securities clearing and independent wealth management businesses
generated operating revenues of $5.6 million and $18.5 million,
respectively.
Segment income increased 15% to $14.8 million in fiscal 2016
compared to $12.9 million in fiscal 2015, primarily as a result of the
acquisition of the Sterne Agee businesses which added $1.5 million of
incremental segment income. Variable expenses, excluding interest, as
a percentage of operating revenues were 73% in fiscal 2016 compared
to 75% in fiscal 2015.
Operating revenues in our Exchange-traded Futures & Options
business increased 2% to $101.9 million in fiscal 2015 compared
to $99.6 million in fiscal 2014 as a 5% increase in exchange-traded
volumes was mostly offset by a lower average rate per contract compared
to fiscal 2014. Interest income in the exchange-traded business, which
was constrained by the effect of low short-term interest rates, was
$3.8 million in fiscal 2015 compared to $1.5 million in fiscal 2014.
The increase in interest income was the result of a 3% increase in
the average level of customer equity to $943.4 million in fiscal 2015
compared to $911.7 million in fiscal 2014, and the implementation
of our interest rate management program.
Operating revenues from FX Prime Brokerage increased 52% to
$21.5 million in fiscal 2015 compared to $14.1 million in fiscal 2014,
as a result of a 45% increase in foreign exchange volumes as a result
of increased foreign currency market volatility.
Segment income increased 105% to $12.9 million in fiscal 2015
compared to $6.3 million in fiscal 2014, primarily as a result of the
increase in operating revenues and a decline in variable expenses as a
percentage of operating revenues driven by lower introducing broker
expenses. Variable expenses, excluding interest, as a percentage of
operating revenues were 75% in fiscal 2015 compared to 79% in
fiscal 2014.
Liquidity, Financial Condition and Capital Resources
Overview
Liquidity is defined as our ability to generate sufficient amounts of
cash to meet all of our cash needs. Liquidity is of critical importance
to us and imperative to maintaining our operations on a daily basis.
INTL FCStone Financial is registered as a broker-dealer with FINRA
and is registered as a futures commission merchant with the CFTC and
NFA. In INTL FCStone Financial, our broker-dealer/FCM subsidiary,
we have responsibilities to meet margin calls at all exchanges on a daily
basis and intra-day basis, if necessary. We require our customers 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. Margin required to be posted to the
exchanges is a function of the net open positions of our customers
and the required margin per contract. INTL FCStone Financial is
subject to minimum capital requirements under Section 4(f)(b) of the
Form 10K 41
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Commodity Exchange Act, Part 1.17 of the rules and regulations of
the CFTC and the SEC Uniform Net Capital Rule 15c3-1 under the
Securities Exchange Act of 1934. These rules specify the minimum
amount of capital that must be available to support our customers’
open trading positions, including the amount of assets that INTL
FCStone Financial must maintain in relatively liquid form, and are
designed to measure general financial integrity and liquidity.
INTL FCStone Ltd, our U.K. regulated subsidiary, is required to be
compliant with the U.K.’s Individual Liquidity Adequacy Standards
(“ILAS”). To comply with these standards, we have implemented
daily liquidity procedures, conduct periodic reviews of liquidity by
stressed scenarios, and have created liquidity buffers.
Sterne, Agee & Leach, Inc., Sterne Agee Clearing, Inc. and Sterne
Agee Financial Services, Inc. are subject to the SEC Uniform Net
Capital Rule 15c3-1 under the Securities Exchange Act of 1934.
In addition, in our physical commodities trading, commercial hedging
OTC, securities and foreign exchange trading activities, we may be
called upon to meet margin calls with our various trading counterparties
based upon the underlying open transactions we have in place with
those counterparties.
We continuously review our overall credit and capital needs to ensure
that our capital base, both stockholders’ equity and debt, as well as
available credit facilities can appropriately support the anticipated
financing needs of our operating subsidiaries.
As of September 30, 2016, we had total equity capital of $433.8 million,
$45.5 million aggregate principal amount of our issued 8.5% senior
unsecured notes, which were redeemed on October 15, 2016, and
bank loans of $182.8 million.
A substantial portion of our assets are liquid. As of September 30, 2016,
approximately 97% of our assets consisted of cash; securities purchased
under agreements to resell; deposits and receivables from exchange-
clearing organizations, broker-dealers, clearing organizations and
counterparties; customer receivables, marketable financial instruments
and investments, and physical commodities inventory. All assets
that are not customer and counterparty deposits are financed by
our equity capital, senior unsecured notes, bank loans, short-term
borrowings from financial instruments sold, not yet purchased and
under repurchase agreements, and other payables.
As of September 30, 2016, we owned debentures issued by a single
asset owning company of the Suriwongse Hotel located in Chiang
Mai, Thailand, and our investment in the hotel was $3.0 million. In
December 2016, we sold the debentures and collected an amount
approximating their carrying value.
As of September 30, 2016, we had deferred tax assets totaling
$34.5 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.
The valuation allowance for deferred tax assets as of September 30,
2016 and September 30, 2015 was $3.6 million and $3.2 million,
respectively. The valuation allowances as of September 30, 2016 and
September 30, 2015 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 income/(losses) for
the years ended September 30, 2016, 2015, and 2014 of $(9.7) million,
$16.5 million, and $(18.4) million, respectively. There are no significant
differences between actual levels of past taxable income and the results
of continuing operations, before income taxes in these jurisdictions.
When evaluating if U.S. federal, state, and local deferred taxes are
realizable, we considered deferred tax liabilities of $4.5 million that are
scheduled to reverse from 2017 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 11 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. The risk includes liquidity risk to the extent our
customers or counterparties are unable to make timely payment of
margin or other credit support. These 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 customers 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
customers to make intra-day margin payments during periods of
significant price movement. We have the ability to increase the margin
42
Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
The majority of the assets of INTL FCStone Financial are restricted
from being transferred to its parent or other affiliates due to specific
regulatory requirements. These restrictions have no impact on our ability
to meet our cash obligations, and no impact is expected in the future.
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.
We have liquidity and funding policies and processes in place that are
intended to maintain significant flexibility to address both company-
specific and industry liquidity needs. The majority of our excess funds
are held with high-quality institutions, under highly-liquid reverse
repurchase agreements, U.S. government obligations and AA-rated
money market investments. We do not hold any direct investments
in the general obligations of any sovereign nations.
In our debt trading business, we enter into receivable under reverse
repurchase agreements and payables under repurchase agreements
primarily to finance inventory positions, acquire securities to cover
short positions or to acquire securities for settlement. We either receive
or pledge securities to adequately collateralize such agreements and
transactions. The value of this collateral is marked-to-market on a daily
basis and we may require counterparties, or be required, to deposit
additional collateral or return collateral pledged, when appropriate.
As of September 30, 2016, $264.2 million of cash, cash equivalents
and available-for-sale investment securities was held by our foreign
subsidiaries. If these funds are needed for operations in the U.S., we
would be required to accrue and pay U.S. taxes to repatriate these
funds, up to the amount of undistributed earnings of $294.3 million.
However, our intent is to indefinitely reinvest these funds outside of
the U.S., and our current plans do not demonstrate a need to repatriate
them to fund our U.S. operations.
During the fiscal years ended September 30, 2016, 2015, and 2014,
we recorded bad debts, net of recoveries of $4.4 million, $7.3 million,
and $5.5 million, respectively. During the year ended September 30,
2016, our bad debts included $3.6 million of customer deficits in the
Commercial Hedging segment, $0.4 million of uncollectible customer
receivables in the Physical Commodities segment and $0.4 million of
uncollectible service fees and notes in the Securities segment. During
the year ended September 30, 2015, our bad debts primarily related
to $2.8 million of customer receivables in our Physical Ag’s & Energy
component of our Physical Commodities segment, $2.3 million of
OTC customer deficits and $0.6 million of LME customer deficits in
our Commercial Hedging segment, $0.5 million of uncollectible service
fees and notes in our Securities segment, and $1.1 million of notes
receivable related to loans pertaining to a former acquisition. During the
year ended September 30, 2014, our bad debts included $3.8 million
in our Commercial Hedging segment, related to account deficits from
a Hong Kong commercial LME customer and Brazilian OTC Financial
Ag & Energy customers, $0.9 million in our Physical Ag & Energy
component, related to renewable fuels activity, and $0.7 million in
our Securities segment related to charge-offs of uncollectible service
fees. Additional information related to bad debts, net of recoveries,
for the fiscal years ended September 30, 2016, 2015, and 2014 is set
forth in Note 5 of the Consolidated Financial Statements.
Primary Sources and Uses of Cash
Our assets and liabilities may vary significantly from period to period due
to changing customer requirements, economic and market conditions and
our growth. Our total assets as of September 30, 2016 and September 30,
2015, were $5,951.3 million and $5,070.0 million, respectively. Our
operating activities generate or utilize cash as a result of net income or
loss earned or incurred during each period and fluctuations in our assets
and liabilities. The most significant fluctuations arise from changes in
the level of customer activity, commodities prices and changes in the
balances of financial instruments and commodities inventory. INTL
FCStone Financial and INTL FCStone Ltd occasionally uses their
margin line credit facilities, on a short-term basis, to meet intraday
settlements with the commodity exchanges prior to collecting margin
funds from their customers.
As of September 30, 2016, approximately $25.7 million of our financial
instruments owned and $25.8 million of financial instruments sold,
not yet purchased, are exchangeable foreign equities and ADRs.
As of September 30, 2016, we had $45.5 million outstanding in
aggregate principal amount of our 8.5% Senior Notes due 2020 (the
“Notes”). The Notes were issued in July 2013, and bore interest at
a rate of 8.5% per year (payable quarterly on January 30, April 30,
July 30 and October 30 of each year). The Notes were scheduled to
mature on July 30, 2020. We could redeem the Notes, in whole or
in part, at any time on and after July 30, 2016, at a redemption price
equal to 100% of the principal amount redeemed plus accrued and
unpaid interest to, but not including, the redemption date. We incurred
debt issuance costs of $1.7 million in connection with the issuance of
the Notes, which were being amortized over the term of the Notes.
On September 15, 2016, we provided notice, through the trustee of
the Notes, to the record holders of the Notes that we would redeem
the outstanding $45.5 million aggregate principal amount of the
Notes in full. Pursuant to the terms of the Indenture, we redeemed
the Notes at a price equal to 100% of the principal amount redeemed
plus accrued and unpaid interest to, but not including, the redemption
date on October 15, 2016.
In April 2015, we obtained a $4.0 million loan from a commercial
bank, secured by equipment purchased with the proceeds. The note
is payable in monthly installments, ending in March 2020.
As of September 30, 2016, we had four committed bank credit facilities,
totaling $447.0 million, of which $180.0 million was outstanding.
The credit facilities include:
(cid:116) A three-year syndicated loan facility, committed until March 18,
2019, under which INTL FCStone Inc. is entitled to borrow up
to $247 million, subject to certain terms and conditions of the
credit agreement. The loan proceeds are used to finance working
capital needs of us and certain subsidiaries. We paid debt issuance
costs of $1.8 million in connection with the issuance of this credit
facility, which are being amortized over the thirty-six month term
of the facility. The agreement also includes a non-financial covenant
limiting the amount of annual consolidated capital expenditures to
$15.0 million. Our annual consolidated expenditures were in excess
Form 10K 43
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
of this amount during fiscal 2016. We requested and were granted
a waiver from the lenders, dated December 8, 2016, for the excess
amount acquired during fiscal 2016.
(cid:116) An unsecured syndicated loan facility, committed until April 6, 2017,
under which our subsidiary, INTL FCStone Financial is entitled to
borrow up to $75 million, subject to certain terms and conditions
of the credit agreement. This line of credit is intended to provide
short-term funding of margin to commodity exchanges as necessary.
(cid:116) A syndicated borrowing facility, committed until May 1, 2018,
under which our subsidiary, FCStone Merchant Services, LLC is
entitled to borrow up to $100 million, subject to certain terms
and conditions of the credit agreement. The loan proceeds are
used to finance traditional commodity financing arrangements and
commodity repurchase agreements.
(cid:116) An unsecured syndicated loan facility, committed until October 27,
2017, under which our subsidiary, INTL FCStone Ltd is entitled to
borrow up to $25 million, subject to certain terms and conditions of
the credit agreement. This facility is intended to provide short-term
funding of margin to commodity exchanges as necessary.
Additional information regarding the committed bank credit facilities
can be found in Note 10 of the Consolidated Financial Statements.
During fiscal 2017, $75 million of our committed credit facilities are
scheduled to expire. We intend to renew or replace these facilities as
they expire, and based on our liquidity position and capital structure,
we believe we will be able to do so.
Additionally, we have a secured, uncommitted loan facility, under
which our subsidiary, INTL FCStone Financial may borrow up to
$50.0 million, collateralized by commodity warehouse receipts, to
facilitate U.S. commodity exchange deliveries of its customers, subject
to certain terms and conditions of the credit agreement.
We also have a secured uncommitted loan facility under which our
subsidiary, INTL FCStone Ltd may borrow up to approximately
$25.0 million, collateralized by commodity warehouse receipts, to
facilitate financing of commodities under repurchase agreement
services to its customers, subject to certain terms and conditions of
the credit agreement.
In connection with the acquisition of the Sterne businesses, we
assumed two uncommitted secured lines of credit under which we
may borrow for short term funding of firm and customer margin
requirements. The facilities bear interest at a rate per annum equal to
such rate in respect of such day as determined by the bank in its sole
discretion. In the event that we fail to pay the principal and interest
on the scheduled due date, the facilities bear penalty interest at a rate
equal to the Federal Funds rate plus 2%. Amounts borrowed under
the facilities are payable on demand.
Our facility agreements contain certain financial covenants relating
to financial measures on a consolidated basis, as well as on a certain
stand-alone subsidiary basis, including minimum net worth, minimum
regulatory capital, minimum net unencumbered liquid assets, maximum
net loss, minimum fixed charge coverage ratio and maximum funded
debt to net worth ratio. Failure to comply with any such covenants
could result in the debt becoming payable on demand. We and our
subsidiaries are in compliance with all of our financial covenants
under the outstanding facilities.
We have contingent liabilities relating to an acquisition we completed
in January 2015. See Note 11 to the Consolidated Financial Statements
for additional information on this contingent liability. The contingent
liability for the estimated additional discounted purchase price
consideration totals $0.8 million as of September 30, 2016, and is
included in ‘accounts payable and other accrued liabilities’ in the
consolidated balance sheets. We estimate cash payments related to
these contingent liabilities to be $0.8 million during fiscal 2017.
We contributed $1.8 million to our defined benefit pension plans
during the year ended September 30, 2016, and expect to contribute
$2.1 million to the plans during fiscal 2017.
Other Capital Considerations
Our activities are subject to significant governmental regulations
and capital adequacy requirements, both in the U.S. and overseas.
Certain other of our non-U.S. subsidiaries are also subject to capital
adequacy requirements promulgated by authorities of the countries
in which they operate.
Our subsidiaries are in compliance with all of their capital regulatory
requirements as of September 30, 2016. Additional information on
these net capital and minimum net capital requirements can be found
in Note 12 of the Consolidated Financial Statements.
The Dodd-Frank Act created a comprehensive new regulatory regime
governing the OTC and listed derivatives markets and their participants
by requiring, among other things: centralized clearing of standardized
derivatives (with certain stated exceptions); the trading of clearable
derivatives on swap execution facilities or exchanges; and registration
and comprehensive regulation of new categories of market participants
as “swap dealers” and swap “introducing brokers.” Our subsidiary,
INTL FCStone Markets, LLC, is a provisionally registered swap
dealer. Some important rules, such as those setting capital and margin
requirements, have not been finalized or fully implemented, and it is
too early to predict with any degree of certainty how we will be affected.
Cash Flows
Our cash and cash equivalents increased from $268.1 million as of
September 30, 2015 to $316.2 million as of September 30, 2016,
a net increase of $48.1 million. Net cash of $27.2 million was used
in operating activities, $35.5 million was used in investing activities
and net cash of $121.0 million was provided by financing activities,
of which $142 million was drawn on lines of credit and increased the
amounts payable to lenders under loans, $2.9 million was paid out as
earn-outs on acquisitions and $19.5 million was used to repurchase
shares. Fluctuations in exchange rates caused a reduction of $9.6 million
to our cash and cash equivalents.
In the commodities industry, companies report trading activities
in the operating section of the statement of cash flows. Due to the
daily price volatility in the commodities market, as well as changes
in margin requirements, fluctuations in the balances of deposits held
at various exchanges, marketable securities and customer commodity
accounts may occur from day-to-day. A use of cash, as calculated on
the consolidated statement of cash flows, includes unrestricted cash
transferred and pledged to the exchanges or guarantee funds. These
44
Form 10K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
funds are held in interest-bearing deposit accounts at the exchanges,
and based on daily exchange requirements, may be withdrawn and
returned to unrestricted cash. Additionally, within our unregulated
OTC and foreign exchange operations, cash deposits received from
customers are reflected as cash provided from operations. Subsequent
transfer of these cash deposits to counterparties or exchanges to margin
their open positions will be reflected as an operating use of cash to the
extent the transfer occurs in a different period than the cash deposit
was received.
Capital expenditures included in investing activities for property,
plant and equipment totaled $15.4 million in fiscal 2016, increasing
from $9.1 million in fiscal 2015. The increase in capital expenditures
is primarily due to an ongoing back-office trade system conversion
related to our OTC activities in our Commercial Hedging segment and
FX Prime Brokerage activities in our Clearing and Execution Services
segment. The new trade system is expected to be placed into service
during our second fiscal quarter ended March 31, 2017. Additionally,
the increase in capital expenditures is due to core information technology
hardware acquisitions and leasehold improvements on additional office
space obtained in London.
During fiscal 2016, we repurchased 750,204 shares of our outstanding
common stock in open market transactions, for an aggregate purchase
price of $19.5 million. During fiscal 2015, we have repurchased 224,509
shares of our outstanding common stock in open market transactions,
for an aggregate purchase price of $4.5 million. During fiscal 2014, we
repurchased 513,800 shares of our outstanding common stock in open
market transactions, for an aggregate purchase price of $9.7 million.
On August 18, 2016, our Board of Directors authorized for fiscal
2017, the repurchase of up to 1.0 million shares of our outstanding
common stock from time to time in open market purchases and
private transactions, commencing on October 1, 2016 and ending on
September 30, 2017, subject to the discretion of the senior management
team to implement our stock repurchase plan, and subject to market
conditions and as permitted by securities laws and other legal, regulatory
and contractual requirements and covenants.
Apart from what has been disclosed above, there are no known trends,
events or uncertainties that have had or are likely to have a material
impact on our liquidity, financial condition and capital resources.
Contractual Obligations
The following table summarizes our cash payment obligations as of September 30, 2016:
Total
Less than 1 year
1 - 3 Years
3 - 5 Years
After 5 Years
Payments Due by Period
$
(in millions)
Operating lease obligations
Purchase obligations(1)
Senior unsecured notes
Contingent acquisition consideration
Other
10.5
—
—
—
2.0
12.5
(1) Represents an estimate of contractual purchase commitments in the ordinary course of business primarily for the purchase of precious and base metals and agricultural and energy
commodities. Unpriced contract commitments have been estimated using September 30, 2016 fair values. The purchase commitments for less than one year will be partially offset by
corresponding sales commitments of $475.9 million.
44.8 $
601.9
45.5
0.8
7.7
700.7 $
11.8 $
—
—
—
1.7
13.5 $
13.7 $
—
—
0.8
2.4
16.9 $
601.9
45.5
—
1.6
657.8 $
8.8 $
$
Total contractual obligations exclude defined benefit pension obligations.
In fiscal 2017, we anticipate making contributions of $2.1 million
to defined benefit plans. Additional information on the funded
status of these plans can be found in Note 15 of the Consolidated
Financial Statements.
Based upon our current operations, we believe that cash flow from
operations, available cash and available borrowings under our credit
facilities will be adequate to meet our future liquidity needs.
Off Balance Sheet Arrangements
We are party to certain financial instruments with off-balance sheet
risk in the normal course of business as a registered securities broker-
dealer and FCM and from our market-making and proprietary trading
in the foreign exchange and commodities trading business. These
financial instruments include futures, forward and foreign exchange
contracts, exchange-traded and OTC options, mortgage-backed
TBAs, and interest rate swaps. Derivative financial instruments
involve varying degrees of off-statement of financial condition
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 statement
of financial condition. Exposure to market risk is influenced by a
number of factors, including the relationships between the financial
instruments and our positions, as well as the volatility and liquidity
in the markets in which the financial instruments are traded. The
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. We attempt to manage our exposure to market risk through
various techniques. Aggregate market limits have been established
and market risk measures are routinely monitored against these
limits. 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.
A significant portion of these instruments are primarily the execution
of orders for commodity futures and options on futures contracts on
behalf of its customers, substantially all of which are transacted on a
margin basis. Such transactions may expose us to significant credit
risk in the event margin requirements are not sufficient to fully cover
losses which customers may incur. We control the risks associated
Form 10K 45
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
with these transactions by requiring customers to maintain margin
deposits in compliance with individual exchange regulations and
internal guidelines. We monitor required margin levels daily and,
therefore, may require customers to deposit additional collateral or
reduce positions when necessary. We also establish contract limits for
customers, which are monitored daily. We evaluate each customer’s
creditworthiness on a case-by-case basis. Clearing, financing, and
settlement activities may require us to maintain funds with or pledge
securities as collateral with other financial institutions. Generally,
these exposures to exchanges are subject to netting of open positions
and collateral, while exposures to customers are subject to netting,
per the terms of the customer agreements, which reduce the exposure
to us 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 are adequate to minimize the risk of
material loss that could be created by positions held as of September 30,
2016. Additionally, we monitor collateral fair value on a daily basis
and adjusts collateral levels in the event of excess market exposure.
Generally, these exposures to both counterparties and customers are
subject to master netting agreements and the terms of the customer
agreements, which reduce our exposure.
As a broker-dealer in U.S. Treasury obligations, U.S. government
agency obligations, and agency mortgage-backed obligations, we
are engaged in various securities trading, borrowing and lending
activities servicing solely institutional counterparties. Our exposure
to credit risk associated with the nonperformance of counterparties
in fulfilling their contractual obligations pursuant to these securities
transactions and market risk associated with the sale of securities not
yet purchased can be directly impacted by volatile trading markets
which may impair their ability to satisfy outstanding obligations
to us. In the event of non-performance and unfavorable market
price movements, we may be required to purchase or sell financial
instruments, which may result in a loss to us.
We transact OTC and foreign exchange contracts with our customers,
and 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. These unmatched transactions are
intended to be short-term in nature and are conducted to facilitate
the most effective transaction for our customer.
Additionally, 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. The risk mitigation of offsetting options
is not within the documented hedging designation requirements of
the Derivatives and Hedging Topic of the ASC.
We also carry short positions, selling financial instruments that we do
not own and borrowing financial instruments to make good delivery,
and therefore we are obliged to purchase such financial instruments at
a future date in order to return the borrowed financial instruments.
We have recorded these obligations in the consolidated financial
statements at September 30, 2016 and September 30, 2015, at fair
value of the related financial instruments, totaling $839.4 million
and $568.3 million, respectively. These positions are held to offset
the risks related to financial assets owned, and reported in our
consolidated balance sheets in ‘financial instruments owned, at fair
value’, and ‘physical commodities inventory’. We will incur losses if
the fair value of the financial instruments sold, not yet purchased,
increases subsequent to September 30, 2016, which might be partially
or wholly offset by gains in the value of assets held as of September 30,
2016. The totals of $839.4 million and $568.3 million include a net
liability of $210.9 million and $54.1 million for derivatives, based
on their fair value as of September 30, 2016 and September 30,
2015, respectively.
We do not anticipate non-performance by counterparties in the
above situations. We have a policy of reviewing the credit standing
of each counterparty with which it conducts business. We have credit
guidelines that limit our current and potential credit exposure to any
one counterparty. We administer limits, monitor credit exposure,
and periodically review the financial soundness of counterparties.
We manage the credit exposure relating to our trading activities in
various ways, including entering into collateral arrangements and
limiting the duration of exposure. Risk is mitigated in certain cases by
closing out transactions and entering into risk reducing transactions.
We are a member of various exchanges that trade and clear futures and
option contracts. In connection with the Sterne acquisition, we are
also a member of and provide guarantees to securities clearinghouses
and exchanges in connection with customer trading activities.
Associated with our memberships, we may be required to pay a
proportionate share of the financial obligations of another member
who may default on its obligations to the exchanges. While the
rules governing different exchange memberships vary, in general
our guarantee obligations would arise only if the exchange had
previously exhausted its resources. In addition, any such guarantee
obligation would be apportioned among the other non-defaulting
members of the exchange. 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, 2016 and 2015.
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.
46
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ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
The 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.
The 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. Therefore, 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.
These 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.
The value of foreign currencies, including foreign currencies sold, not
yet purchased, are converted into its U.S. dollar equivalents at the
foreign exchange rates in effect at the close of business at the end of
the accounting period. For foreign currency transactions completed
during each reporting period, the foreign exchange rate in effect at
the time of the transaction is used.
The application of the valuation process for financial instruments and
foreign currencies is critical because these items represent a significant
portion of our total assets. Valuations for substantially all of the
financial instruments held are available from independent publishers
of market information. The valuation process may involve estimates
and judgments in the case of certain financial instruments with limited
liquidity and OTC derivatives. Given the wide availability of pricing
information, the high degree of liquidity of the majority of our assets,
and the relatively short periods for which they are typically held in
inventory, there is insignificant sensitivity to changes in estimates and
insignificant risk of changes in estimates having a material effect on
our financial statements. The basis for estimating the valuation of any
financial instruments has not undergone any change.
Revenue Recognition. A significant portion of our revenues are
derived principally from realized and unrealized trading income in
securities, derivative instruments, commodities and foreign currencies
purchased or sold for our account. We record realized and unrealized
trading income on a trade date basis. We state securities owned and
securities sold, not yet purchased and foreign currencies sold, not yet
purchased, at fair value with related changes in unrealized appreciation
or depreciation reflected in ‘trading gains, net’ in the consolidated
income statements. We record fee and interest income on the accrual
basis and dividend income is recognized on the ex-dividend date.
Revenue on commodities that are purchased for physical delivery to
customers and that are not readily convertible into cash is recognized
at the point in time when the commodity has been shipped, title and
risk of loss has been transferred to the customer, and the following
conditions have been met: persuasive evidence of an arrangement
exists, the price is fixed and determinable, and collectability of the
resulting receivable is reasonably assured.
The critical aspect of revenue recognition is recording all known
transactions as of the trade date of each transaction for the financial
period. We have developed systems for each of our businesses to capture
all known transactions. Recording all known transactions involves
reviewing trades that occur after the financial period that relate to
the financial period. The accuracy of capturing this information is
dependent upon the completeness and accuracy of data capture of
the operations systems and our clearing firms.
Income Taxes. We are subject to income taxes in the U.S. and numerous
foreign jurisdictions. Significant judgment is required in determining
the consolidated provision for income taxes and in evaluating tax
positions, including evaluating uncertainties. As a result, the company
recognizes tax liabilities based on estimates of whether additional taxes
and interest will be due. These tax liabilities are recognized when
despite our belief that our tax return positions are supportable, we
believe that certain positions may not be fully sustained upon review
by the relevant tax authorities.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. Significant judgment is
also required in determining any valuation allowance recorded against
deferred tax assets. In assessing the need for a valuation allowance,
management considers all available evidence for each jurisdiction
including past operating results, estimates of future taxable income,
and the feasibility of ongoing tax planning strategies. In the event that
we change our determination as to the amount of deferred tax assets
that can be realized, we will adjust our valuation allowance with a
corresponding impact to income tax expense in the period in which
such determination is made.
We believe that our accruals for tax liabilities are adequate for all
open audit years based on our assessment of many factors including
past experience and interpretations of tax law. This assessment relies
on estimates and assumptions and may involve series of complex
judgments about future events. To the extent that new information
becomes available which causes us to change our judgment regarding
Form 10K 47
PART II
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk
the adequacy of existing tax liabilities, such changes to tax liabilities will
impact income tax expense in the period in which such determination
is made. The consolidated provision for income taxes will change period
to period based on non-recurring events, such as the settlement of
income tax audits and changes in tax law, as well as recurring factors
including the geographic mix of income before taxes, state and local
taxes, and the effects of various global income tax strategies.
ITEM 7A Quantitative and Qualitative Disclosures
about Market Risk
See also Note 4 to the Consolidated Financial Statements, ‘Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk’.
Market Risk
We conduct our market-making and trading activities predominantly
as a principal, which subjects our capital to significant risks. These
risks include, but are not limited to, absolute and relative price
movements, price volatility and changes in liquidity, over which
we have virtually no control. Our exposure to market risk varies
in accordance with the volume of customer-driven market-making
transactions, the size of the proprietary positions and the volatility
of the financial instruments traded.
We seek to mitigate exposure to market risk by utilizing a variety of
qualitative and quantitative techniques:
(cid:116) Diversification of business activities and instruments;
(cid:116) Limitations on positions;
(cid:116) Allocation of capital and limits based on estimated weighted risks; and
(cid:116) Daily monitoring of positions and mark-to-market profitability.
We utilize derivative products in a trading capacity as a dealer to
satisfy customer needs and mitigate risk. We manage risks from both
derivatives and non-derivative cash instruments on a consolidated
basis. The risks of derivatives should not be viewed in isolation, but
in aggregate with our other trading activities.
Management believes that the volatility of revenues is a key indicator
of the effectiveness of its risk management techniques.
The graph below summarizes volatility of our daily revenue, determined on a marked-to-market basis, during the year ended September 30, 2016.
s
y
a
D
f
o
r
e
b
m
u
N
80
70
60
50
40
30
20
10
0
1
$0
to
$500
Marked-to-Market Revenues
77
74
19
6
46
24
5
2
$500
to
$1,000
$1,000
to
$1,500
$1,500
to
$2,000
$2,000
to
$2,500
$2,500
to
$3,000
$3,000
to
$3,500
$3,500
to
$4,000
$4,000
to
$4,500
Daily Revenues ($000’s)
1
$4,500
to
$5,000
In our Securities market-making and trading activities, we maintain inventories of equity and debt securities. In our Physical Commodities
segment, our positions include physical inventories, forwards, futures and options on futures, and OTC derivatives. Our commodity trading
activities are managed as one consolidated book for each commodity encompassing both cash positions and derivative instruments.We monitor
the aggregate position for each commodity in equivalent physical ounces, metric tons, or other relevant unit.
48
Form 10K
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. Within our
domestic institutional fixed income business, we maintain a significant
amount of trading assets and liabilities which are sensitive to changes
in interest rates. These trading activities consist primarily of securities
trading in connection with U.S. Treasury, U.S. government agency,
agency mortgage-backed and agency asset-backed obligations. Derivative
instruments, which consist of futures, mortgage-backed “to be announced”
(TBA) securities and forward settling transactions, are used to manage
risk exposures in the trading inventory. We enter into TBA securities
transactions for the sole purpose of managing risk associated with the
purchase of mortgage pass-through securities.
In addition, 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.
We employ an interest rate management strategy, where we use derivative
financial instruments in the form of interest rate swaps and outright
purchases of medium term U.S. Treasury notes to manage a portion of
our aggregate interest rate position. On a quarterly basis, we evaluate
our overall level of short term investable balances, net of our of variable
rate debt, and either invest a portion of these investable balances in
medium term U.S. Treasury notes or enter into interest rate swaps
when a sufficient interest rate spread between short term and medium
PART II
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk
term rates exists. Under this strategy, excluding cash deposits and our
investments in AA-rated money market funds, the weighted average
time to maturity of our portfolio is not to exceed 24 months in duration.
As part of this strategy we hold $780 million in par value of medium
term U.S. Treasury notes and $375 million in interest rate swap derivative
contracts, with the remainder being held in short term U.S. Treasury
bills and AA-rated money market fund investments. The weighted
average time to maturity of the portfolio, excluding cash deposits
and our investments in AA-rated money market funds is 15 months.
The U.S. Treasury notes and interest rate swaps are not designated for
hedge accounting treatment, and changes in their fair values, which
are volatile and can fluctuate from period to period, are recorded in
earnings on a quarterly basis. During the fiscal year ended September
30, 2016 and 2015, operating revenues include unrealized (losses) gains
of ($0.7) million and $7.0 million, respectively, related to the change
in fair value of these U.S. Treasury notes and interest rate swaps.
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. The debt instruments are carried
at their unpaid principal balance which approximates fair value. As of
September 30, 2016, $180.0 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, 2016, we had $48.3 million
outstanding in fixed-rate long-term debt. There are no earnings or
liquidity risks associated with our fixed-rate debt.
Form 10K 49
PART II
ITEM 8 Financial Statements and Supplementary Data
ITEM 8 Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
INTL FCStone Inc.:
We have audited INTL FCStone Inc. and subsidiaries’ (the Company)
internal control over financial reporting as of September 30, 2016,
based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Company’s management is responsible
for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on
Internal Control over Financial Reporting appearing under Item 9A
of the Company’s September 30, 2016 annual report on Form 10-K.
Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of September 30,
2016, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
Management’s assessment of the effectiveness of the Company’s internal
control over financial reporting as of September 30, 2016 excluded
Sterne Agee & Leach, Inc., Sterne Agee Clearing, Inc. and Sterne
Agee Financial Services, Inc., acquired with effect from July 1, 2016,
and Sterne Agee Asset Management, Inc. and Sterne Agee Investment
Advisor Services, Inc., acquired with effect from August 1, 2016. Our
audit of internal control over financial reporting of the Company also
excluded an evaluation of the internal control over financial reporting
of the aforementioned legal entities.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated
balance sheets of the Company as of September 30, 2016 and 2015, and
the related consolidated statements of income, comprehensive income,
cash flows, and stockholders’ equity for each of the years in the three-
year period ended September 30, 2016, as well as the accompanying
financial statement schedule. Our report dated December 14, 2016
expressed an unqualified opinion on those consolidated financial
statements and the accompanying financial statement schedule.
/s/ KPMG LLP
Kansas City, Missouri
December 14, 2016
50
Form 10K
PART II
ITEM 8 Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
INTL FCStone Inc.:
We have audited the accompanying consolidated balance sheets of
INTL FCStone Inc. and subsidiaries (the Company) as of September 30,
2016 and 2015, and the related consolidated statements of income,
comprehensive income, cash flows, and stockholders’ equity for each
of the years in the three-year period ended September 30, 2016. In
connection with our audits of the consolidated financial statements,
we also have audited the accompanying financial statement schedule.
These consolidated financial statements and financial statement
schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
the Company as of September 30, 2016 and 2015, and the results of
its operations and its cash flows for each of the years in the three-year
period ended September 30, 2016, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the Company’s
internal control over financial reporting as of September 30, 2016,
based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated December 14, 2016
expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
/s/ KPMG LLP
Kansas City, Missouri
December 14, 2016
Form 10K 51
PART II
ITEM 8 Financial Statements and Supplementary Data
Consolidated Balance Sheets
(in millions, except par value and share amounts)
ASSETS
Cash and cash equivalents
Cash, securities and other assets segregated under federal and other regulations (including $618.8
and $515.5 at fair value at September 30, 2016 and September 30, 2015 respectively)
Securities purchased under agreements to resell
Deposits with and receivables from:
Exchange-clearing organizations (including $868.5 and $1,009.4 at fair value at
September 30, 2016 and September 30, 2015, respectively)
Broker-dealers, clearing organizations and counterparties (including $(15.2) and $(52.9) at fair value
at September 30, 2016 and September 30, 2015, respectively)
Receivable from customers, net
Notes receivable, net
Income taxes receivable
Financial instruments owned, at fair value (includes securities pledged as collateral that can be sold
or repledged of $47.2 and $170.7 at September 30, 2016 and September 30, 2015, respectively)
Physical commodities inventory (including $71.2 and $15.2 at fair value at September 30, 2016
and September 30, 2015, respectively)
Deferred income taxes, net
Property and equipment, net
Goodwill and intangible assets, net
Other assets
Total assets
LIABILITIES AND EQUITY
Liabilities:
Accounts payable and other accrued liabilities (including $0.8 and $3.3 at fair value at
September 30, 2016 and September 30, 2015, respectively)
Payable to:
Customers
Broker-dealers, clearing organizations and counterparties (including $3.5 and $1.6 at fair value at
September 30, 2016 and September 30, 2015, respectively)
Lenders under loans
Senior unsecured notes
Income taxes payable
Securities sold under agreements to repurchase
Financial instruments sold, not yet purchased, at fair value
Total liabilities
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; no shares issued or outstanding
Common stock, $0.01 par value. Authorized 30,000,000 shares; 20,557,175 issued and
18,435,218 outstanding at September 30, 2016 and 20,184,556 issued and 18,812,803
outstanding at September 30, 2015
Common stock in treasury, at cost - 2,121,957 shares at September 30, 2016 and 1,371,753
shares at September 30, 2015
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
September 30, 2016
September 30, 2015
$
316.2
$
1,136.3
609.6
268.1
756.9
325.3
1,524.4
1,533.5
237.0
194.5
18.9
1.1
1,606.1
123.8
34.5
29.4
56.6
62.9
5,951.3
$
277.6
217.3
78.4
10.6
1,421.9
32.8
28.2
19.7
58.1
41.6
5,070.0
161.3
$
144.8
2,854.2
260.1
182.8
45.5
7.1
1,167.1
839.4
5,517.5
—
0.2
(46.3)
249.4
255.1
(24.6)
433.8
5,951.3
$
2,593.5
262.9
41.6
45.5
9.0
1,007.3
568.3
4,672.9
—
0.2
(26.8)
240.8
200.4
(17.5)
397.1
5,070.0
$
$
$
52
Form 10K
Consolidated Income Statements
(in millions, except share and per share amounts)
Revenues:
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting and management fees
Interest income
Other income
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Compensation and other expenses:
Compensation and benefits
Communication and data services
Occupancy and equipment rental
Professional fees
Travel and business development
Depreciation and amortization
Bad debts and impairments
Other
Total compensation and other expenses
Gain on acquisition
Income from continuing operations, before tax
Income tax expense
Net income from continuing operations
Loss from discontinued operations, net of tax
Net income
Basic earnings per share:
Income from continuing operations
Loss from discontinued operations
Net income per common share
Diluted earnings per share:
Income from continuing operations
Loss from discontinued operations
Net income per common share
Weighted-average number of common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
PART II
ITEM 8 Financial Statements and Supplementary Data
$
$
$
$
$
$
Year Ended September 30,
2015
2016
2014
14,112.0
321.2
224.3
42.0
55.2
0.2
14,754.9
14,083.9
671.0
129.9
68.9
28.3
443.9
263.9
32.7
13.3
14.0
11.5
8.2
4.4
29.4
377.4
6.2
72.7
18.0
54.7
—
54.7
2.94
—
2.94
2.90
—
2.90
$
$
$
$
$
$
34,089.9 $
328.6
192.5
42.5
39.4
0.3
34,693.2
34,068.9
624.3
122.7
52.7
17.1
431.8
251.1
28.1
13.5
12.5
10.5
7.2
7.3
23.5
353.7
—
78.1
22.4
55.7
—
55.7 $
2.94 $
—
2.94 $
2.87 $
—
2.87 $
33,546.4
244.5
180.7
42.1
8.0
0.7
34,022.4
33,531.5
490.9
108.5
49.9
10.5
322.0
201.9
25.8
12.3
14.9
9.9
7.3
5.5
18.4
296.0
—
26.0
6.4
19.6
(0.3)
19.3
1.03
(0.02)
1.01
1.00
(0.02)
0.98
18,410,561
18,625,372
18,525,374
18,932,235
18,528,302
19,132,302
Form 10K 53
PART II
ITEM 8 Financial Statements and Supplementary Data
Consolidated Statements of Comprehensive Income
(in millions)
Net income
Other comprehensive income (loss), net of tax:
2016
Year Ended September 30,
2015
2014
$
54.7
$
55.7
$
Foreign currency translation adjustment
Pension liabilities adjustment
Net unrealized gain on available-for-sale securities
Reclassification of adjustment for gains included in net income:
Periodic pension costs (included in compensation and benefits)
Realized gain on available-for-sale securities (included in trading gains, net and
interest income)
Income tax expense from reclassification adjustments (included in income tax expense)
Reclassification adjustment for gains included in net income
Other comprehensive loss
Comprehensive income
See accompanying notes to consolidated financial statements.
$
(7.4)
(0.2)
—
0.5
—
—
0.5
(7.1)
47.6
$
(4.0)
(1.5)
2.7
0.3
(5.4)
2.0
(3.1)
(5.9)
49.8
$
19.3
(4.6)
(0.8)
0.2
0.2
(0.1)
(0.1)
—
(5.2)
14.1
54
Form 10K
PART II
ITEM 8 Financial Statements and Supplementary Data
Consolidated Cash Flows Statements
(in millions)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
2016
Year Ended September 30,
2015
2014
$
54.7
$
55.7
$
19.3
Depreciation and amortization
Provision for bad debts and impairments
Deferred income taxes
Amortization of debt issuance costs and debt discount
Amortization of share-based compensation expense
Loss on sale of property and equipment
Gain on acquisition
Gain on sale of exchange memberships and common stock
Changes in operating assets and liabilities, net:
Cash, securities and other assets segregated under federal and other regulations
Securities purchased under agreements to resell
Deposits and receivables from exchange-clearing organizations
Deposits and receivables from broker-dealers, clearing organizations,
and counterparties
Receivable from customers, net
Notes receivable, net
Income taxes receivable
Financial instruments owned, at fair value
Physical commodities inventory
Other assets
Accounts payable and other accrued liabilities
Payable to customers
Payable to broker-dealers, clearing organizations and counterparties
Income taxes payable
Securities sold under agreements to repurchase
Financial instruments sold, not yet purchased, at fair value
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Cash paid for acquisitions, net
Purchase of exchange memberships and common stock
Sale of exchange memberships and common stock
Purchase of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Net change in payable to lenders under loans
Payments related to earn-outs on acquisitions
Proceeds from note payable
Repayment of note payable
Share repurchase
Debt issuance costs
Exercise of stock options
Income tax benefit on stock options and awards
Net cash provided by (used in) financing activities
7.8
4.4
(0.8)
1.1
5.1
0.4
(6.2)
—
(379.9)
(285.1)
10.9
135.7
97.8
59.5
8.2
(192.9)
(91.0)
(17.4)
7.5
172.2
(53.8)
0.3
159.8
273.9
(27.8)
(20.0)
(0.1)
—
(15.4)
(35.5)
142.0
(2.9)
—
(0.8)
(19.5)
(2.1)
3.5
0.8
121.0
7.2
7.3
4.8
0.9
3.6
0.5
—
(1.2)
(315.0)
15.2
195.1
(150.2)
(169.0)
(14.5)
—
(565.0)
7.1
(16.2)
23.2
332.1
251.1
1.7
186.0
177.5
37.9
(7.8)
(0.7)
2.1
(9.1)
(15.5)
15.5
(2.2)
4.0
(0.4)
(4.7)
(0.2)
2.5
0.5
15.0
7.3
5.5
(6.8)
1.0
4.3
0.3
—
—
(1.3)
—
(159.2)
1.1
32.0
(27.9)
4.2
(42.6)
17.8
0.1
1.9
191.5
(5.2)
5.2
—
84.1
132.6
—
—
—
(4.3)
(4.3)
(38.5)
(1.6
—
—
(9.7)
(0.3)
1.4
(0.1)
(48.8)
Form 10K 55
2016
Year Ended September 30,
2015
2014
(9.6)
48.1
268.1
316.2
26.0
8.5
$
$
$
— $
(0.4) $
$
187.1
(136.0)
51.1
$
— $
$
3.4
(0.6)
36.8
231.3
268.1
15.8
15.3
1.6
1.9
1,011.4
(995.1)
16.3
5.0
5.0
$
$
$
$
$
$
$
$
$
(4.3
75.2
156.1
231.3
9.6
3.0
0.5
(1.8)
—
—
—
—
—
PART II
ITEM 8 Financial Statements and Supplementary Data
(in millions)
Effect of exchange rates on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Cash paid for interest
Income taxes paid, net of cash refunds
Supplemental disclosure of non-cash investing and financing activities:
Identified intangible assets and goodwill on acquisitions
Additional consideration payable related to acquisitions
Acquisition of business:
Assets acquired
Liabilities acquired
Total net assets acquired
Deferred consideration payable related to acquisitions
Escrow deposits related to acquisitions
See accompanying notes to consolidated financial statements.
$
$
$
$
$
$
$
$
$
56
Form 10K
Consolidated Statements of Stockholders’ Equity
PART II
ITEM 8 Financial Statements and Supplementary Data
(in millions)
Balances as of September 30, 2013
Net income
Other comprehensive loss
Exercise of stock options
Share-based compensation
Repurchase of stock
Balances as of September 30, 2014
Net income
Other comprehensive loss
Exercise of stock options
Share-based compensation
Repurchase of stock
Stock held in escrow for business combination
Balances as of September 30, 2015
Net income
Other comprehensive loss
Exercise of stock options
Share-based compensation
Repurchase of stock
Balances as of September 30, 2016
See accompanying notes to consolidated financial statements.
Common
Stock
Treasury
Stock
Additional
Paid-in
Capital
$
0.2 $
(7.8)
$
224.0
0.2
(9.7)
(17.5)
(4.5)
(4.8)
26.8
0.2
$
0.2 $
(19.5)
(46.3)
$
1.3
4.3
—
229.6
3.0
3.6
(0.2)
4.8
240.8
3.5
5.1
—
249.4
Accumulated
Other
Comprehensive
Loss
Total
Retained
Earnings
$
125.4 $
19.3
144.7
55.7
200.4
54.7
(6.4)
$
(5.2)
(11.6)
(5.9)
17.5
(7.1)
335.4
19.3
(5.2)
1.3
4.3
(9.7)
345.4
55.7
(5.9)
3.0
3.6
(4.7)
—
397.1
54.7
(7.1)
3.5
5.1
(19.5)
433.8
$
255.1 $
(24.6)
$
Form 10K 57
PART II
ITEM 8 Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
NOTE 1 Description of Business and Significant Accounting Policies
INTL FCStone Inc., a Delaware corporation, and its consolidated
subsidiaries (collectively “INTL” or “the Company”), is a diversified global
financial services organization providing execution, risk management
and advisory services, market intelligence, and clearing services across
assets classes and markets around the world. The Company’s services
include comprehensive risk management advisory services for commercial
customers; execution of listed futures and options on futures contracts on
all major commodity exchanges; structured over-the-counter (“OTC”)
products in a wide range of commodities; physical trading and hedging
of precious and base metals and select other commodities; trading of
more than 140 foreign currencies; market-making in international
equities; fixed income; debt origination and asset management.
The Company provides these services to a diverse group of more than
20,000 predominantly wholesale organizations located throughout
the world, including producers, processors and end-users of nearly
all widely-traded physical commodities to manage their risks and
enhance margins; to commercial counterparties who are end-users of
the firm’s products and services; to governmental and non-governmental
organizations; and to commercial banks, brokers, institutional investors
and major investment banks.
Basis of Presentation
The accompanying consolidated financial statements include the
accounts of INTL FCStone Inc. and all other entities in which the
Company has a controlling financial interest. All material intercompany
transactions and balances have been eliminated in consolidation.
Unless otherwise stated herein, all references to fiscal 2016, fiscal 2015,
and fiscal 2014 refer to the Company’s fiscal years ended September 30.
In the consolidated income statements, the total revenues reported
combine gross revenues for the physical commodities business and
net revenues for all other businesses. The subtotal ‘operating revenues’
in the consolidated income statements is calculated by deducting
physical commodities cost of sales from total revenues. The subtotal
‘net operating revenues’ in the consolidated income statements is
calculated as operating revenues less transaction based clearing expenses,
introducing broker commissions and interest expense. Transaction-
based clearing expenses represent variable expenses paid to executing
brokers, exchanges, clearing organizations and banks in relation to
our transactional volumes. Introducing broker commissions include
commission paid to non-employee third parties that have introduced
customers to the Company. Net operating revenues represent revenues
available to pay variable compensation to risk management consultants
and traders and direct non-variable expenses, as well as variable and
non-variable expenses of operational and administrative employees.
Use of Estimates
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States
58
Form 10K
of America (“U.S. GAAP”) requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent liabilities as of the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. The most significant of these estimates
and assumptions relate to fair value measurements for financial
instruments and investments, revenue recognition, the provision for
potential losses from bad debts, valuation of inventories, valuation of
goodwill and intangible assets, self-insurance liabilities, incomes taxes
and contingencies. These estimates are based on management’s best
knowledge of current events and actions the Company may undertake
in the future. The Company reviews all significant estimates affecting
the financial statements on a recurring basis and records the effect
of any necessary adjustments prior to their issuance. Although these
and other estimates and assumptions are based on the best available
information, actual results could be materially different from these
estimates.
Internal Subsidiary Consolidation
Effective July 1, 2015, the Company merged three of its wholly-owned
regulated United States (“U.S.”) subsidiaries into its wholly owned
regulated U.S. subsidiary, INTL FCStone Securities Inc., and the
surviving entity was renamed INTL FCStone Financial Inc. (“INTL
FCStone Financial”) and is registered as both a broker-dealer and a
futures commission merchant (“FCM”). As such, the assets, liabilities
and equity of FCStone, LLC, INTL FCStone Partners L.P., and FCC
Investments, Inc. were transferred into INTL FCStone Financial.
Foreign Currency Translation
Assets and liabilities recorded in foreign currencies are translated at
the exchange rates prevailing on the balance sheet date. Revenue and
expenses are translated at average rates of exchange prevailing during
the period. Gains or losses on translation of the financial statements
of a non-U.S. operation, when the functional currency is other
than the U.S. dollar, are recorded in other comprehensive income
(“OCI”), net of tax, a component of stockholders’ equity. Foreign
currency remeasurement gains or losses on transactions denominated
in nonfunctional currencies are included in ‘trading gains, net’ in the
consolidated income statements.
Cash and Cash Equivalents
The Company considers cash held at banks and all highly liquid
investments, including certificates of deposit, which may be withdrawn
at any time at the discretion of the Company without penalty, to be
cash and cash equivalents. Cash and cash equivalents consist of cash,
foreign currency, money market funds and certificates of deposit not
deposited with or pledged to exchange-clearing organizations, broker-
dealers, clearing organizations or counterparties. The money market
funds are valued at period-end at the net asset value provided by the
fund’s administrator, which approximates fair value. Certificates of
deposit are stated at cost plus accrued interest, which approximates
fair value. The Company has an investment policy, which limits the
maximum amount placed in any one fund and with any one institution
in order to reduce credit risk. The Company does not believe that it
is exposed to significant risk on cash and cash equivalents.
Cash, Securities and Other Assets Segregated
under Federal and other Regulations
Pursuant to requirements of the Commodity Exchange Act in the
U.S. and similarly in the United Kingdom (“U.K.”), pursuant to the
Markets in Financial Instruments Implementing Directive 2006/73/EC
underpinning the Client Asset or ‘CASS’ rules in the Financial Services
Authority (“FSA”) handbook, funds deposited by customers relating
to futures and options on futures contracts in regulated commodities
must be carried in separate accounts which are designated as segregated
customer accounts. The deposits in segregated customer accounts are
not commingled with the funds of the Company. Under the FSA’s rules,
certain categories of customers may choose to opt-out of segregation.
As of September 30, 2016 and 2015, cash, securities and other assets
segregated under federal and other regulations consisted of cash held
at banks and money market funds of approximately $515.2 million
and $240.0 million, respectively, U.S. government securities and U.S.
government agency obligations of approximately $595.5 million and
$493.4 million, respectively, and commodities warehouse receipts of
approximately $23.3 million and $22.1 million, respectively (see fair
value measurements discussion in Note 3).
Deposits and Receivables from Exchange-
Clearing Organizations, Broker-dealers,
Clearing Organizations and Counterparties,
and Payables to Broker-dealers, Clearing
Organizations and Counterparties
As required by the regulations of the U.S. Commodity Futures Trading
Commission (“CFTC”) and the aforementioned FSA handbook,
customer funds received to margin, guarantee, and/or secure commodity
futures transactions are segregated and accounted for separately from
the general assets of the Company. Deposits with exchange-clearing
organizations, broker-dealers and counterparties pertain primarily
to deposits made to satisfy margin requirements on customer and
proprietary open futures and options on futures positions and to satisfy
the requirements set by clearing exchanges for clearing membership.
The Company also pledges margin deposit with various counterparties
for OTC derivative contracts, and these deposits are also included
in deposits and receivables from broker-dealers and counterparties.
Deposits with and receivables from exchange-clearing organizations
and broker-dealers and counterparties are reported gross, except
where a right of offset exists. As of September 30, 2016 and 2015, the
Company had cash and cash equivalents on deposit with or pledged
to exchange-clearing organizations, broker-dealers and counterparties
of $0.9 billion.
These balances also include securities pledged by the Company on
behalf of customers and customer-owned securities that are pledged.
It is the Company’s practice to include customer owned securities on
its consolidated balance sheets, as the rights to those securities have
PART II
ITEM 8 Financial Statements and Supplementary Data
been transferred to the Company under the terms of the futures
trading agreement. Securities pledged include U.S. Treasury bills
and instruments backed by U.S. government sponsored entities and
government-sponsored enterprise backed mortgage-backed securities
(“mortgage-backed securities”). Securities that are not customer-owned
are adjusted to fair value with associated changes in unrealized gains
or losses recorded through current period earnings. For customer
owned securities, the change in fair value is offset against the payable
to customers with no impact recognized in the consolidated income
statements.
The securities, primarily U.S. government obligations and mortgage-
backed securities, held by INTL FCStone Financial, a subsidiary of
the Company, as collateral or as margin have been deposited with
exchange-clearing organizations, broker-dealers or other counterparties.
The fair value of these securities was approximately $0.5 billion as of
September 30, 2016 and 2015.
Management has considered guidance required by the Transfers
and Servicing Topic of the ASC as it relates to securities pledged by
customers to margin their accounts within the FCM Division of
INTL FCStone Financial. Based on a review of the agreements with
the customer, management believes the transferor surrenders control
over those assets because: (a) the transferred assets have been isolated
from the transferor—put presumptively beyond the reach of the
transferor and its creditors, even in bankruptcy or other receivership,
(b) each transferee has the right to pledge or exchange the assets (or
beneficial interests) it received, and no condition both constrains the
transferee (or holder) from taking advantage of its right to pledge or
exchange and provides more than a trivial benefit to the transferor
and (c) the transferor does not maintain effective control over the
transferred assets through either (1) an agreement that both entitles
and obligates the transferor to repurchase or redeem them before
their maturity or (2) the ability to unilaterally cause the holder to
return specific assets, other than through a cleanup call. Under this
guidance, the Company reflects the customer collateral assets and
corresponding liabilities in the Company’s consolidated balance sheets
as of September 30, 2016 and 2015.
In addition to margin, deposits with exchange-clearing organizations
include guaranty deposits. The guaranty deposits are held by the clearing
organization for use in potential default situations by one or more
members of the clearing organization. The guaranty deposits may be
applied to the Company’s obligations to the clearing organization, or
to the clearing organization’s obligations to other clearing members
or third parties.
The Company maintains customer omnibus and proprietary accounts
with other counterparties, and the equity balances in those accounts
along with any margin cash or securities deposited with the carrying
broker are included in deposits and receivables from broker-dealers
and counterparties.
Receivables from and payables to exchange-clearing organizations
are also comprised of amounts due from or due to exchange-clearing
organizations for daily variation settlements on open futures and
options on futures positions. The variation settlements due from
or due to exchange-clearing organizations are paid in cash on the
following business day.
Deposits and receivables from broker-dealers, clearing organizations and
counterparties, and payables to broker-dealers, clearing organizations
and counterparties also include amounts related to the value of
Form 10K 59
PART II
ITEM 8 Financial Statements and Supplementary Data
customers cross-currency payment transactions related to the Global
Payments segment. These amounts arise due to a clearing period
before the funds are received and payments are made, which usually
is one to two business days.
Deposits and receivables with exchange-clearing organizations also
includes the unrealized gains and losses associated with the customers’
options on futures contracts. See discussion in the Financial Instruments
and Derivatives section below for additional information on the
treatment of derivative contracts. For customer owned derivative
contracts, the fair value is offset against the payable to customers
with no impact recognized on the consolidated income statements.
Receivable from and Payable to Customers
Receivable from customers, net of the allowance for doubtful accounts,
include the total of net deficits in individual exchange-traded and
OTC trading accounts carried by the Company. Customer deficits
arise from realized and unrealized trading losses on futures, options
on futures, swaps and forwards and amounts due on cash and margin
transactions. Customer deficit accounts are reported gross of customer
accounts that contain net credit or positive balances, except where a
right of offset exists. Net deficits in individual exchange-traded and
OTC trading accounts include both secured and unsecured deficit
balances due from customers as of the balance sheet date. Secured
deficit amounts are backed by U.S. Treasury bills and notes and
commodity warehouse receipts. These U.S Treasury bills and notes
and commodity warehouse receipts are not netted against the secured
deficit amounts, as the conditions for right of setoff have not been met.
Payable to customers represent the total of customer accounts with
credit or positive balances. Customer accounts are used primarily in
connection with commodity transactions and include gains and losses
on open commodity trades as well as securities and other deposits
made as required by the Company, the exchange-clearing organizations
or other clearing organizations. Customer accounts with credit or
positive balances are reported gross of customer deficit accounts,
except where a right of offset exists.
Receivables from and payables to customers also include amounts
related to the value of customers cross-currency payment transactions
related to the Global Payments segment. These amounts arise due
to a clearing period before the funds are received and payments are
made, which usually is one to two business days.
The future collectability of the receivable from customers can be
impacted by the Company’s collection efforts, the financial stability
of its customers, and the general economic climate in which it
operates. The Company evaluates accounts that it believes may
become uncollectible on a specific identification basis, through
reviewing daily margin deficit reports, the historical daily aging of the
receivables, and by monitoring the financial strength of its customers.
The Company may unilaterally close customer trading positions in
certain circumstances. In addition, to evaluate customer margining
and collateral requirements, customer positions are stress tested
regularly and monitored for excessive concentration levels relative
to the overall market size.
The Company generally charges off an outstanding receivable balance
when all economically sensible means of recovery have been exhausted.
That determination considers information such as the occurrence of
significant changes in the customer’s financial position such that the
60
Form 10K
customer can no longer pay the obligation, or that the proceeds from
collateral will not be sufficient to pay the balance.
Notes Receivable
The Company originates short-term notes receivable from customers
with the outstanding balances typically being insured 90% to 98%
by a third party, including accrued interest, subject to applicable
deductible amounts. The Company may sell the insured portion of
the notes through non-recourse participation agreements with other
third parties. See discussion of notes receivable related to commodity
repurchase agreements below.
Accrual of commodity financing income on any note is discontinued
when, in the opinion of management, there is reasonable doubt as to
the timely collectability of interest or principal. Nonaccrual notes are
returned to an accrual status when, in the opinion of management,
the financial position of the borrower indicates there is no longer any
reasonable doubt as to the timely payment of principal and interest.
The Company records a charge against earnings for notes receivable
losses when management believes that collectability of the principal
is unlikely.
Physical Commodities Inventory
Inventories of certain agricultural commodities are carried at net
realizable value, which approximates fair value less disposal costs. The
agricultural commodities inventories have reliable, readily determinable
and realizable market prices, have relatively predictable and insignificant
costs of disposal and are available for immediate delivery. Changes
in the fair values of these agricultural commodities inventories are
included as a component of ‘cost of physical commodities sold’ in
the consolidated income statements.
Inventories of precious metals, except as described below, are stated
at the lower of cost or market (“LCM”), using the weighted-average
price and first-in first-out costing method.
Prior to the transfer of the Company’s precious metals business
(see following discussion), precious metals inventory held by INTL
Commodities Inc. was valued at LCM under the provisions of the
Inventory Topic of the Accounting Standards Codification (“ASC”),
using the weighted-average price and first-in first-out costing method.
Subsequent to the transfer, precious metals inventory held by INTL
FCStone Ltd is measured at fair value, with changes in fair value
included as a component of ‘trading gains, net’ in the consolidated
income statements.
Change in Precious Metals Accounting
The Company engages in trading activities in a variety of physical
commodities, including actively trading precious metals whereby the
Company provides a full range of trading and hedging capabilities,
including OTC products, to select producers, consumers, and investors.
In the Company’s precious metals trading activities, it acts as a
principal, committing its own capital to buy and sell precious metals
on a spot and forward basis.
On April 10, 2015 (the “transfer date”), the Company transitioned
the portion of its precious metals business conducted through its
unregulated domestic subsidiary, INTL Commodities Inc., to its
PART II
ITEM 8 Financial Statements and Supplementary Data
United Kingdom based broker-dealer subsidiary, INTL FCStone
Ltd INTL FCStone Ltd is regulated by the Financial Conduct
Authority (“FCA”), the regulator of the financial services industry
in the United Kingdom.
losses recognized in earnings. The fair value of a financial instrument
is the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced
or liquidation sale.
In anticipation of the transfer of the precious metals business, INTL
Commodities Inc. liquidated all of its precious metals inventory
as of the transfer date. Subsequent to the transfer, precious metals
inventory held by INTL FCStone Ltd is measured at fair value, with
changes in fair value included as a component of ‘trading gains,
net’ in the consolidated income statement, in accordance with U.S.
GAAP accounting requirements for broker-dealers. Precious metals
inventory held by subsidiaries that are not broker-dealers continues
to be valued at the lower of cost or market value.
Property and Equipment
Property and equipment is stated at cost, net of accumulated
depreciation and amortization and depreciated using the straight-
line method over the estimated useful lives of the assets. Leasehold
improvements are amortized on a straight-line basis over the estimated
useful life of the improvement or the term of the lease, whichever is
shorter. Certain costs of software developed or obtained for internal
use are capitalized and amortized over the estimated useful life of the
software. Expenditures for maintenance, repairs, and minor replacements
are charged against earnings, as incurred. Expenditures that increase the
value or productive capacity of assets are capitalized. When property
and equipment are retired, sold, or otherwise disposed of, the asset’s
carrying amount and related accumulated depreciation are removed
from the accounts and any gain or loss is included in earnings.
Goodwill and Identifiable Intangible Assets
Goodwill is the cost of acquired companies in excess of the fair value
of identifiable net assets at acquisition date. In accordance with the
Intangibles – Goodwill and Other Topic of the ASC, goodwill is
tested for impairment on an annual basis at the fiscal year-end, and
between annual tests if indicators of potential impairment exist, using
a fair-value-based approach. No impairment of goodwill has been
identified during any of the periods presented.
Identifiable intangible assets subject to amortization are amortized
using the straight-line method over their estimated period of benefit,
ranging from two to twenty years. Identifiable intangible assets are
tested for impairment whenever events or changes in circumstances
suggest that an asset’s or asset group’s carrying value may not be
fully recoverable in accordance with the Intangibles – Goodwill
and Other Topic of the ASC. Residual value is presumed to be zero.
Identifiable intangible assets not subject to amortization are reviewed
at each reporting period to re-evaluate if the intangible asset’s useful
life remains indefinite. Additionally, intangible assets not subject to
amortization are tested annually for impairment at the fiscal year-end,
and between annual tests if indicators of potential impairment exist,
using a fair-value-based approach.
Financial Instruments and Derivatives
Financial instruments owned and sold, not yet purchased, at fair value
consist of financial instruments carried at fair value or amounts that
approximate fair value, with related unrealized changes in gains or
The Company accounts for its securities pledged on behalf of customers
and proprietary securities as trading securities in accordance with U.S.
GAAP accounting requirements for broker-dealers.
Investment in managed funds, at fair value represents investments in
funds managed by the Company’s fund managers. The investments
are valued at period-end at the net asset value provided by the fund’s
administrator.
Commodities warehouse receipts are valued at the cash price, or the
nearby futures prices in the absence of a cash price, for the commodity
based on published market quotes. For commodities warehouse receipts,
the change in fair value is offset against the payable to customers with
no impact on the consolidated income statements.
The Company utilizes derivative instruments to manage exposures
to foreign currency, commodity price and interest rate risks for the
Company and its customers. The Company’s objectives for holding
derivatives include reducing, eliminating, and efficiently managing
the economic impact of these exposures as effectively as possible.
Derivative instruments are recognized as either assets or liabilities
and are measured at fair value. The accounting for 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. The 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.
The 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. The valuation models used to derive the
fair values of OTC derivatives require inputs including contractual
terms, market prices, yield curves and measurements of volatility. The
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. The 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.
The Company’s derivative contracts also include forward purchase and
sale contracts for physical delivery of the agricultural commodities
in a future period. Contracts to purchase agricultural commodities
generally relate to the current or future crop year. Contracts for the
sale of agricultural commodities generally do not extend beyond
one year. Forward purchase and sale contracts are valued at market
prices when available or other market quotes adjusted for differences,
primarily in transportation, between the exchange-traded market and
local markets where the terms of the contracts are based. Changes
in the fair value of agricultural commodity inventories held for sale,
forward purchase and sale contracts and exchange-traded futures and
options contracts are recognized as a component of cost of sales of
physical commodities.
Form 10K 61
PART II
ITEM 8 Financial Statements and Supplementary Data
The 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. The Company has a subsidiary
that is a registered broker-dealer/FCM, clearing on various exchanges.
A primary source of revenues for the Company’s broker-dealer/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.
The 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. The
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.
The 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. These
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. These spot and forward contracts
are accounted for as free-standing derivatives and reported in the
consolidated balance sheets at their fair values. The 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.
The 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. These 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. The 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, 2016, 2015, and 2014. The 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
The Company is required to hold certain exchange membership
seats and exchange firm common stock and pledge them for clearing
62
Form 10K
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”), and the Deposit Trust and Clearing Corporation (“DTCC”).
Exchange firm common stock include shares of CME Group, Inc.,
ICE and LME.
Exchange memberships and firm common stocks pledged for clearing
purposes are recorded at cost and are included in ‘other assets’ on
the consolidated balance sheets. Equity investments in exchange
firm common stock not pledged for clearing purposes are classified
as trading securities and recorded at fair value, with unrealized gains
and losses recorded as a component of “trading gains, net” on the
consolidated income statements. Equity investments in exchange
firm common stock not pledged for clearing purposes are included
in ‘financial instruments owned’ on the consolidated balance sheets.
The cost basis for exchange memberships and firm common stock
pledged for clearing purposes was $12.1 million and $9.9 million
as of September 30, 2016 and 2015, respectively. The fair value of
exchange memberships and firm common stock pledged for clearing
purposes was $9.1 million and $7.6 million as of September 30, 2016
and 2015, respectively. The fair value of exchange firm common
stock is determined by quoted market prices, and the fair value of
exchange memberships is determined by recent sale transactions. The
Company monitors the fair value of exchange membership seats and
firm common stock on a quarterly basis, and does not consider any
current unrealized losses on individual exchange memberships to be
anything other than a temporary impairment.
Commodity and Other Repurchase Agreements
and Collateralized Transactions
In the normal course of operations the Company executes notes
receivable under sale/repurchase agreements with customers whereby
the customers sell certain commodity inventory or other investments
and agree to repurchase the commodity inventory or investment at a
future date at a fixed rate. These transactions are short-term in nature,
and in accordance with the guidance contained in the Transfers and
Servicing Topic of the ASC, are treated as secured borrowings rather
than commodity inventory and purchases and sales in the Company’s
consolidated financial statements. These transactions are reflected as
notes receivable in the consolidated balance sheet. Commodities or
investments sold under repurchase agreements are reflected at the
amount of cash received in connection with the transactions. The
Company may be required to provide additional collateral based on
the fair value of the underlying asset.
The Company also participates in commodity sale/repurchase
transactions that are accounted for as commodity inventory and
purchases and sales of physical commodities as opposed to secured
borrowings. The re-purchase price under these arrangements is not fixed
at the time of execution and, therefore, do not meet all the criteria to
be accounted for as product financing arrangements under ASC 470.
Business Combinations
Acquisitions are accounted for as business combinations in accordance
with the provisions of the Business Combinations Topic of the ASC.
Under this accounting guidance most of the assets and liabilities
acquired and assumed are measured at fair value as of the acquisition
date. Certain contingent liabilities acquired require remeasurement
at fair value in each subsequent reporting period. Noncontrolling
interests are initially measured at fair value and classified as a separate
component of equity. Acquisition related costs, such as fees for attorneys,
accountants, and investment bankers, are expensed as incurred and
are not capitalized as part of the purchase price. For all acquisitions,
regardless of the consummation date, deferred tax assets, valuation
allowances, and uncertain tax position adjustments occurring after
the measurement period are recorded as a component of income,
rather than adjusted through goodwill.
Determining the fair value of certain assets and liabilities acquired is
subjective in nature and often involves the use of significant estimates
and assumptions. Estimating the fair value of the assets and liabilities
acquired requires significant judgment.
Contingent Consideration
The Company estimates and records the acquisition date estimated fair
value of contingent consideration as part of purchase price consideration
for acquisitions. Additionally, each reporting period, the Company
estimates changes in the fair value of contingent consideration, and
any change in fair value is recognized in the consolidated income
statement. An increase in the earn-out expected to be paid will result
in a charge to operations in the period that the anticipated fair value
of contingent consideration increases, while a decrease in the earn-out
expected to be paid will result in a credit to operations in the period
that the anticipated fair value of contingent consideration decreases.
The estimate of the fair value of contingent consideration requires
subjective assumptions to be made of future operating results, discount
rates, and probabilities assigned to various potential operating result
scenarios. Future revisions to these assumptions could materially
change the estimate of the fair value of contingent consideration and,
therefore, materially affect the Company’s future financial results.
Additional Paid-In Capital
The Company’s additional paid-in capital (“APIC”) consists of
stockholder contributions that are in excess of par value of common
stock. Included in APIC are amounts related to the exercise of stock
options, share-based compensation and shares held in escrow.
In September 2010, the Company acquired certain assets of Provident
Group (“Provident”). The purchase price for the assets and services
of the sellers was $5.0 million. Subsequent to closing, the individual
sellers placed the entire purchase price into an escrow account and
the funds were used to purchase outstanding shares of the Company
on the open market. There were 214,325 shares purchased and placed
into escrow as a result of this agreement. The entire purchase price
was recorded as a reduction in additional paid in capital as shares held
in escrow for business combinations. The shares held in escrow for
business combinations were to be released to the individual sellers,
over a five year period from the date of closing based on net profits,
in accordance with the provisions of the acquisition agreement. At
PART II
ITEM 8 Financial Statements and Supplementary Data
September 30, 2015, the end of the five year period, the terms of
the agreement were not met and 204,271 shares were forfeited to
the Company and recorded as treasury stock. In accordance with
the acquisition agreement, there were no shares earned or released
during the year ended September 30, 2015, while 10,054 shares were
earned and subsequently released to the sellers prior to fiscal 2015.
Revenue Recognition
Sales of physical commodities revenue are recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the fee
is fixed or determinable, and collectability is reasonably assured.
The Company reports its physical commodities revenues, except as
described below, on a gross basis, with the corresponding cost of sales
shown separately, in accordance with the guidelines provided in the
Revenue Recognition Topic of the ASC.
Change in Precious Metals Accounting
Prior to the transfer, INTL Commodities Inc. precious metals sales
and costs of sales were recorded on a gross basis in accordance with the
Revenue Recognition Topic of the ASC. Subsequent to the transfer,
INTL FCStone Ltd precious metals sales and cost of sales are presented
on a net basis and included as a component of ‘trading gains, net’ in
the consolidated income statements, in accordance with U.S GAAP
accounting requirements for broker-dealers. Precious metals sales and
cost of sales for subsidiaries that are not broker-dealers continue to
be recorded on a gross basis.
The change has no effect on the Company’s operating revenues,
income from continuing operations, or net income. Management
has historically assessed the performance of the physical commodities
businesses on an operating revenue basis, and continues to do so.
Trading gains, net include brokerage fees and margins generated
from OTC derivative trades executed with customers and other
counterparties and are recognized when trades are executed. Trading
gains, net also include activities where the Company acts as principal in
the purchase and sale of individual securities, currencies, commodities
or derivative instruments with customers. These transactions may be
offset simultaneously with another customer or counterparty, offset
with similar but not identical positions on an exchange, made from
inventory, or may be aggregated with other purchases to provide
liquidity intraday, for a number of days, or in some cases, particularly
the base metals business, even longer periods (during which fair value
may fluctuate). In addition, trading gains, net includes activities from
the Company’s operations of a proprietary foreign exchange desk which
arbitrages the futures and cash markets (see additional discussion in
the Financial Instruments and Derivatives policy note for revenue
recognition on proprietary trading activities). Net dealer inventory
and investment gains are recognized on a trade-date basis and include
realized gains or losses and changes in unrealized gains or losses on
investments at fair value. Dividend income and dividend expense,
on short equity positions, are recognized net, in ‘trading gain, net’
on the ex-dividend date.
Commissions on futures contracts are recognized on a half-turn basis
in two equal parts. The first half is recognized when the contract is
opened and the second half is recognized when the transaction is
closed. Commissions on options on futures contracts are generally
recognized on a half-turn basis, except that full commissions are
Form 10K 63
PART II
ITEM 8 Financial Statements and Supplementary Data
recognized on options expected to expire without being exercised
or offset. Commissions and fees are charged at various rates based
on the type of account, the products traded, and the method of
trade. Clearing and transaction fees are charged to customers on a
per exchange contract basis based on the trade date. Such fees are
for clearing customers’ exchange trades and include fees charged to
the Company by the various futures exchanges. See discussion of
transaction-based clearing expenses below.
Consulting and management fees include risk management consulting
fees which are billed and recognized as revenue on a monthly basis
when risk management services are provided. Such agreements are
generally for one year periods, but are cancelable by either party
upon providing thirty days written notice to the other party and the
amounts are not variable based on customer trading activities. Asset
management fees are recognized as they are earned based on fees due
at each period-end date. These include performance fees based on
the amount that is due under the formula for exceeding performance
targets as of the period-end date. Fee income for structuring and
arrangement of debt transactions and management and investment
advisory income is recorded when the services related to the underlying
transactions are provided and success fees are recorded when complete,
as determined under the terms of the assignment or engagement.
Interest income, generated primarily from investments and customer
inventory financing, is recognized on an accrual basis. Interest from
investments is generated from securities purchased using customer
funds deposited with the Company to satisfy margin requirements,
net of interest returned to customers, and from securities acquired
through internally-generated company funds. Interest also includes
unrealized gains and losses on securities owned and those deposited
with other parties.
Revenue generally is recognized net of any taxes collected from
customers and subsequently remitted to governmental authorities.
Share-Based Compensation
The Company accounts for share-based compensation in accordance
with the guidance of the Compensation-Stock Compensation Topic of
the ASC. The cost of employee services received in exchange for a share-
based award is generally measured based on the grant-date fair value
of the award. Share-based employee awards that require future service
are amortized over the relevant service period. Expected forfeitures
are included in determining share-based employee compensation
expense. For option awards granted, compensation cost is recognized
on a straight-line basis over the vesting period for the entire award.
Transaction-Based Clearing Expenses
Clearing fees and related expenses include primarily variable expenses
for clearing and settlement services, including fees the Company pays
to executing brokers, exchanges, clearing organizations and banks.
These fees are based on transaction volume, and recorded as expense
on the trade date. Clearing fees are passed on to customers and are
presented gross in the consolidated statements of income under the
Revenue Recognition Topic of the ASC, as the Company acts as a
principal for these transactions.
Introducing Broker Commissions
Introducing broker commissions include commissions paid to non-
employee third parties that have introduced customers to the Company.
Introducing brokers are individuals or organizations that maintain
relationships with customers and accept futures and options orders
from those customers. The Company directly provides all account,
transaction and margining services to introducing brokers, including
accepting money, securities and property from the customers. The
commissions are determined and settled monthly.
Cost of Sales of Physical Commodities
Income Taxes
Cost of sales of physical commodities include finished commodity or
raw material and processing costs along with operating costs relating
to the receipt, storage and delivery of the physical commodities. Cost
of sales of physical commodities also includes changes in the fair
value of agricultural commodity inventories held for sale, and related
forward purchase and sale contracts and exchange-traded futures and
options contracts.
Income tax expense includes U.S. federal, state and local and foreign
income taxes. Certain items of income and expense are not reported
in tax returns and financial statements in the same year. The tax effect
of such temporary differences is reported as deferred income taxes.
Tax provisions are computed in accordance with the Income Taxes
Topic of the ASC.
Compensation and Benefits
Compensation and benefits consists primarily of salaries, incentive
compensation, variable compensation, including commissions,
related payroll taxes and employee benefits. The Company classifies
employees as either risk management consultants / traders, operational
or administrative personnel, which includes the executive officers.
Variable compensation paid to risk management consultants and
traders generally represents a fixed percentage of revenues generated,
and in some cases, revenues produced less direct costs and an overhead
allocation. The Company accrues commission expense on a trade
date basis.
Comprehensive Income
Comprehensive income consists of net income and other gains
and losses affecting stockholders’ equity that, under U.S. GAAP,
are excluded from net income. Other comprehensive income (loss)
includes net actuarial losses from defined benefit pension plans and
gains and losses on foreign currency translations.
Noncontrolling Interest and Variable Interest
Entities
In accordance with the Consolidation Topic of the ASC, the Company
consolidates any variable interest entities for which it is the primary
64
Form 10K
beneficiary, as defined. The Company applies the equity method of
accounting when the Company does not have a controlling interest
in an entity, but exerts significant influence over the entity.
Preferred Stock
The Company is authorized to issue one million shares of preferred
stock, par value of $0.01 per share, in one or more classes or series to be
established by the Company’s board of directors. As of September 30,
2016 and 2015, no preferred shares were outstanding and the Company’s
board of directors had not yet established any class or series of shares.
Recent Accounting Pronouncements
In August 2016, the FASB issued Accounting Standards Update
(“ASU”) 2016-15, Classification of Certain Cash Receipts and Cash
Payments (Topic 230), which addresses eight classification issues related
to the statement of cash flows. This ASU is effective for public business
entities for annual and interim periods in fiscal years beginning after
December 15, 2017. For all other entities, the ASU is effective for
annual periods in fiscal years beginning after December 15, 2018,
and interim periods in fiscal years beginning after December 15,
2019. Entities should apply this ASU using a retrospective transition
method to each period presented. Early adoption is permitted,
including adoption in an interim period. The Company expects to
adopt this guidance starting with the first quarter of fiscal year 2019.
The Company is currently evaluating the impact the new guidance
will have on its statement of cash flows.
In June 2016, the FASB issued ASU 2016-13, Measurement of
Credit Losses on Financial Instruments, which significantly changes
the ways entities recognize credit losses on financial instruments.
The guidance is effective for public business entities for annual and
interim periods in fiscal years beginning after December 15, 2019,
with early adoption permitted in annual and interim periods in fiscal
years beginning after December 15, 2018. The Company expects
to adopt this guidance starting with the first quarter of fiscal year
2021. The guidance introduces a new credit reserving model known
as the Current Expected Credit Loss (“CECL”) model, which is
based on expected losses, and differs significantly from the incurred
loss approach used today. The CECL model requires measurement
of expected credit losses not only based on historical experience and
current conditions, but also by including reasonable and supportable
forecasts incorporating forward-looking information and will likely
result in earlier recognition of credit reserves. The Company is currently
evaluating the impact the new guidance will have on its financial
position, results of operations and cash flows.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts
with Customers (Topic 606). ASU 2014-09 completes the joint
effort by the FASB and International Accounting Standards Board
(IASB) to improve financial reporting by creating common revenue
recognition guidance for GAAP and International Financial Reporting
Standards (IFRS). In March 2016, the FASB issued ASU 2016-08,
“Revenue from Contracts with Customers (Topic 606): Principal versus
Agent Considerations (Reporting Revenue Gross versus Net).” ASU
2016-08 clarifies the implementation guidance on principal versus
agent considerations. In April 2016, the FASB issued ASU 2016-10,
PART II
ITEM 8 Financial Statements and Supplementary Data
“Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing.” ASU 2016-10 clarifies the
implementation guidance on identifying performance obligations. These
ASUs apply to all companies that enter into contracts with customers
to transfer goods or services. These ASUs are effective for public entities
for interim and annual reporting periods beginning after December 15,
2017. Early adoption is permitted only as of annual reporting periods
beginning after December 15, 2016, including interim periods within
that reporting period. The Company expects to adopt this guidance
starting with the first quarter of fiscal year 2019. Entities have the
choice to apply these ASUs either retrospectively to each reporting
period presented or by recognizing the cumulative effect of applying
these standards at the date of initial application and not adjusting
comparative information. The Company is currently evaluating the
requirements of these standards and has not yet determined the
impact on its financial position, results of operations and cash flows.
In March 2016, the FASB issued ASU 2016-09, Compensation –
Stock Compensation (Topic 718): Improvements to Employee Share-
Based Payment Accounting. ASU 2016-09 simplifies the accounting
for share-based payment award transactions including: income tax
consequences, classification of awards as either equity or liabilities
and classification on the statement of cash flows. ASU 2016-09 is
effective for fiscal years beginning after December 15, 2016, including
interim periods within those fiscal years. Early adoption is permitted.
The Company expects to adopt this guidance starting with the first
quarter of fiscal year 2018. The Company is currently evaluating
the requirements of ASU 2016-09 and has not yet determined the
impact on its financial position, results of operations and cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic
842), which supersedes ASC 840, Leases. This ASU is based on the
principle that entities should recognize assets and liabilities arising
from leases. The ASU does not significantly change the lessees’
recognition, measurement and presentation of expenses and cash
flows from the previous accounting standard. The ASU’s primary
change is the requirement for entities to recognize a lease liability for
payments and a right of use asset representing the right to use the
leased asset during the term on operating lease arrangements. Lessees
are permitted to make an accounting policy election to not recognize
the asset and liability for leases with a term of twelve months or less.
Lessors’ accounting under the ASC is largely unchanged from the
previous accounting standard. In addition, the ASU expands the
disclosure requirements of lease arrangements. Lessees and lessors
will use a modified retrospective transition approach, which includes
a number of practical expedients. This guidance is effective for fiscal
years beginning after December 15, 2018, including interim periods
within those fiscal years. The Company expects to adopt this guidance
starting with the first quarter of fiscal year 2020. The Company has
not yet determined the impact on its financial position, results of
operations and cash flows.
In January 2016, the FASB issued ASU No. 2016-01, Financial
Instruments--Overall (Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities. ASU No. 2016-01
addresses the recognition, measurement, presentation and disclosure
of financial assets and liabilities. The guidance primarily affects the
accounting for equity investments, financial liabilities under the fair
value option and the presentation and disclosure requirements for
Form 10K 65
PART II
ITEM 8 Financial Statements and Supplementary Data
financial instruments. In addition, the guidance clarifies the valuation
allowance assessment when recognizing deferred tax assets resulting from
unrealized losses on available-for-sale debt securities. This guidance is
effective for the Company in the first quarter of fiscal 2019, and early
adoption is not permitted, with certain exceptions. The amendments
are required to be applied by means of a cumulative-effect adjustment
on the balance sheet as of the beginning of the fiscal year of adoption.
The Company is currently assessing the impact, if any, the guidance
may have upon adoption.
In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation
of Interest (Subtopic 835-30). ASU 2015-03 requires that debt issuance
costs related to a recognized debt liability be presented in the balance
sheet as a direct deduction from the carrying amount of that debt
liability. In June 2015, the FASB issued ASU 2015-15 as an amendment
to this guidance to address the absence of authoritative guidance for
debt issuance costs related to line-of-credit arrangements. The SEC
staff stated that they would not object to an entity deferring and
presenting debt issuance costs as an asset and subsequently amortizing
the deferred debt issuance costs ratably over the term of the line-of-
credit arrangement, regardless of whether there are any outstanding
borrowings on the line-of-credit arrangement. The ASU is effective
for public entities for annual periods beginning after December 15,
2015, and interim periods within those annual reporting periods.
Early adoption is permitted for financial statements that have not
been previously issued. The guidance will be applied on a retrospective
basis. The Company expects to adopt this guidance starting with
the first quarter of fiscal year 2017. The adoption of this standard is
not expected to have a material impact on the financial statements.
NOTE 2 Earnings per Share
The Company presents basic and diluted earnings per share (“EPS”)
using the two-class method which requires all outstanding unvested
share-based payment awards that contain rights to non-forfeitable
dividends and therefore participate in undistributed earnings with
common stockholders be included in computing earnings per share.
Under the two-class method, net earnings are reduced by the amount
of dividends declared in the period for each class of common stock
and participating security. The remaining undistributed earnings
are then allocated to common stock and participating securities,
based on their respective rights to receive dividends. Restricted stock
awards granted to certain employees and directors contain non-
forfeitable rights to dividends at the same rate as common stock, and
are considered participating securities. Basic EPS has been computed
by dividing net income by the weighted-average number of common
shares outstanding.
The following is a reconciliation of the numerator and denominator
of the diluted net income per share computations for the periods
presented below.
(in millions, except share amounts)
Numerator:
Income from continuing operations
Less: Allocation to participating securities
Income from continuing operations allocated to common stockholders
Loss from discontinued operations
Less: Allocation to participating securities
Loss from discontinued operations allocated to common stockholders
Diluted net income
Less: Allocation to participating securities
Diluted net income allocated to common stockholders
Denominator:
Weighted average number of:
Common shares outstanding
Dilutive potential common shares outstanding:
Share-based awards
Diluted shares outstanding
$
$
$
$
$
$
Year Ended September 30,
2015
2016
2014
54.7
(1.0)
53.7
$
— $
—
— $
$
54.7
(1.0)
53.7
$
$
55.7
(1.3)
54.4
$
— $
—
— $
$
55.7
(1.3)
54.4
$
$
19.6
(0.5)
19.1
(0.3)
—
(0.3)
19.3
(0.5)
18.8
18,410,561
18,525,374
18,528,302
214,811
18,625,372
406,861
18,932,235
604,000
19,132,302
The dilutive effect of share-based awards is reflected in diluted net
income per share by application of the treasury stock method, which
includes consideration of unamortized share-based compensation
expense required under the Compensation – Stock Compensation
Topic of the ASC.
Options to purchase 910,060, 997,459 and 1,120,985 shares of
common stock for fiscal years ended September 30, 2016, 2015,
and 2014, respectively, were excluded from the calculation of diluted
earnings per share because they would have been anti-dilutive.
66
Form 10K
PART II
ITEM 8 Financial Statements and Supplementary Data
NOTE 3 Assets and Liabilities, at Fair Value
The Company’s financial and nonfinancial assets and liabilities
reported at fair value are included in the following captions on the
consolidated balance sheets:
(cid:116) Cash and cash equivalents
(cid:116) Cash, securities and other assets segregated under federal and other
regulations
(cid:116) Deposits and receivables from exchange-clearing organizations,
broker-dealers, clearing organizations and counterparties
(cid:116) Financial instruments owned and sold, not yet purchased
(cid:116) Physical commodities inventory
(cid:116) Accounts payable and other accrued liabilities
(cid:116) Payable to broker-dealers, clearing organizations and counterparties
Fair Value Hierarchy
As required by the Fair Value Measurement Topic of the ASC, financial
and nonfinancial assets and liabilities are classified in their entirety
based on the lowest level of input that is significant to the fair value
measurement. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3
measurements). A market is active if there are sufficient transactions on
an ongoing basis to provide current pricing information for the asset or
liability, pricing information is released publicly, and price quotations
do not vary substantially either over time or among market makers.
Observable inputs reflect the assumptions market participants would
use in pricing the asset or liability developed based on market data
obtained from sources independent of the reporting entity. The guidance
requires the Company to consider counterparty credit risk of all parties
to outstanding derivative instruments that would be considered by a
market participant in the transfer or settlement of such contracts (exit
price). The Company’s exposure to credit risk on derivative financial
instruments relates to the portfolio of OTC derivative contracts as all
exchange-traded contracts held can be settled on an active market with
the credit guarantee by the respective exchange. The Company requires
each counterparty to deposit margin collateral for all OTC instruments
and is also required to deposit margin collateral with counterparties. The
Company has assessed the nature of these deposits and used its discretion
to adjust each based on the underlying credit considerations for the
counterparty and determined that the collateral deposits minimize the
exposure to counterparty credit risk in the evaluation of the fair value
of OTC instruments as determined by a market participant.
The majority of financial assets and liabilities on the consolidated
balance sheets are reported at fair value. Cash is reported at the balance
held at financial institutions. Cash equivalents includes money market
funds, which are valued at period-end at the net asset value provided
by the fund’s administrator, and certificates of deposit, which are stated
at cost plus accrued interest, which approximates fair value. Cash,
securities and other assets segregated under federal and other regulations
include the value of cash collateral as well as the value of other pledged
investments, primarily U.S. Treasury bills and obligations issued by
government sponsored entities and commodities warehouse receipts.
Deposits with and receivables from exchange-clearing organizations
and broker-dealers, clearing organizations and counterparties and
payable to customers and broker-dealers, clearing organizations and
counterparties include the value of cash collateral as well as the value
of money market funds and other pledged investments, primarily U.S.
Treasury bills and obligations issued by government sponsored entities
and mortgage-backed securities. These balances also include the fair
value of exchange-traded futures and options on futures and exchange-
cleared swaps and options determined by prices on the applicable
exchange. Financial instruments owned and sold, not yet purchased
include the value of U.S. and foreign government obligations, corporate
debt securities, derivative financial instruments, commodities, mutual
funds and investments in managed funds. The fair value of exchange
common stock is determined by quoted market prices, and the fair value
of exchange memberships is determined by recent sale transactions.
Physical commodities inventory includes precious metals that are a
part of the trading activities of a regulated broker-dealer subsidiary
and is recorded at fair value using spot prices. Physical commodities
inventory also includes agricultural and energy commodities that are
a part of the trading activities of a non-broker dealer subsidiary and
are also recorded at fair value using spot prices. The carrying value of
receivables from customers, net and notes receivable, net approximates
fair value, given their short duration. Payables to lenders under loans
carry variable rates of interest and thus approximate fair value. The fair
value of the Company’s senior unsecured notes was estimated to be
$46.2 million and $46.6 million (carrying value of $45.5 million) as of
September 30, 2016 and 2015, respectively, based on the transaction
prices at public exchanges for the same or similar issues.
In the Rates Division of INTL FCStone Financial, the Company
has amounts receivable from and payable to broker-dealers, clearing
organizations and counterparties in connection with U.S. Treasury
obligations, U.S. government agency obligations, and agency mortgage-
backed and asset-backed obligations. Receivables from broker-dealers,
clearing organizations and counterparties primarily include amounts
receivable for securities sold but not yet delivered by the Company
on settlement date (“fails-to-deliver”) and net receivables arising from
unsettled trades. Payables to broker-dealers, clearing organizations
and counterparties primarily include amounts payable for securities
purchased, but not yet received by the Company on settlement date
(“fails-to-receive”), net payables arising from unsettled trades. Due to
their short-term nature, receivables from and payables to broker-dealers,
clearing organizations and counterparties approximate fair value.
In the Rates Division of INTL FCStone Financial, the Company has a
significant amount of trading assets and liabilities. The Rates Division’s
trading activities consists primarily of securities trading in connection
with U.S. Treasury obligations, U.S. government agency obligations,
and agency mortgage-backed and asset-backed obligations. The acquired
assets and liabilities, including derivatives, are recorded on a trade date
basis at fair value.
The fair value estimates presented herein are based on pertinent
information available to management as of September 30, 2016 and
2015. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts
have not been comprehensively revalued for purposes of these financial
statements since that date and current estimates of fair value may differ
significantly from the amounts presented herein.
Form 10K 67
PART II
ITEM 8 Financial Statements and Supplementary Data
Cash equivalents, securities, commodities warehouse receipts, derivative
financial instruments and contingent liabilities are carried at fair
value, on a recurring basis, and are classified and disclosed into three
levels in the fair value hierarchy. The Company did not have any fair
value adjustments for assets or liabilities measured at fair value on a
non-recurring basis during the years ended September 30, 2016 and
2015. The three levels of the fair value hierarchy under the Fair Value
Measurement Topic of the ASC are:
Level 1 - Unadjusted quoted prices in active markets that are accessible
at the measurement date for identical, unrestricted assets or liabilities.
Level 1 consists of financial assets and liabilities whose fair values are
estimated using quoted market prices. Included in Level 1 are money
market funds, certificates of deposit, commodities warehouse receipts,
some common stock and American Depositary Receipts (“ADRs”), some
exchangeable foreign ordinary equities (“GDRs”), some corporate and
municipal bonds, physical precious metals, agricultural, and energy
commodities, equity investments in exchange firms, some mutual
funds, as well as futures and options on futures contracts traded on
national exchanges, exchange-cleared swaps and options which are
valued using exchange closing prices, OTC swaps and options contracts
using quoted prices from national exchanges in which the Company
executes transactions for customer and proprietary accounts, and OTC
firm purchase and sale commitments related to our agricultural and
energy commodities;
Level 2 - Quoted prices for identical or similar assets or liabilities in
markets that are less active, that is, markets in which there are few
transactions for the asset or liability that are observable for substantially
the full term. Included in Level 2 are those financial assets and liabilities
for which fair values are estimated using models or other valuation
methodologies. These models are primarily industry-standard models
that consider various observable inputs, including time value, yield
curve, volatility factors, observable current market and contractual
prices for the underlying financial instruments, as well as other relevant
economic measures. Included in Level 2 are U.S. and foreign government
obligations, mortgage-backed securities, some common stock and ADRs,
some GDRs, some corporate and municipal bonds, commodities leases,
and OTC forwards, swaps, and options, and OTC firm purchase and
sale commitments related to precious metals commodities; and
Level 3 - Prices or valuation techniques that require inputs that are
both significant to the fair value measurement and unobservable (i.e.,
supported by little or no market activity). Level 3 comprises financial
assets and liabilities whose fair value is estimated based on internally
developed models or methodologies utilizing significant inputs that
are not readily observable from objective sources. Included in Level 3
are common stock and ADRs, some corporate and municipal bonds,
some other investments and contingent liabilities.
68
Form 10K
The following tables set forth the Company’s financial and nonfinancial assets and liabilities accounted for at fair value, on a recurring basis,
as of September 30, 2016 and September 30, 2015 by level in the fair value hierarchy. There were no assets or liabilities that were measured
at fair value on a nonrecurring basis as of September 30, 2016 and 2015.
PART II
ITEM 8 Financial Statements and Supplementary Data
(in millions)
ASSETS:
Unrestricted cash equivalents - certificates of deposits
Commodities warehouse receipts
U.S. government obligations
Securities and other assets segregated under federal and other
regulations
Money market funds
U.S. government obligations
Derivatives
Deposits and receivables from exchange-clearing organizations
“To be announced” (TBA) and forward settling securities
Derivatives
Deposits and receivables from broker-dealers, clearing
organizations and counterparties
Common and preferred stock and ADRs
Exchangeable foreign ordinary equities and ADRs
Corporate and municipal bonds
U.S. government obligations
Foreign government obligations
Mortgage-backed securities
Derivatives
Commodities leases
Commodities warehouse receipts
Exchange firm common stock
Mutual funds and other
Financial instruments owned
Physical commodities inventory
Total assets at fair value
LIABILITIES:
Accounts payable and other accrued liabilities - contingent
liabilities
$
$
TBA and forward settling securities
Derivatives
September 30, 2016
Level 1
Level 2
Level 3
Netting and
Collateral(1)
Total
$
7.1 $
23.3
—
— $
—
595.5
— $
—
—
— $
—
—
23.3
512.7
—
2,149.9
2,662.6
—
—
—
34.6
25.2
36.9
—
—
—
206.9
—
8.9
6.4
8.8
327.7
71.2
3,091.9 $
595.5
—
472.1
—
472.1
0.3
8.0
8.3
1.7
0.5
0.9
514.9
14.6
747.5
1,350.8
137.2
—
—
—
2,768.1
—
3,844.0 $
— $
—
1,961.7
— $
2.6
97.5
—
—
—
—
—
—
—
—
0.2
—
3.0
—
—
—
—
—
—
—
—
3.2
—
3.2 $
0.8 $
—
—
7.1
23.3
595.5
618.8
512.7
472.1
(116.3)
868.5
0.3
(15.5)
(15.2)
36.5
25.7
40.8
514.9
14.6
747.5
193.9
8.1
8.9
6.4
8.8
1,606.1
71.2
3,156.5
—
—
—
(2,266.2)
(2,266.2)
—
(23.5)
(23.5)
—
—
—
—
—
—
(1,363.8)
(129.1)
—
—
—
(1,492.9)
—
(3,782.6)
$
— $
0.9
(2,059.2)
0.8
3.5
—
Payables to broker-dealers, clearing organizations and
counterparties
Common and preferred stock and ADRs
Exchangeable foreign ordinary equities and ADRs
Corporate and municipal bonds
U.S. government obligations
Foreign government obligations
Mortgage-backed securities
Derivatives
Commodities leases
3.5
23.9
25.8
6.9
509.8
—
—
210.9
62.1
839.4
Financial instruments sold, not yet purchased
Total liabilities at fair value
843.7
(1) Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level are included in that level.
100.1
0.4
0.5
—
509.8
—
—
1,319.3
207.8
2,037.8
2,137.9 $
1,961.7
23.5
25.3
6.9
—
—
—
199.4
—
255.1
2,216.8 $
(2,058.3)
—
—
—
—
—
—
(1,307.8)
(145.7)
(1,453.5)
(3,511.8)
—
—
—
—
—
—
—
—
—
—
0.8 $
$
$
Form 10K 69
PART II
ITEM 8 Financial Statements and Supplementary Data
(in millions)
ASSETS:
Unrestricted cash equivalents - certificates of deposits
Commodities warehouse receipts
U.S. government obligations
Securities and other assets segregated under federal and other
regulations
Money market funds
U.S. government obligations
Derivatives
Deposits and receivables from exchange-clearing organizations
TBA and forward settling securities
Derivatives
Deposits and receivables from broker-dealers, clearing
organizations and counterparties - derivatives
Common and preferred stock and ADRs
Exchangeable foreign ordinary equities and ADRs
Corporate and municipal bonds
U.S. government obligations
Foreign government obligations
Mortgage-backed securities
Derivatives
Commodities leases
Commodities warehouse receipts
Exchange firm common stock
Mutual funds and other
Financial instruments owned
Physical commodities inventory
Total assets at fair value
LIABILITIES:
Accounts payable and other accrued liabilities - contingent
liabilities
$
$
TBA and forward settling securities
Derivatives
September 30, 2015
Level 1
Level 2
Level 3
Netting and
Collateral(1)
Total
$
1.3 $
22.1
—
— $
—
493.4
— $
—
—
— $
—
—
1.3
22.1
493.4
22.1
431.8
—
3,615.9
4,047.7
—
0.1
0.1
23.7
82.9
26.1
—
—
—
278.5
—
2.8
5.6
3.4
423.0
15.2
4,509.4 $
493.4
—
501.4
—
501.4
1.2
537.9
539.1
1.9
6.6
2.0
513.4
12.1
699.5
1,702.0
64.6
—
—
—
3,002.1
—
4,536.0 $
— $
—
3,491.3
— $
2.6
528.7
—
—
—
—
—
—
—
—
0.5
—
3.2
—
—
—
—
—
—
—
—
3.7
—
3.7 $
3.3 $
—
—
—
—
—
(3,539.7)
(3,539.7)
(1.0)
(591.1)
(592.1)
—
—
—
—
—
—
(1,949.9)
(57.0)
—
—
—
(2,006.9)
—
(6,138.7)
$
515.5
431.8
501.4
76.2
1,009.4
0.2
(53.1)
(52.9)
26.1
89.5
31.3
513.4
12.1
699.5
30.6
7.6
2.8
5.6
3.4
1,421.9
15.2
2,910.4
— $
(1.0)
(4,020.0)
3.3
1.6
—
Payable to broker-dealers, clearing organizations and
counterparties - derivatives
Common and preferred stock and ADRs
Exchangeable foreign ordinary equities and ADRs
U.S. government obligations
Foreign government obligations
Mortgage-backed securities
Derivatives
Commodities leases
1.6
18.6
90.0
341.0
6.4
2.8
54.1
55.4
568.3
Financial instruments sold, not yet purchased
573.2
Total liabilities at fair value
(1) Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level are included in that level.
531.3
0.6
1.0
341.0
6.4
2.8
1,723.5
99.1
2,174.4
2,705.7 $
3,491.3
18.0
89.0
—
—
—
264.0
—
371.0
3,862.3 $
(4,021.0)
—
—
—
—
—
(1,933.4)
(43.7)
(1,977.1)
(5,998.1)
—
—
—
—
—
—
—
—
—
3.3 $
$
$
Realized and unrealized gains and losses are included in ‘trading gains, net’ in the consolidated income statements.
70
Form 10K
PART II
ITEM 8 Financial Statements and Supplementary Data
Information on Level 3 Financial Assets and Liabilities
The Company’s financial assets at fair value classified within level 3 of the fair value hierarchy as of September 30, 2016 and 2015 are
summarized below:
(in millions)
Total level 3 assets
Level 3 assets for which the Company bears economic exposure
Total assets
Total financial assets at fair value
Total level 3 assets as a percentage of total assets
Level 3 assets for which the Company bears economic exposure as a percentage of total assets
Total level 3 assets as a percentage of total financial assets at fair value
September 30, 2016
$
$
$
$
3.2
3.2
5,951.3
3,156.5
September 30, 2015
$
$
$
$
3.7
3.7
5,070.0
2,910.4
0.1%
0.1%
0.1%
0.1%
0.1%
0.1%
The following tables set forth a summary of changes in the fair value of the Company’s level 3 financial assets and liabilities during the fiscal
years ended September 30, 2016 and 2015, including a summary of unrealized gains (losses) during the fiscal year ended on the Company’s
level 3 financial assets and liabilities still held as of September 30, 2016.
(in millions)
ASSETS:
Common and preferred stock
and ADRs
Corporate and municipal
bonds
Balances at
beginning of
period
Realized gains
(losses) during
period
Level 3 Financial Assets and Financial Liabilities
For the Year Ended September 30, 2016
Unrealized
gains (losses)
during period
Purchases/
issuances
Settlements
Transfers in
or (out) of
Level 3
Balances at
end of period
$
$
0.5 $
3.2
3.7 $
— $
—
— $
(0.3) $
(0.2)
(0.5) $
— $
—
— $
— $
— $
—
— $
—
— $
0.2
3.0
3.2
(in millions)
LIABILITIES:
Contingent liabilities
Balances at
beginning of
period
Realized gains
(losses) during
period
Remeasurement
gains (losses)
during period
Acquisitions
Settlements
Transfers in
or (out) of
Level 3
Balances at
end of period
$
3.3 $
— $
0.4
$
— $
(2.9) $
— $
0.8
(in millions)
ASSETS:
Common and preferred stock
and ADRs
Corporate and municipal
bonds
Balances at
beginning of
period
Realized gains
(losses) during
period
Level 3 Financial Assets and Financial Liabilities
For the Year Ended September 30, 2015
Unrealized
gains (losses)
during period
Purchases/
issuances
Settlements
Transfers in
or (out) of
Level 3
Balances at
end of period
$
$
0.7 $
3.6
4.3 $
— $
—
— $
(0.2) $
(0.4)
(0.6) $
— $
—
— $
— $
— $
—
— $
—
— $
0.5
3.2
3.7
(in millions)
LIABILITIES:
Contingent liabilities
Balances at
beginning of
period
Realized gains
(losses) during
period
Remeasurement
gains (losses)
during period
Acquisitions
Settlements
Transfers in
or (out) of
Level 3
Balances at
end of period
$
5.5 $
— $
1.8
$
0.1 $
(4.1) $
— $
3.3
Form 10K 71
PART II
ITEM 8 Financial Statements and Supplementary Data
In accordance with the Fair Value Measurement Topic of the ASC,
the Company has estimated on a recurring basis each period the
fair value of debentures issued by a single asset owning company
of Suriwongse Hotel located in Chiang Mai, Thailand. As of
September 30, 2016, the Company’s investment in the hotel was
$3.0 million, and included within the corporate and municipal
bonds classification in the level 3 financial assets and financial
liabilities tables. The Company classified its investment in the hotel
within level 3 of the fair value hierarchy because the fair value was
determined using significant unobservable inputs, which included
projected cash flows. These cash flows were discounted employing
present value techniques. The Company estimated the fair value of
its investment in these debentures by using a management-developed
forecast, which was based on the income approach. The Company
continued to monitor the hotel renovation process and evaluate the
fair value of the debentures. There had been no significant change
in the fair value of the debentures, and no additional loss had been
recognized during the years ended September 30, 2016, 2015 and
2014. In December 2016, the Company sold the debentures and
collected an amount approximating their carrying value.
The Company is required to make additional future cash payments
based on certain financial performance measures of its acquired
businesses. The Company is required to remeasure the fair value of
the cash earnout arrangements on a recurring basis in accordance
with the guidance in the Business Combinations Topic of the
ASC. The Company has classified its liabilities for the contingent
earnout arrangements within level 3 of the fair value hierarchy
because the fair value is determined using significant unobservable
inputs, which include projected cash flows. The estimated fair
value of the contingent purchase consideration is based upon
management-developed forecasts, a level 3 input in the fair value
hierarchy. These cash flows are discounted employing present value
techniques in arriving at fair value. The discount rate was developed
using market participant company data and there have been no
significant changes in the discount rate environment. From the dates
of acquisition to September 30, 2016, certain acquisitions have had
changes in the estimates of undiscounted cash flows, based on actual
performances fluctuating from estimates. During the fiscal years
ended September 30, 2016 and 2015, the fair value of the contingent
consideration increased $0.4 million and decreased $1.8 million,
respectively, with the corresponding income or expense classified
as ‘other’ in the consolidated income statements.
The value of an exchange-traded derivative contract is equal to
the unrealized gain or loss on the contract determined by marking
the contract to the current settlement price for a like contract on
the valuation date of the contract. A settlement price may not be
used if the market makes a limit move with respect to a particular
derivative contract or if the securities underlying the contract
experience significant price fluctuations after the determination
of the settlement price. When a settlement price cannot be used,
derivative contracts will be valued at their fair value as determined
in good faith pursuant to procedures adopted by management of
the Company.
The Company reports transfers in and out of levels 1, 2 and 3, as
applicable, using the fair value of the securities as of the beginning of
the reporting period in which the transfer occurred. The Company
did not have any additional significant transfers between level
1 and level 2 fair value measurements for the fiscal years ended
September 30, 2016 and 2015.
The Company has classified equity investments in exchange firms’
common stock not pledged for clearing purposes as trading. The
investments are recorded at fair value, with unrealized gains and losses
recorded, net of taxes, included in earnings. As of September 30, 2016,
the cost and fair value of the equity investments in exchange firms
is $3.7 million and $6.4 million, respectively. As of September 30,
2015, the cost and fair value of the equity investments in exchange
firms was $3.7 million and $5.6 million, respectively.
In June 2015, the Company sold shares of common stock in the
Intercontinental Exchange, Inc. (“ICE”). The Company was required
to hold these ICE shares for clearing purposes and, as a result,
the shares were being held at cost on the consolidated balance
sheet. The Company recorded a receivable for the proceeds of
$2.1 million, which was received in July 2015, and recognized a gain
of $1.2 million before taxes, during the year ended September 30,
2015, in connection with the sale of these shares.
For the fiscal year ended September 30, 2015, the Company reclassified
the unrealized gain remaining in AOCI of approximately $3.3 million,
net of income tax expense of $2.0 million, into earnings.
During the year ended September 30, 2014, the Company sold
all of its investments in mortgage-backed securities and the U.S.
government obligations that were held as of September 30, 2014,
matured, and as a result, realized gains of $0.1 million, net of tax,
were reclassified from OCI for the year ended September 30, 2014.
Except as discussed previously, there were no other sales of
AFS Securities during years ended September 30, 2016 and
September 30, 2015, and as a result, no additional realized gains
or losses were recorded for the years ended September 30, 2016
and September 30, 2015.
72
Form 10K
PART II
ITEM 8 Financial Statements and Supplementary Data
NOTE 4 Financial Instruments with Off-Balance Sheet Risk and Concentrations
of Credit Risk
The Company is party to certain financial instruments with off-balance
sheet risk in the normal course of its business. The Company has sold
financial instruments that it does not currently own and will therefore
be obliged to purchase such financial instruments at a future date.
The Company has recorded these obligations in the consolidated
financial statements as of September 30, 2016 at the fair values of
the related financial instruments. The Company will incur losses
if the fair value of the underlying financial instruments increases
subsequent to September 30, 2016. The total of $839.4 million as of
September 30, 2016 includes $210.9 million for derivative contracts,
which represent a liability to the Company based on their fair values
as of September 30, 2016.
Derivatives
The Company utilizes derivative products in its trading capacity as
a dealer in order to satisfy customer needs and mitigate risk. The
Company manages risks from both derivatives and non-derivative cash
instruments on a consolidated basis. The risks of derivatives should
not be viewed in isolation, but in aggregate with the Company’s
other trading activities. The majority of the Company’s derivative
(in millions)
Derivative contracts not accounted for as hedges:
Exchange-traded commodity derivatives
OTC commodity derivatives
Exchange-traded foreign exchange derivatives
OTC foreign exchange derivatives
Exchange-traded interest rate derivatives
Equity index derivatives
TBA and forward settling securities
Gross fair value of derivative contracts
Impact of netting and collateral
Total fair value included in ‘Deposits and receivables from
exchange-clearing organizations’
Total fair value included in ‘Deposits and receivables from broker-dealers,
clearing organizations and counterparties’
Total fair value included in ‘Financial instruments owned, at fair value’
Total fair value included in ‘Payables to broker-dealers, clearing
organizations and counterparties
Fair value included in ‘Financial instruments sold, not yet purchased, at
fair value’
positions are included in the consolidating balance sheets in ‘deposits
and receivables from exchange-clearing organizations’, ‘financial
instruments owned and sold, not yet purchased, at fair value’ and
‘payables to broker-dealers, clearing organizations and counterparties’.
The Company employs an interest rate risk management strategy
that uses derivative financial instruments in the form of interest rate
swaps to manage a portion of the aggregate interest rate position. The
Company’s objective is to invest the majority of customer segregated
deposits in high quality, short-term investments and swap the resulting
variable interest earnings into the medium-term interest stream.
The risk mitigation of these interest rate swaps is not within the
documented hedging designation requirements of the Derivatives and
Hedging Topic of the ASC, and as a result they are recorded at fair
value, with changes in the marked-to-market valuation of the financial
instruments recorded within ‘trading gains, net’ in the consolidated
income statements. At September 30, 2016, the Company had
$375 million in notional principal of interest rate swaps outstanding
with a weighted-average life of 15 months.
Listed below are the fair values of the Company’s derivative assets
and liabilities as of September 30, 2016 and 2015. Assets represent
net unrealized gains and liabilities represent net unrealized losses.
September 30, 2016
September 30, 2015
Assets(1)
Liabilities(1)
Assets(1)
Liabilities(1)
$
$
$
$
2,022.1
1,217.0
12.2
346.5
78.7
39.1
0.3
3,715.9
(3,653.5)
(116.3)
(15.2)
193.9
$
$
$
$
3,443.6
1,621.2
27.8
892.2
126.8
22.8
1.2
6,135.6
(6,081.7)
76.2
(52.9)
30.6
$
$
$
1,920.5
1,188.9
7.5
290.2
120.5
50.3
2.6
3,580.5
(3,366.1)
3.5
210.9
$
$
$
3,313.8
1,650.7
20.6
865.4
136.0
21.0
2.6
6,010.1
(5,954.4)
1.6
54.1
(1) As of September 30, 2016 and 2015, the Company’s derivative contract volume for open positions was approximately 4.0 million and 4.1 million contracts, respectively.
The Company’s derivative contracts are principally held in its
Commodities and Risk Management Services (“Commercial Hedging”)
segment. The Company assists its Commercial Hedging segment
customers in protecting the value of their future production by entering
into option or forward agreements with them on an OTC basis. The
Company also provides its Commercial Hedging segment customers
with option products, including combinations of buying and selling
puts and calls. The Company mitigates its risk by generally offsetting
the customer’s transaction simultaneously with one of the Company’s
trading counterparties or will offset that transaction with a similar but
not identical position on the exchange. The risk mitigation of these
offsetting trades is not within the documented hedging designation
requirements of the Derivatives and Hedging Topic of the ASC.
These derivative contracts are traded along with cash transactions
because of the integrated nature of the markets for these products.
The Company manages the risks associated with derivatives on an
aggregate basis along with the risks associated with its proprietary
trading and market-making activities in cash instruments as part of
Form 10K 73
PART II
ITEM 8 Financial Statements and Supplementary Data
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.
Through its Rates Division, the Company transacts in derivative
instruments, which consist of futures, mortgage-backed TBA securities
and forward settling transactions, that are used to manage risk
exposures. The fair value of these transactions is recorded in receivables
or payables to broker-dealers, clearing organizations and counterparties.
Realized and unrealized gains and losses on securities and derivative
transactions are reflected in ‘trading gains, net’.
The Company enters into TBA securities transactions for the sole purpose of managing risk associated with the purchase of mortgage pass-
through securities. TBA securities are included within payables to broker-dealers, clearing organizations and counterparties. Forward settling
securities represent non-regular way securities and are included in financial instruments owned and sold. As of September 30, 2016, these
transactions are summarized as follows (in millions):
Gain/(Loss)
Notional
Amounts
Unrealized gain on TBA securities purchased within payables to broker-dealers, clearing organizations and
counterparties and related notional amounts(1)
Unrealized loss on TBA securities purchased within payables to broker-dealers, clearing organizations and
counterparties and related notional amounts(1)
Unrealized gain on TBA securities sold within payables to broker-dealers, clearing organizations and
counterparties and related notional amounts(1)
Unrealized loss on TBA securities sold within payables to broker-dealers, clearing organizations and
counterparties and related notional amounts(1)
Unrealized gain on forward settling securities purchased within receivables from broker-dealers, clearing
organizations and counterparties and related notional amounts
Unrealized gain on forward settling securities sold within receivables from broker-dealers, clearing organizations and
(470.4)
counterparties and related notional amounts
(1) The notional amounts of these instruments reflect the extent of the Company’s involvement in TBA securities and do not represent risk of loss due to counterparty non-performance.
(754.3)
(702.3)
607.9
485.5
289.8
(1.7)
(0.8)
0.2
0.1
0.8
1.3
$
$
$
$
$
$
$
$
$
$
$
$
The following table sets forth the Company’s net gains (losses) related to derivative financial instruments for the fiscal years ended September 30,
2016, 2015, and 2014, in accordance with the Derivatives and Hedging Topic of the ASC. The net gains (losses) set forth below are included
in ‘trading gains, net’ in the consolidated income statements.
(in millions)
Commodities
Foreign exchange
Interest rate and equity
TBA and forward settling securities
Net gains from derivative contracts
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.
The 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. These 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. The 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. The Company seeks to control its credit risk through a
74
Form 10K
Year Ended September 30,
2016
2015
2014
$
$
41.8
9.7
0.8
(14.4
37.9
$
$
78.6
7.5
3.2
(5.1)
84.2
$
$
65.7
7.5
—
—
73.2
variety of reporting and control procedures, including establishing
credit limits based upon a review of the counterparties’ financial
condition and credit ratings. The Company monitors collateral levels
on a daily basis for compliance with regulatory and internal guidelines
and requests changes in collateral levels as appropriate.
The 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. These 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. The Company controls the risks
associated with these transactions by requiring customers to maintain
margin deposits in compliance with individual exchange regulations
and internal guidelines. The Company monitors required margin
levels daily and, therefore, may require customers to deposit additional
collateral or reduce positions when necessary. The Company also
PART II
ITEM 8 Financial Statements and Supplementary Data
establishes credit limits for customers, which are monitored daily. The
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, 2016 and September 30, 2015 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. The 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. The 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.
NOTE 5 Receivables From Customers, Net and Notes Receivable, Net
Receivables from customers, net and notes receivable, net include an
allowance for bad debts, which reflects the Company’s best estimate of
probable losses inherent in the receivables from customers and notes
receivable. The Company provides for an allowance for doubtful
accounts based on a specific-identification basis. The Company
continually reviews its allowance for bad debts. The allowance for
doubtful accounts related to receivables from customers was $9.5 million
and $10.2 million as of September 30, 2016 and 2015, respectively.
The allowance for doubtful accounts related to notes receivable
was $0.2 million and $1.0 million as of September 30, 2016 and
2015, respectively.
During the year ended September 30, 2016, the Company recorded
bad debt expense, net of recoveries, of $4.4 million, including provision
increases of $4.2 million and direct write-offs of $0.4 million, offset
by recoveries of $0.2 million. The increase in bad debts during fiscal
2016 primarily related to $3.6 million of customer deficits in the
Commercial Hedging segment, $0.4 million of uncollectible customer
receivables in the Physical Commodities segment and $0.4 million of
uncollectible service fees and notes in the Securities segment.
During the year ended September 30, 2015, the Company recorded
bad debt expense, net of recoveries, of $7.3 million, including provision
increases of $6.6 million and direct write-offs of $0.7 million, offset
by minimal recoveries. The increase in bad debts during fiscal 2015
related to $2.8 million of receivables from a renewable fuels customer
in the Physical Commodities segment, $2.3 million of OTC customer
deficits and $0.6 million of LME customer deficits in the Commercial
Hedging segment, $0.5 million of uncollectible service fees and notes
in our Securities segment, and $1.1 million of notes receivable related
to loans pertaining to a former acquisition.
During the year ended September 30, 2014, the Company recorded
bad debt expense, net of recoveries, of $5.5 million, including provision
increases of $5.1 million and direct write-offs of $0.6 million, offset
by recoveries of $0.2 million. The provision increases during fiscal
2014 was $3.8 million in the Commercial Hedging segment, primarily
related to account deficits from a Hong Kong commercial LME
customer and Brazilian OTC Financial Ag & Energy customers.
Additionally, the Company recorded bad debts of $0.9 million in the
Physical Commodities segment, related to renewable fuels activity, and
$0.7 million in the Securities segment primarily related to charge-offs
of uncollectible service fees.
Activity in the allowance for doubtful accounts and notes for the years ended September 30, 2016, 2015, and 2014 was as follows:
(in millions)
Balance, beginning of year
Provision for bad debts
Deductions:
Charge-offs
Balance, end of year
2016
2015
2014
$
$
11.2
4.2
(5.7)
9.7
$
$
5.8
6.0
(0.6)
11.2
$
$
1.2
5.3
(0.7)
5.8
Form 10K 75
PART II
ITEM 8 Financial Statements and Supplementary Data
The Company originates short-term notes receivable from customers
with the outstanding balances typically being insured 90% to 98%
by a third party, including accrued interest, subject to applicable
deductible amounts. The total balance outstanding under insured notes
receivable was $5.0 million and $41.4 million as of September 30,
2016 and 2015, respectively. The Company has sold $4.6 million and
$30.7 million of the insured portion of the notes through non-recourse
participation agreements with other third parties as of September 30,
2016 and 2015, respectively. The Company has completed its exit
of the majority of this activity during the year ended September 30,
2016. The Company believes the run-off of the remaining activity
will have a minimal impact on the Company.
See discussion of notes receivable related to commodity repurchase
agreements in Note 13.
NOTE 6 Physical Commodities Inventory
The Company’s inventories consist of finished physical commodities. Inventories by component of the Company’s Physical Commodities
segment are shown below.
(in millions)
Physical Ag & Energy(1)
Precious metals - held by broker-dealer subsidiary(2)
Precious metals - held by non-broker-dealer subsidiaries(3)
Physical commodities inventory
(1) Physical Ag & Energy maintains agricultural commodity inventories, including corn, soybeans, wheat, dried distillers grain, canola, sorghum, coffee and others. The agricultural
commodity inventories are carried at net realizable value, which approximates fair value less disposal costs, with changes in net realizable value included as a component of ‘cost of
sales of physical commodities’ on the consolidated income statement. The agricultural inventories have reliable, readily determinable and realizable market prices, have relatively
insignificant costs of disposal and are available for immediate delivery.
65.9
5.3
52.6
123.8
0.4
10.8
21.6
32.8
$
$
$
$
September 30, 2016
September 30, 2015
(2) Precious metals held by the Company’s subsidiary, INTL FCStone Ltd, a United Kingdom based broker-dealer subsidiary, is measured at fair value, with changes in fair value
included as a component of ‘trading gains, net’ on the consolidated income statement, in accordance with U.S. GAAP accounting requirements for broker-dealers.
(3) Precious metals inventory held by subsidiaries that are not broker-dealers are valued at the lower of cost or market value.
The Company has recorded lower of cost or market (“LCM”) adjustments for certain precious metals inventory of $0.6 million and $0.3 million
as of September 30, 2016 and 2015, respectively. The adjustments are included in ‘cost of sales of physical commodities’ in the consolidated
income statements.
NOTE 7 Property and Equipment, Net
Property and equipment are stated at cost, and reported net of accumulated depreciation on the consolidated balance sheets. Depreciation
on plant and equipment is calculated on the straight-line method over the estimated useful lives of the assets. The estimated useful lives of
property and equipment range from 3 to 10 years. During the fiscal years ended September 30, 2016, 2015, and 2014, depreciation expense
was $6.6 million, $5.7 million and $5.7 million, respectively.
A summary of property and equipment, at cost less accumulated depreciation as of September 30, 2016 and 2015 is as follows:
September 30, 2016
September 30, 2015
$
$
6.8
22.8
20.6
11.9
62.1
(32.7)
29.4
$
$
5.2
9.0
16.1
9.9
40.2
(20.5)
19.7
(in millions)
Property and equipment:
Furniture and fixtures
Software
Equipment
Leasehold improvements
Total property and equipment
Less accumulated depreciation
Property and equipment, net
76
Form 10K
PART II
ITEM 8 Financial Statements and Supplementary Data
NOTE 8 Goodwill
Goodwill allocated to the Company’s operating segments as of September 30, 2016 and 2015 is as follows:
(in millions)
Commercial Hedging
Global Payments
Physical Commodities
Securities
Goodwill
NOTE 9 Intangible Assets
September 30, 2016
$
$
30.7
6.3
2.4
8.1
47.5
$
September 30, 2015
$
30.7
6.3
2.4
8.1
47.5
The gross and net carrying values of intangible assets as of the balance sheet dates, by major intangible asset class are as follows:
(in millions)
Intangible assets subject to amortization:
Trade name
Software programs/platforms
Customer base
Intangible assets not subject to amortization:
Trade name
Total intangible assets
September 30, 2016
Accumulated
Amortization
Gross
Amount
Net
Amount
Gross
Amount
September 30, 2015
Accumulated
Amortization
Net
Amount
$
$
1.1 $
2.7
14.0
17.8
—
17.8 $
(0.6)
(2.4)
(5.7)
(8.7)
—
(8.7)
$
$
0.5 $
0.3
8.3
9.1
—
9.1 $
— $
2.7
14.0
16.7
1.1
17.8 $
— $
(2.3)
(4.9)
(7.2)
—
(7.2)
—
0.4
9.1
9.5
1.1
10.6
$
During the year ended September 30, 2016, as part of the periodic
assessment of useful lives of the intangible assets, the Company
determined the indefinite-lived trade names, related to the Risk
Management Incorporated and RMI Consulting, Inc. (the “RMI
Companies”) acquisitions, were no longer considered to be indefinite.
The Company is intending to phase out the use of those trade names
in the future. The value of the RMI Companies’ trade names of
$1.1 million was recorded in the Commercial Hedging segment.
The RMI Companies’ trade names were determined to have a remaining
finite useful life of approximately two years. The trade names were
not deemed to be impaired, however, the value of the trade names
was transferred from the indefinite-lived category to intangible assets
subject to amortization over the estimated two year useful life. The
Company recorded amortization for the trade names of $0.6 million,
within ‘depreciation and amortization’ on the consolidated income
statements, during the year ended September 30, 2016.
Amortization expense related to intangible assets was $1.6 million,
$1.5 million, and $1.6 million for the fiscal years ended September
30, 2016, 2015, and 2014, respectively.
The estimated future amortization expense as of September 30, 2016 is as follows (in millions):
Year ending September 30,
2017
2018
2019
2020
2021 and thereafter
$
$
1.6
1.0
1.0
0.8
4.7
9.1
Form 10K 77
PART II
ITEM 8 Financial Statements and Supplementary Data
NOTE 10 Credit Facilities
Variable-Rate Credit Facilities
The Company has four committed credit facilities under which the
Company and its subsidiaries may borrow up to $447.0 million,
subject to the terms and conditions for these facilities. The amounts
outstanding under these credit facilities are short term borrowings
and carry variable rates of interest, thus approximating fair value. The
Company’s credit facilities are as follows:
A three-year syndicated committed loan facility established on
September 30, 2013 and amended on March 18, 2016 and
September 15, 2016, under which $247 million is available to the
Company for general working capital requirements. The line of credit
is secured by a pledge of shares held in certain of the Company’s
subsidiaries. Unused portions of the loan facility require a commitment
fee of 0.625% on the unused commitment. Borrowings under the
facility bear interest at the Eurodollar Rate, as defined, plus 3.00% or
Base Rate, as defined, plus 2.00%, and averaged 5.25% as of September
30, 2016. The agreement contains financial covenants related to
consolidated tangible net worth, consolidated funded debt to net
worth ratio, consolidated fixed charge coverage ratio and consolidated
net unencumbered liquid assets, as defined. The Company was in
compliance with these financial covenants as of September 30, 2016.
The agreement also includes a non-financial covenant limiting the
amount of annual consolidated capital expenditures to $15.0 million.
The Company’s annual consolidated expenditures were in excess of
this amount during fiscal 2016. The Company requested and was
granted a waiver from the lenders, dated December 8, 2016, for the
excess amount acquired during fiscal 2016. The Company paid debt
issuance costs of $1.8 million in connection with the issuance of this
credit facility, which are being amortized over the thirty-six month
term of the facility.
An unsecured syndicated committed line of credit, established on
June 21, 2010 and renewed by amendment on March 16, 2016,
under which $75 million is available to the Company’s subsidiary,
INTL FCStone Financial to provide short term funding of margin to
commodity exchanges as necessary. This line of credit is subject to annual
review, and the continued availability of this line of credit is subject to
INTL FCStone Financial’s financial condition and operating results
continuing to be satisfactory as set forth in the agreement. Unused
portions of the margin line require a commitment fee of 0.50% on
the unused commitment. Borrowings under the margin line are on
a demand basis and bear interest at the Base Rate, as defined, plus
2.00%, which was 5.50% as of September 30, 2016. The agreement
contains financial covenants related to INTL FCStone Financial’s
tangible net worth, excess net capital and maximum net loss over a
trailing twelve month period, as defined. INTL FCStone Financial
was in compliance with these covenants as of September 30, 2016.
The facility is guaranteed by the Company.
A syndicated committed borrowing facility established on March
15, 2016, and amended on November 14, 2016, under which
$100.0 million is available to the Company’s subsidiary, FCStone
Merchant Services, LLC (“FCStone Merchants”) for financing
traditional commodity financing arrangements and commodity
repurchase agreements. The facility is secured by the assets of FCStone
Merchants, and guaranteed by the Company. Unused portions of the
78
Form 10K
borrowing facility require a commitment fee of 0.50% on the unused
commitment. The borrowings outstanding under the facility bear
interest at a rate per annum equal to the Base Rate plus Applicable
Margin, as defined, which averaged 4.25% as of September 30, 2016.
The agreement contains financial covenants related to tangible net
worth, as defined. FCStone Merchants was in compliance with this
covenant as of September 30, 2016. FCStone Merchants paid minimal
debt issuance costs in connection with this credit facility.
A syndicated committed borrowing facility established on November
15, 2013, and renewed by amendment on October 27, 2016, under
which $25.0 million is available to the Company’s subsidiary, INTL
FCStone Ltd for short term funding of margin to commodity exchanges.
The borrowings outstanding under the facility bear interest at a rate
per annum equal to 2.50% plus the Federal Funds Rate, as defined.
The agreement contains financial covenants related to consolidated
tangible net worth, as defined. INTL FCStone Ltd was in compliance
with this covenant as of September 30, 2016. INTL FCStone Ltd paid
minimal debt issuance costs in connection with this credit facility.
The facility is guaranteed by the Company.
The Company also has a secured, uncommitted loan facility, under which
the Company’s wholly owned subsidiary, INTL FCStone Financial may
borrow up to $50.0 million, collateralized by commodity warehouse
receipts, to facilitate U.S. commodity exchange deliveries of its customers,
subject to certain terms and conditions of the credit agreement.
The Company also has a secured, uncommitted loan facility, under
which the Company’s wholly owned subsidiary, INTL FCStone Ltd
may borrow up to approximately $25.0 million, collateralized by
commodity warehouse receipts, to facilitate financing of commodities
under repurchase agreement services to its customers, subject to certain
terms and conditions of the credit agreement.
In connection with the acquisition of the Sterne businesses discussed
in Note 18, the Company assumed two uncommitted secured lines
of credit under which the Company may borrow for short term
funding of firm and customer margin requirements. The facilities bear
interest at a rate per annum equal to such rate in respect of such day
as determined by the bank in its sole discretion. In the event that the
Company fails to pay the principal and interest on the scheduled due
date, the facilities bear penalty interest at a rate equal to the Federal
Funds rate plus 2%. The amounts borrowed under the facilities are
payable on demand. As of September 30, 2016, the Company had
no borrowings against these lines.
Note Payable to Bank
In April 2015, the Company obtained a $4.0 million loan from a
commercial bank, secured by equipment purchased with the proceeds.
The note is payable in monthly installments, ending in March 2020.
The note bears interest at a rate per annum equal to LIBOR plus 2.00%.
Senior Unsecured Notes
In July 2013, the Company completed the offering of $45.5 million
aggregate principal amount of the Company’s 8.5% Senior Notes due
2020 (the “Notes”). The net proceeds of the sale of the Notes were being
used for general corporate purposes. The Notes bore interest at a rate
of 8.5% per year (payable quarterly on January 30, April 30, July 30
and October 30 of each year). The Notes were scheduled to mature
on July 30, 2020. The Company could redeem the Notes, in whole
or in part, at any time on and after July 30, 2016, at a redemption
price equal to 100% of the principal amount redeemed plus accrued
and unpaid interest to, but not including, the redemption date. The
Company incurred debt issuance costs of $1.7 million in connection
with the issuance of the Notes, which were being amortized over the
term of the Notes.
PART II
ITEM 8 Financial Statements and Supplementary Data
On September 15, 2016, the Company provided notice, through
the trustee of the Notes, to the record holders of the Notes that the
Company would redeem the outstanding $45.5 million aggregate
principal amount of the Notes in full. Pursuant to the terms of the
Indenture, the Company redeemed the Notes at a price equal to 100%
of the principal amount redeemed plus accrued and unpaid interest
to, but not including, the redemption date on October 15, 2016.
The following table sets forth a listing of credit facilities, the current committed amounts, as of the report date, on the facilities, and outstanding
borrowings on the facilities as well as indebtedness on a promissory note an on senior notes as of September 30, 2016 and 2015:
CREDIT FACILITIES
(in millions)
Borrower
INTL FCStone Inc.
INTL FCStone Financial
INTL FCStone Financial
FCStone Merchants
INTL FCStone Ltd
Security
Certain pledged shares of certain subsidiaries
None
Commodity warehouse receipts
Certain commodities assets
None
Renewal/
Expiration Date
March 18, 2019
April 6, 2017
n/a
May 1, 2018
October 27, 2017
NOTE PAYABLE TO BANK
Monthly installments, due March 2020 and secured by certain equipment
SENIOR UNSECURED NOTES
8.50% senior notes, redeemed October 15, 2016
Total indebtedness
Total
Commitment
$
247.0 $
75.0
—
100.0
25.0
447.0 $
$
Amounts Outstanding
September 30,
2016
September 30,
2015
136.5 $
—
—
43.5
—
180.0 $
2.8
45.5
228.3 $
$
28.0
—
—
10.0
—
38.0
3.6
45.5
87.1
As reflected above, $75 million of the Company’s committed credit facilities are scheduled to expire during the fiscal year ended September 30,
2017. The Company intends to renew or replace these facilities as they expire, and based on the Company’s liquidity position and capital
structure, the Company believes it will be able to do so.
NOTE 11 Commitments and Contingencies
Legal Proceedings
Certain conditions may exist as of the date the financial statements
are issued, which may result in a loss to the Company but which
will only be resolved when one or more future events occur or fail
to occur. The Company assesses such contingent liabilities, and such
assessment inherently involves an exercise of judgment. In assessing loss
contingencies related to legal proceedings that are pending against the
Company or unasserted claims that may result in such proceedings,
the Company’s legal counsel evaluates the perceived merits of any legal
proceedings or unasserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a
material loss had been incurred at the date of the financial statements
and the amount of the liability can be estimated, then the estimated
liability would be accrued in the Company’s financial statements. If
the assessment indicates that a potentially material loss contingency
is not probable, but is reasonably possible, or is probable but cannot
be estimated, then the nature of the contingent liability, together with
an estimate of the range of possible loss if determinable and material,
would be disclosed. Neither accrual nor disclosure is required for loss
contingencies that are deemed remote. The Company accrues legal
fees related to contingent liabilities as they are incurred.
In addition to the matters discussed below, from time to time and in
the ordinary course of business, the Company is involved in various
legal actions and proceedings, including tort claims, contractual
disputes, employment matters, workers’ compensation claims and
collections. The Company carries insurance that provides protection
against certain types of claims, up to the policy limits of the insurance.
As of September 30, 2016 and 2015, the consolidated balance sheets
include loss contingency accruals, recorded during and prior to these
fiscal years then ended, which are not material, individually or in the
aggregate, to the Company’s financial position or liquidity. In the
opinion of management, possible exposure from loss contingencies
in excess of the amounts accrued, and in addition to the possible
losses discussed below, is not material to the Company’s earnings,
financial position or liquidity.
Form 10K 79
PART II
ITEM 8 Financial Statements and Supplementary Data
The following is a summary of a significant legal matter involving
the Company.
Sentinel Litigation
Prior to its July 1, 2015 merger into INTL FCStone Financial, the
Company’s subsidiary FCStone, LLC, had a portion of its excess
segregated funds invested with Sentinel Management Group Inc.
(“Sentinel”), a registered FCM and an Illinois-based money manager
that provided cash management services to other FCMs. In August
2007, Sentinel halted redemptions to customers and sold certain of
the assets it managed to an unaffiliated third party at a significant
discount. On August 17, 2007, subsequent to Sentinel’s sale of
certain assets, Sentinel filed for bankruptcy protection. In aggregate,
$15.5 million of FCStone, LLC’s $21.9 million in invested funds
were returned to it before and after Sentinel’s bankruptcy petition.
In August 2008, the bankruptcy trustee of Sentinel filed adversary
proceedings against FCStone, LLC, and a number of other FCMs
in the Bankruptcy Court for the Northern District of Illinois. The
case was subsequently reassigned to the U.S. District Court, for the
Northern District of Illinois. In the complaint, the trustee sought
avoidance of alleged transfers or withdrawals of funds received by
FCStone, LLC and other FCMs within 90 days prior to the filing
of the Sentinel bankruptcy petition, as well as avoidance of post-
petition distributions and disallowance of the proof of claim filed by
FCStone, LLC. The trustee sought recovery of pre- and post-petition
transfers totaling approximately $15.5 million.
The trial of this matter took place, as a test case, during October
2012. The trial court entered a judgment against FCStone, LLC
on January 4, 2013. On January 17, 2013, the trial court entered
an agreed order, staying execution and enforcement, pending an
appeal of the judgment. On March 19, 2014, the appeal court
ruled in favor of FCStone, LLC. On April 16, 2014, the trustee
filed a petition for rehearing of the appeal. On May 19, 2014, the
U.S. Court of Appeals for the Seventh Circuit denied the petition.
The trustee did not file a writ for certiorari with the U.S. Supreme
Court during the time allotted to do so.
On February 10, 2015, based on a new theory, the trustee filed a
motion for judgment against FCStone, LLC in the U.S. District
Court, for the Northern District of Illinois, seeking to claw back
the post-petition transfer of $14.5 million and to recover the funds
held in reserve in the name of FCStone, LLC. FCStone, LLC filed its
opposition brief and an associated motion for judgment on March
17, 2015. The trustee filed its reply briefs on April 7, 2015 and the
Company filed its reply briefs on April 22, 2015.
On March 28, 2016 the U.S. District Court for the Northern District
of Illinois entered an order in favor of FCStone, LLC (now INTL
FCStone Financial Inc.) and against the trustee on the trustee’s
post-petition claim, in light of the Seventh Circuit’s opinion. The
same court ruled against INTL FCStone Financial and in favor
of the trustee with respect to the funds held in reserve accounts.
On April 25, 2016, INTL FCStone Financial filed a notice of appeal
to the U.S. Court of Appeals for the Seventh Circuit relating to the
portion of the final judgment dated March 28, 2016 of the district
court and INTL FCStone Financial’s claim to funds in reserve
accounts. On April 26, 2016, the trustee filed a notice of appeal
80
Form 10K
from the March 28, 2016 final judgment of the district court. On
April 27, 2016, the court consolidated the two appeals and directed
the trustee to file an opening brief. On June 27, 2016 the trustee
filed his appellate brief. On August 31, 2016, the Futures Industry
Association, Inc. filed a voluntary brief in support of INTL FCStone
Financial’s cross-appeal.
The Company has determined that losses related to this matter are
neither probable nor reasonably possible. The Company believes
the case is without merit and intends to defend itself vigorously.
Our assessments are based on estimates and assumptions that
have been deemed reasonable by management, but that may later
prove to be incomplete or inaccurate, and unanticipated events
and circumstances may occur that might cause us to change those
estimates and assumptions.
Contractual Commitments
Contingent Liabilities - Acquisitions
Under the terms of the purchase agreement, related to the acquisitions
listed below, the Company has an obligation to pay additional
consideration if specific conditions and earnings targets are met. In
accordance with the Business Combinations Topic of the ASC, the
fair value of the additional consideration is recognized as a contingent
liability as of the acquisition date. The contingent liability for these
estimated additional purchase price considerations of $0.8 million
and $3.3 million are included in ‘accounts payable and other accrued
liabilities’ in the consolidated balance sheets as of September 30, 2016
and 2015, respectively. The acquisition date fair value of additional
consideration is remeasured to its fair value each reporting period,
with changes in fair value recorded in current earnings. The change
in fair value during the years ended September 30, 2016, 2015, and
2014 were an increase of $0.4 million, increase of $1.8 million and
decrease of $2.3 million, respectively, and are included in ‘other’ in
the consolidated income statements.
The Company has a contingent liability relating to the January 2015
acquisition of G.X. Clarke, which may result in the payment of
additional purchase price consideration. The contingent consideration
in no event shall exceed $1.5 million. The estimated total purchase
price, including contingent consideration, is $27.5 million as of
September 30, 2016, of which $0.8 million remains outstanding and
is included in ‘accounts payable and other accrued liabilities’ in the
consolidated balance sheet.
Operating Leases
The Company is obligated under various noncancelable operating
leases for the rental of office facilities, automobiles, service obligations
and certain office equipment, and accounts for these lease obligations
on a straight line basis. The expense associated with operating leases
amounted to $9.9 million, $10.1 million and $9.5 million, for fiscal
years ended September 30, 2016, 2015, and 2014, respectively. The
expenses associated with the operating leases and service obligations
are reported in the consolidated income statements in ‘occupancy
and equipment rental’, ‘transaction-based clearing expenses’ and
‘other’ expenses.
Future aggregate minimum lease payments under noncancelable operating leases as of September 30, 2016 are as follows:
PART II
ITEM 8 Financial Statements and Supplementary Data
(in millions)
Year ending September 30,
2017
2018
2019
2020
2021
Thereafter
$
$
8.8
7.1
6.6
6.3
5.5
10.5
44.8
Purchase Commitments
The Company determines an estimate of contractual purchase
commitments in the ordinary course of business primarily for the
purchase of precious metals and agricultural and energy commodities.
Unpriced contract commitments have been estimated using September
30, 2016 fair values. The purchase commitments and other obligations
as of September 30, 2016 for less than one year, one to three years and
three to five years were $603.5 million, $2.4 million and $1.7 million,
respectively. There were $2.0 million in purchase commitments and
other obligations after five years as of September 30, 2016. The
purchase commitments for less than one year will be partially offset
by corresponding sales commitments of $475.9 million.
Exchange Member Guarantees
The Company is a member of various exchanges that trade and clear
futures and option contracts. In connection with the Sterne acquisition,
the Company is also a member of and provides guarantees to securities
clearinghouses and exchanges in connection with customer trading
activities. Associated with its memberships, the Company may be
required to pay a proportionate share of the financial obligations of
another member who may default on its obligations to the exchanges.
While the rules governing different exchange memberships vary, in
general the Company’s guarantee obligations would arise only if the
exchange had previously exhausted its resources. In addition, any
such guarantee obligation would be apportioned among the other
non-defaulting members of the exchange. Any potential contingent
liability under these arrangements is not quantifiable and could exceed
the cash and securities it has posted to the clearinghouse as collateral.
The Company has not recorded any contingent liability in the
consolidated financial statements for these agreements and believes that
any potential requirement to make payments under these agreements
is remote.
Self-Insurance
The Company self-insures its costs related to medical and dental claims.
The Company is self-insured, up to a stop loss amount, for eligible
participating employees and retirees, and for qualified dependent
medical and dental claims, subject to deductibles and limitations.
Liabilities are recognized based on claims filed and an estimate of
claims incurred but not reported. The Company has purchased
stop-loss coverage to limit its exposure on a per claim basis and in
aggregate in the event that aggregated actual claims would exceed
120% of actuarially estimated claims. The Company is insured for
covered costs in excess of these limits. Although the ultimate outcome
of these matters may exceed the amounts recorded and additional losses
may be incurred, the Company does not believe that any additional
potential exposure for such liabilities will have a material adverse
effect on the Company’s consolidated financial position or results of
operations. As of September 30, 2016 and 2015, the Company had
$1.0 million and $0.8 million, respectively, accrued for self-insured
medical and dental claims included in ‘accounts payable and other
liabilities’ in the consolidated balance sheets.
NOTE 12 Regulatory Requirements and Subsidiary Dividend Restrictions
The Company’s subsidiary INTL FCStone Financial is registered as
a broker dealer and member of the Financial Industry Regulatory
Authority (“FINRA”) subject to the SEC Uniform Net Capital Rule
15c3-1, which requires the maintenance of minimum net capital.
INTL FCStone Financial is also a commodity futures commission
merchant registered with the CFTC and subject to the net capital
requirements of the CFTC Regulation 1.17. Under the more restrictive
of these rules, INTL FCStone Financial is required to maintain
“adjusted net capital”, equivalent to the greater of $1,000,000 or
8 percent of customer and noncustomer risk maintenance margin
requirements on all positions, as defined in such rules, regulations,
and requirements. Net capital and the related net capital requirement
may fluctuate on a daily basis. INTL FCStone Financial also has
restriction on dividends, which restricts the withdrawal of equity
capital if the planned withdrawal would reduce net capital, subsequent
to haircuts and charges, to an amount less than 120% of the greatest
minimum requirement.
Pursuant to the requirements of the Commodity Exchange Act, funds
deposited by customers of INTL FCStone Financial relating to their
trading of futures and options on futures on a U.S. commodities
exchange must be carried in separate accounts which are designated as
segregated customers’ accounts. Pursuant to the requirements of the
CFTC, funds deposited by customers of INTL FCStone Financial
relating to their trading of futures and options on futures traded on,
or subject to the rules of, a foreign board of trade must be carried
in separate accounts in an amount sufficient to satisfy all of INTL
FCStone Financial’s current obligations to customers trading foreign
futures and foreign options on foreign commodity exchanges or
boards of trade, which are designated as secured customers’ accounts.
Form 10K 81
PART II
ITEM 8 Financial Statements and Supplementary Data
See Additional Information of INTL FCStone Financial Related to
Customer Segregated and Secured Funds further below for additional
information regarding INTL FCStone Financial’s calculation of
segregated and secured customer funds.
The Company’s subsidiaries Sterne, Agee & Leach, Inc., Sterne Agee
Clearing, Inc. and Sterne Agee Financial Services, Inc. are subject
to the SEC Uniform Net Capital Rule 15c3-1 under the Securities
Exchange Act of 1934.
The Company’s subsidiary INTL FCStone Ltd is regulated by the
Financial Conduct Authority (“FCA”), the regulator of the financial
services industry in the United Kingdom, as a Financial Services Firm
under part IV of the Financial Services and Markets Act 2000. The
regulations impose regulatory capital, as well as conduct of business,
governance, and other requirements. The conduct of business rules
include those that govern the treatment of customer money and
other assets which under certain circumstances for certain classes of
customer must be segregated from the firm’s own assets.
The Company’s subsidiary INTL FCStone Pty Ltd is regulated by
the Australian Securities and Investment Commission and is subject
to a net tangible asset capital requirement. INTL FCStone Pty Ltd
is also regulated by New Zealand Clearing Limited, and is subject
to a capital adequacy requirement.
FCStone Commodity Services (Europe), Ltd. is domiciled in Ireland
and subject to regulation by the Central Bank of Ireland, and is
subject to a net capital requirement.
INTL FCStone DTVM Ltda. (“INTL FCStone DTVM”) is a
registered broker-dealer and regulated by the Brazilian Central Bank
and Securities and Exchange Commission of Brazil, and is subject
to a capital adequacy requirement.
All subsidiaries of the Company are in compliance with all of their regulatory requirements as of September 30, 2016, as follows:
(in millions)
Subsidiary
INTL FCStone Financial Inc.
INTL FCStone Financial Inc.
INTL FCStone Financial Inc.
Sterne Agee Clearing Inc.
Sterne, Agee & Leach, Inc.
Sterne Agee Financial Services, Inc.
INTL FCStone Ltd
INTL FCStone Ltd
INTL Netherlands BV
INTL FCStone DTVM Ltda.
INTL Gainvest S.A.
INTL Gainvest S.A.
INTL Capital S.A.
INTL CIBSA S.A.
INTL CIBSA S.A.
As of September 30, 2016
Regulatory Authority
Requirement Type
Actual
SEC and CFTC
CFTC
CFTC
SEC
SEC
SEC
FCA (United Kingdom)
FCA (United Kingdom)
FCA (United Kingdom)
Brazilian Central Bank and Securities and
Exchange Commission of Brazil
National Securities Commission (“CNV”)
CNV
General Inspector of Justice (Argentina)
CNV
CNV
Net capital
Segregated funds
Secured funds
Net capital
Net capital
Net capital
Net capital
Segregated funds
Net capital
Capital adequacy
Capital adequacy
Net capital
Net capital
Capital adequacy
Net capital
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
140.8 $
2,177.9 $
107.7 $
1.0 $
29.0 $
3.3 $
136.9 $
54.8 $
136.1 $
2.5 $
7.7 $
3.6 $
15.3 $
7.1 $
10.9 $
Minimum
Requirement
81.7
2,126.4
91.3
0.1
2.0
0.3
84.9
49.5
85.0
0.5
0.1
0.1
12.6
1.1
0.6
Certain other non-U.S. subsidiaries of the Company are also subject to capital adequacy requirements promulgated by authorities of the
countries in which they operate. As of September 30, 2016, these subsidiaries were in compliance with their local capital adequacy requirements.
Additional Information of INTL FCStone
Financial Related to Customer Segregated and
Secured Funds
Pursuant to the requirements of the Commodity Exchange Act,
funds deposited by customers of INTL FCStone Financial relating
to futures and options on futures positions in regulated commodities
must be carried in separate accounts which are designated as segregated
customers’ accounts. Certain amounts in the accompanying table
reflect reclassifications and eliminations required for regulatory filing.
Funds deposited by customers and other assets, which have been
segregated as belonging to the commodity customers as of September 30,
2016 and 2015, are as follows:
(in millions)
Cash, at banks - segregated
Securities representing investments of customers’ funds, at banks
Securities held for customers in lieu of cash, at banks
Deposits with and receivables from:
Exchange-clearing organizations, including securities, net of omnibus eliminations
Securities held for customers in lieu of cash
Total customer-segregated funds
Amount required to be segregated
Excess funds in segregation
82
Form 10K
September 30, 2016
September 30, 2015
$
$
383.6 $
595.4
1.8
1,173.9
23.2
2,177.9
2,126.4
51.5 $
126.9
492.5
0.9
1,237.8
22.1
1,880.2
1,830.9
49.3
PART II
ITEM 8 Financial Statements and Supplementary Data
Funds deposited by customers and other assets, which are held in separate accounts for customers trading foreign futures and foreign options
customers, as of September 30, 2016 and 2015 are as follows:
(in millions)
Cash - secured
Securities
Equities with registered futures commission merchants
Amounts held by clearing organizations of foreign boards of trade
Amounts held by members of foreign boards of trade
Total customer-secured funds
Amount required to be secured
Excess secured funds
September 30, 2016
September 30, 2015
$
$
70.5 $
—
3.6
6.7
26.9
107.7
91.3
16.4 $
64.7
—
2.6
—
18.3
85.6
65.2
20.4
NOTE 13 Commodity and Other Repurchase Agreements and Collateralized Transactions
The Company’s outstanding notes receivable in connection with the sale/
repurchase agreements, whereby the customers sell certain commodity
inventory and agree to repurchase the commodity inventory at a future
date at either a fixed or floating rate, as of September 30, 2016 and
2015 was $1.5 million and $26.7 million, respectively.
The obligations outstanding related to commodities sold under
repurchase agreements that are recorded in ‘lenders under loans’ as of
September 30, 2016 and 2015 were $43.5 million and $10.0 million,
respectively.
The Company enters into securities purchased under agreements to
resell and payables under repurchase agreements primarily to finance
financial instruments, acquire securities to cover short positions or
to acquire securities for settlement. These agreements are recorded at
their contractual amounts plus accrued interest. The related interest is
recorded in the consolidated income statement as interest income or
interest expense, as applicable. In connection with these agreements
and transactions, it is the policy of the Company to receive or pledge
cash or securities to adequately collateralize such agreements and
transactions in accordance with general industry guidelines and
practices. The value of the collateral is valued daily and the Company
may require counterparties to deposit additional collateral or return
collateral pledged, when appropriate. The carrying amounts of these
agreements and transactions approximate fair value due to their short-
term nature and the level of collateralization.
The Company pledges financial instruments owned to collateralize
repurchase agreements. At September 30, 2016, on a settlement date
basis, financial instruments owned of $47.2 million were pledged
as collateral under repurchase agreements. The counterparty has the
right to repledge the collateral in connection with these transactions.
NOTE 14 Share-Based Compensation
Share-based compensation expense is included in ‘compensation
and benefits’ in the consolidated income statements and totaled
$5.1 million, $3.6 million and $4.3 million for the fiscal years ended
September 30, 2016, 2015, and 2014, respectively.
Stock Option Plans
The Company sponsors a stock option plan for its directors, officers,
employees and consultants. The 2013 Stock Option Plan, which was
These financial instruments owned have been pledged as collateral and
have been parenthetically disclosed on the consolidated balance sheet.
In addition, as of September 30, 2016, the Company pledged settlement
date securities owned of $1,037.6 million and securities received under
reverse repurchase agreements of $108.4 million to cover collateral for
tri-party repurchase agreements. For these securities, the counterparty
does not have the right to sell or repledge the collateral.
At September 30, 2016, the Company has accepted collateral that it is
permitted by contract or custom to sell or repledge. This collateral consists
primarily of securities received in reverse repurchase agreements. The
fair value of such collateral at September 30, 2016, was $607.3 million
of which $504.4 million was used to cover securities sold short which
are recorded in financial instruments sold, not yet purchased on the
consolidated balance sheet. In the normal course of business, this
collateral is used by the Company to cover financial instruments sold,
not yet purchased and to obtain financing in the form of repurchase
agreements. At September 30, 2016, substantially all of the above
collateral had been delivered against financial instruments sold, not
yet purchased or repledged by the Company to obtain financing.
Through its acquisition of Sterne Agee, as discussed in Note 18, in the
normal course of business the Company has margin securities, securities
borrowed and securities held on behalf of correspondent brokers, on
terms which permit it to repledge the securities to others. At September
30, 2016, the Company had obtained and had available securities, on
a settlement date basis, with a fair value of $148.4 million on such
terms, of which $22.5 million have either been pledged or otherwise
transferred to others in connection with the Company’s financing
activities or to satisfy commitments under short sales.
approved by the Company’s Board of Directors and shareholders,
authorizes the Company to issue stock options covering up to
1.0 million shares of the Company’s common stock. As of September
30, 2016, there were 0.8 million shares authorized for future grant
under this plan. Awards that expire or are canceled generally become
available for issuance again under the plan. The Company settles
stock option exercises with newly issued shares of common stock.
Form 10K 83
PART II
ITEM 8 Financial Statements and Supplementary Data
Fair value is estimated at the grant date based on a Black-Scholes-Merton option-pricing model using the following weighted-average assumptions:
Expected stock price volatility
Expected dividend yield
Risk free interest rate
Average expected life (in years)
Year Ended September 30,
2015
2014
2016
28%
—%
0.83%
3.06
28%
—%
0.66%
3.22
34%
—%
0.80%
2.88
Expected stock price volatility rates are primarily based on the historical
volatility. The Company has not paid dividends in the past and does
not currently expect to do so in the future. Risk free interest rates
are based on the U.S. Treasury yield curve in effect at the time of
grant for periods corresponding with the expected life of the option
or award. The average expected life represents the estimated period of
time that options or awards granted are expected to be outstanding,
based on the Company’s historical share option exercise experience
for similar option grants. The weighted average fair value of options
issued during fiscal years ended September 30, 2016, 2015, and 2014
was $6.40, $4.31 and $4.48, respectively.
The following is a summary of stock option activity for the year ended September 30, 2016:
Balances at September 30, 2015
Granted
Exercised
Forfeited
Expired
Balances at September 30, 2016
Exercisable at September 30, 2016
Shares
Available
for Grant
828,665
(90,500)
15,998
754,163
Number of
Options
Outstanding
1,297,984
90,500
(147,205)
(16,498)
(8,960)
1,215,821
306,520
Weighted
Average
Exercise Price
$
$
$
$
$
$
$
28.28 $
31.37 $
18.52 $
25.23 $
54.23 $
29.55 $
40.58 $
Weighted Average
Grant Date
Fair Value
Weighted Average
Remaining Term
(in years)
Aggregate
Intrinsic Value
($ millions)
12.37
6.40
1.50
5.28
20.04
12.88
15.09
4.24 $
1.8
3.80 $
0.92 $
14.1
2.2
The total compensation cost not yet recognized for non-vested awards of $5.3 million as of September 30, 2016 has a weighted-average period
of 4.76 years over which the compensation expense is expected to be recognized. The total intrinsic value of options exercised during fiscal
years 2016, 2015 and 2014 was $1.9 million, $3.6 million and $1.8 million, respectively.
The options outstanding as of September 30, 2016 broken down by exercise price are as follows:
Exercise Price
$
$
$
$
$
$
$
$
$
$
$
—
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
$
$
$
$
$
$
$
$
$
$
$
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
55.00
Number of Options
Outstanding
Weighted Average
Exercise Price
Weighted Average
Remaining Term
(in years)
—
—
—
75,325 $
156,997 $
720,000 $
83,000 $
—
—
—
180,499 $
1,215,821 $
n/a
n/a
n/a
18.77
22.07
25.91
31.37
n/a
n/a
n/a
54.23
29.55
n/a
n/a
n/a
1.00
1.73
5.38
3.28
n/a
n/a
n/a
0.68
3.80
84
Form 10K
PART II
ITEM 8 Financial Statements and Supplementary Data
Restricted Stock Plan
The Company sponsors a restricted stock plan for its directors, officers
and employees. The Company’s 2012 restricted stock plan, which was
approved by the Company’s Board of Directors and shareholders,
authorizes up to 1.5 million shares to be issued. As of September 30,
2016, 0.7 million shares were authorized for future grant under the
restricted stock plan. Awards that expire or are canceled generally
become available for issuance again under the plan. The Company
utilizes newly issued shares of common stock to make restricted
stock grants.
The following is a summary of restricted stock activity through September 30, 2016:
Balances at September 30, 2015
Granted
Vested
Forfeited
Balances at September 30, 2016
Shares
Available
for Grant
974,919
(229,886)
2,749
747,782
Number
of Shares
Outstanding
Weighted Average
Grant Date
Fair Value
Weighted Average
Remaining Term
(in years)
Aggregate
Intrinsic Value
($ millions)
230,043
229,886
(99,428)
(2,749)
357,752
$
$
$
$
$
20.10
31.40
19.84
21.89
27.39
2.17
$
5.7
1.39
$
13.9
The total compensation cost not yet recognized of $7.1 million as of September 30, 2016 has a weighted-average period of 1.39 years over
which the compensation expense is expected to be recognized. Compensation expense is amortized on a straight-line basis over the vesting
period. Restricted stock grants are included in the Company’s total issued and outstanding common shares.
NOTE 15 Retirement Plans
Defined Benefit Retirement Plans
The Company has a frozen defined benefit pension plan (the “Plan”)
and recognizes its funded status, measured as the difference between
the fair value of the plan assets and the projected benefit obligation,
in “accounts payable and other accrued liabilities” in the consolidated
balance sheets. Plan assets, which are managed in a third-party trust,
primarily consist of a diversified blend of approximately 70% debt
securities and 30% equity investments and had a total fair value
of $33.7 million and $30.2 million as of September 30, 2016 and
2015, respectively. All plan assets fall within Level 2 of the fair value
hierarchy. The benefit obligation associated with the Plan will vary
over time only as a result of changes in market interest rates, the life
expectancy of the plan participants, and benefit payments, since the
accrual of benefits was suspended when the Plan was frozen in 2006.
The benefit obligation was $38.5 million and $37.1 million and the
discount rate assumption used in the measurement of this obligation
was 3.60% and 4.25% as of September 30, 2016 and 2015, respectively.
The Company’s unfunded pension obligation was$4.8 million and
$6.9 million as of September 30, 2016 and 2015, respectively.
The net periodic benefit cost associated with the Plan was $0.2 million
for the year ended September 30, 2016 and less than $0.1 million
for the year ended September 30, 2015. The Company recognized
a net periodic benefit of $0.1 million for the year ended September
30, 2014. The expected long-term return on plan assets assumption is
6.00% for 2016. The Company made contributions of $1.8 million
and $2.2 million to the Plan in the years ended September 30, 2016
and 2015, respectively. The Company complies with minimum
funding requirements. The estimated undiscounted future benefit
payments are expected to be $3.0 million in 2017, $2.1 million in
2018, $2.1 million in 2019,$2.0 million in 2020, $1.9 million in
2021 and $9.3 million in 2022 through 2026.
Defined Contribution Retirement Plans
The Company offers participation in the INTL FCStone Inc. 401(k)
Plan (“401(k) Plan”), a defined contribution plan providing retirement
benefits, to all domestic employees who have reached 21 years of age,
and provided four months of service to the Company. Employees
may contribute from 1% to 80% of their annual compensation
to the 401(k) Plan, limited to a maximum annual amount as set
periodically by the Internal Revenue Service. The Company makes
matching contributions to the 401(k) Plan in an amount equal to
62.5% of each participant’s eligible elective deferral contribution to
the 401(k) Plan, up to 8% of employee compensation. Matching
contributions vest, by participant, based on the following years of
service schedule: less than two years – none, after two years – 33%,
after three years – 66%, and after four years – 100%.
U.K. based employees of INTL FCStone are eligible to participate
in a defined contribution pension plan. The Company contributes
double the employee’s contribution up to 10% of total base salary
for this plan. For this plan, employees are 100% vested in both the
employee and employer contributions at all times.
For fiscal years ended September 30, 2016, 2015, and 2014, the
Company’s contribution to these defined contribution plans were
$5.3 million, $5.1 million and $4.1 million, respectively.
Form 10K 85
PART II
ITEM 8 Financial Statements and Supplementary Data
NOTE 16 Other Expenses
Other expenses for the years ended September 30, 2016, 2015, and 2014 are comprised of the following:
Year Ended September 30,
2015
2016
$
(in millions)
Contingent consideration, net(1)
Insurance
Advertising, meetings and conferences
Non-trading hardware and software maintenance and software
licensing
Office supplies and printing
Other clearing related expenses
Other non-income taxes
Other
Total other expenses
(1) Contingent consideration includes remeasurement of contingent liabilities related to business combinations accounted for in accordance with the provisions of the Business
4.7
1.2
1.1
3.7
6.6
23.5
7.1
1.1
1.3
4.3
8.0
29.4
3.8
1.1
1.2
3.9
5.7
18.4
(2.0)
1.6
3.1
0.4
2.1
5.1
1.8
1.7
2.7
$
$
$
$
$
2014
Combinations Topic of the ASC (see Note 3).
NOTE 17 Income Taxes
Income tax expense (benefit) for the years ended September 30, 2016, 2015, and 2014 was allocated as follows:
(in millions)
Income tax expense attributable to income from continuing operations
Income tax (benefit) expense attributable to loss from discontinued
operations
Taxes allocated to stockholders’ equity, related to unrealized gains
(losses) on available-for-sale securities
Taxes allocated to stockholders’ equity, related to pension liabilities
Taxes allocated to additional paid-in capital, related to share-based
compensation
Total income tax expense
$
$
2016
Year Ended September 30,
2015
2014
18.0
$
22.4
$
—
—
0.2
(0.8)
17.4
$
—
(0.4)
(0.8)
(0.5)
20.7
$
The components of the provision for income taxes attributable to income from continuing operations were as follows:
(in millions)
Current taxes:
U.S. federal
U.S. State and local
International
Total current taxes
Deferred taxes
Income tax benefit attributable to interest income
Income tax expense
Year Ended September 30,
2016
2015
2014
$
$
1.3
0.8
16.8
18.9
(0.8)
(0.1)
18.0
$
$
0.8
1.2
15.4
17.4
5.0
—
22.4
6.4
(0.2)
0.1
(0.5)
0.1
5.9
0.5
—
11.6
12.1
(5.7)
—
6.4
2014
(13.0
39.0
26.0
$
$
$
$
U.S. and international components of (loss) income from continuing operations, before income taxes, was as follows:
(in millions)
U.S.
International
Income from continuing operations, before tax
Year Ended September 30,
2016
2015
4.9
67.9
72.8
$
$
14.5
63.7
78.2
$
$
86
Form 10K
Items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes were as follows:
PART II
ITEM 8 Financial Statements and Supplementary Data
Federal statutory rate effect of:
U.S. State and local income taxes
Foreign earnings taxed at lower rates
Change in foreign valuation allowance
Change in state valuation allowance
Uncertain tax positions
U.S. permanent items
Foreign permanent items
U.S. bargain purchase gain
Other reconciling items
Effective rate
Year Ended September 30,
2016
2015
2014
35.0%
1.3%
(9.3)%
(0.3)%
—%
—%
0.8%
0.2%
(3.0)%
0.3%
25.0%
35.0%
1.8%
(10.1)%
(0.1)%
0.6%
—%
0.5%
1.1%
—%
(0.1)%
28.7%
35.0%
—%
(14.7)%
1.9%
(0.2%
(0.5)%
1.9%
7.0%
—%
(5.7)%
24.7%
The components of deferred income tax assets and liabilities were as follows:
(in millions)
Deferred tax assets:
Share-based compensation
Pension liability
Deferred compensation
Foreign net operating loss carryforwards
U.S. State and local net operating loss carryforwards
U.S. federal net operating loss carryforwards
Intangible assets
Capital loss carryforwards
Bad debt reserve
Tax Credit Carryforwards
Other compensation
Other
Total gross deferred tax assets
Less valuation allowance
Deferred tax assets
Deferred income tax liabilities:
Unrealized gain on securities
Prepaid expenses
Fixed assets
Deferred income tax liabilities
Deferred income taxes, net
September 30, 2016
September 30, 2015
$
$
4.3
1.9
2.0
2.0
4.9
12.4
8.3
—
1.6
1.4
3.3
1.8
43.9
(3.6)
40.3
1.3
1.9
2.6
5.8
34.5
$
$
3.2
2.7
2.3
2.3
4.3
8.6
4.6
0.2
2.4
1.0
1.9
1.3
34.8
(3.2)
31.6
1.0
1.1
1.3
3.4
28.2
Deferred income tax balances reflect the effects of temporary differences
between the carrying amounts of assets and liabilities and their tax
bases and are stated at enacted tax rates expected to be in effect when
taxes are actually paid or recovered.
As of September 30, 2016 and 2015, the Company has net operating
loss carryforwards for U.S. federal, state, local, and foreign income
tax purposes of $15.7 million and $12.0 million, net of valuation
allowances, respectively, which are available to offset future taxable
income in these jurisdictions. The U.S. federal net operating loss
carryforward of $12.4 million begins to expire after September 2033.
The state and local net operating loss carryforwards of $3.3 million,
net of valuation allowance, begin to expire after September 2020.
The Company has an Alternative Minimum Tax credit carryforward
of $1.3 million, which has an indefinite life, and an R&D credit
carryforward of $0.1 million that begins to expire after September 2031.
The valuation allowance for deferred tax assets as of September 30, 2016
was $3.6 million. The net change in the total valuation allowance for
the year ended September 30, 2016 was an increase of $0.4 million.
The valuation allowances as of September 30, 2016 and 2015 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. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not
that some or all of the deferred tax assets will not be realized.
The Company incurred U.S. federal, state, and local taxable income/
(losses) for the years ended September 30, 2016, 2015, and 2014 of
$(9.7) million, $16.5 million, and $(18.4) million, respectively. There
are no significant differences between actual levels of past taxable income
and the results of continuing operations, before income taxes in these
jurisdictions. When evaluating if U.S. federal, state, and local deferred
Form 10K 87
PART II
ITEM 8 Financial Statements and Supplementary Data
taxes are realizable, the Company considered deferred tax liabilities
of $4.5 million that are scheduled to reverse from 2017 to 2019 and
$1.3 million of deferred tax liabilities associated with unrealized gains
in securities which the Company could sell, if necessary. Furthermore,
the Company considered its 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 11 years. Based on the tax planning strategies that can
be implemented, management believes that it is more likely than not
that the Company will realize the tax benefit of the deferred tax assets,
net of the existing valuation allowance, in the future.
The total amount of undistributed earnings in the Company’s
foreign subsidiaries, for income tax purposes, was $294.3 million
and $227.2 million as of September 30, 2016 and 2015, respectively.
It is the Company’s current intention to reinvest undistributed earnings
of its foreign subsidiaries in the foreign jurisdictions, resulting in
the indefinite postponement of the remittance of those earnings.
Accordingly, no provision has been made for foreign withholding
taxes or U.S. federal income taxes which may become payable if
undistributed earnings of foreign subsidiaries were paid as dividends
to the Company.
The Company recognizes the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position will
be sustained on examination by the taxing authority, based upon the
technical merits of the position. The tax benefit recognized in the
consolidated financial statements from such a position is measured
based on the largest benefit that has a greater than 50% likelihood
of being realized upon ultimate settlement.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(in millions)
Balance, beginning of year
Gross increases for tax positions related to current year
Gross increases for tax positions related to prior years
Gross decreases for tax positions of prior years
Settlements
Lapse of statute of limitations
Balance, end of year
2016
Year Ended September 30,
2015
2014
$
$
— $
—
0.1
—
—
—
0.1
$
— $
—
—
—
—
—
— $
0.1
—
—
(0.1)
—
—
—
The Company has a minimal balance of uncertain tax benefits as of
September 30, 2016, that, if recognized, would affect the effective
tax rate. While it is expected that the amount of unrecognized tax
benefits will change in the next twelve months, the Company does
not expect this change to have a material impact on the results of
operations or the financial position of the Company.
Accrued interest and penalties are included in the related tax liability
line in the consolidated balance sheets. The Company had no accrued
interest, net of federal benefit, and penalties included in the consolidated
balance sheets as of September 30, 2016 and 2015.
The Company recognizes accrued interest and penalties related to
income taxes as a component of income tax expense. The Company
had no amount of interest, net of federal benefit, and penalties
recognized as a component of income tax expense during the years
ended September 30, 2016, 2015, and 2014.
The Company and its subsidiaries file income tax returns with
the U.S. federal jurisdiction and various U.S. state and local and
foreign jurisdictions. The Company has open tax years ranging from
September 30, 2008 through September 30, 2016 with U.S. federal
and state and local taxing authorities. In the U.K., the Company has
open tax years ending September 30, 2015 to September 30, 2016. In
Brazil, the Company has open tax years ranging from December 31,
2011 through December 31, 2015. In Argentina, the Company has
open tax years ranging from September 30, 2009 to September 30,
2016. During the year ended September 30, 2016, the Company’s
U.S. net operating loss carryback claim was reviewed by the Joint
Committee of Taxation, and the Company received a full refund.
NOTE 18 Acquisitions and Disposals
Acquisition in Fiscal 2016
Sterne Agee
Effective July 1, 2016, the Company acquired all of the equity interests
of Sterne Agee, LLC’s (a wholly-owned subsidiary of Stifel Financial
Corp.) legacy independent brokerage and clearing businesses, Sterne
Agee & Leach, Inc.; Sterne Agee Clearing, Inc.; Sterne Agee Financial
Services, Inc. Effective August 1, 2016, the Company acquired all of
the equity interests of Sterne Agee, LLC’s legacy Registered Investment
Advisor (“RIA”) business, Sterne Agee Asset Management, Inc. and
Sterne Agee Investment Advisor Services, Inc. - collectively (“Sterne
Agee”) for cash consideration.
The acquisition-date fair value of the consideration transferred totaled
$45.0 million. The preliminary purchase price allocation resulted in
$24.9 million in cash, $151.6 million in receivables, $5.7 million in
deferred tax assets,$4.8 million in other assets and $136.0 million
in liabilities assumed. The fair value of identifiable assets acquired
and liabilities assumed exceeded the fair value of the consideration
transferred. Consequently, the Company reassessed the recognition
and measurement of identifiable assets acquired and liabilities assumed
and concluded that all acquired assets and assumed liabilities were
recognized and that the valuation procedures and resulting measures
were appropriate. As a result, the Company recognized a gain of
$6.2 million, which is included in the line item ‘gain on acquisition’
in the consolidated income statement. The Company believes the
88
Form 10K
transaction resulted in a gain primarily due to the Company’s ability to
incorporate these business activities into its existing business structure,
and its ability to utilize certain deferred tax assets and other assets while
operating the business that may not have been likely to be realized
by the seller. The allocation of the consideration to the fair value of
the assets acquired and liabilities assumed is preliminary and subject
to further adjustment as additional information is obtained. These
allocations are subject to change within the measurement period (up
to one year from the acquisition date) as final information is obtained.
The businesses have been included within the Company’s Clearing
and Execution Services Segment. The Company’s consolidated
income statement for the year ended September 30, 2016 includes
the post acquisition results of the Sterne Agee businesses, which were
immaterial. The acquired businesses contributed net operating revenues
of $8.6 million and net loss of $0.1 million to the Company for the
period from July 1, 2016 to September 30, 2016.
Acquisition in Fiscal 2015
The Company’s consolidated financial statements include the operating
results of the acquired businesses from the dates of acquisition.
G.X. Clarke & Co.
Effective January 1, 2015, the Company acquired all of the partnership
interests of G.X. Clarke & Co., an SEC registered institutional dealer
in fixed income securities. G.X. Clarke was based in New Jersey,
transacted in U.S. Treasury, U.S. government agency and agency
mortgage-backed securities, and was a FINRA member with an
institutional customer base consisting of asset managers, commercial
bank trust and investment departments, broker-dealers, and insurance
companies. The purchase price payable by the Company was equal
to G.X. Clarke’s net tangible book value at closing of approximately
$25.9 million plus a premium of $1.5 million, and up to an additional
$1.5 million over the next three years, subject to the achievement of
certain profitability thresholds. In conjunction with the acquisition,
the name of G.X. Clarke was changed to INTL FCStone Partners L.P.
The acquisition agreement includes the purchase of certain tangible
assets and assumption of certain liabilities. For the acquisition,
management made an initial fair value estimate of the assets acquired
and liabilities assumed as of January 1, 2015. The Company believes
that due to the short-term nature of many of the tangible assets acquired
and liabilities assumed, that their carrying values, as included in the
historical financial statements of G.X. Clarke, approximate their fair
values. The Company finalized its purchase accounting estimates with
the assistance of a third-party valuation expert. The portion of the
purchase price representing the initial premium of $1.5 million and
the contingent consideration of $0.1 million has been assigned to
the customer base and software programs/platforms intangible assets
(see Note 9). The Company assigned useful lives of 5 years for the
customer base and software programs/platforms intangible assets.
As part of the net cash paid, the Company and G.X. Clarke established
two escrow accounts totaling $10.0 million, related to an Adjustment
Escrow and Indemnity Escrow. The Adjustment Escrow, of $5.0 million,
PART II
ITEM 8 Financial Statements and Supplementary Data
related to potential purchase price adjustment obligations was released,
during year ended September 30, 2015, upon determination of the
final tangible book value of net assets of G.X. Clarke. The Indemnity
Escrow, of $5.0 million, relates to potential claims made by the
Company for indemnification in accordance with the terms of the
acquisition agreement and is to be released immediately following the
twenty-four month anniversary of the closing date of the acquisition.
The remaining escrow balance is included in ‘other assets’ in the
consolidated balance sheet.
In addition, as part of the net cash paid for the acquisition, the
Company has deferred payment of $5.0 million, in accordance with
the terms of the acquisition agreement. The deferred payment shall
be equal to $5.0 million less the aggregate net loss, if any, incurred
for the twelve full fiscal quarters commencing after the closing date.
The deferred payment amount shall be due and payable shortly after
the twelfth full fiscal quarter commencing after the closing date. The
deferred payment is included in ‘accounts payable and other accrued
liabilities’ in the consolidated balance sheet.
As discussed above, the terms of the acquisition agreement include
a contingent payment of an additional purchase price of up to
$1.5 million, based on the performance of the acquired business. The
contingent consideration, which in no event shall exceed $1.5 million,
is expected to be paid in two payments. The first payment was made
after the first four full fiscal quarters commencing after the closing
date, and totaled $0.5 million, as the acquired business generated
more than $5.0 million in after-tax net income over the first four full
fiscal quarters after the closing date. The second and final payment
is expected to occur after the twelfth full fiscal quarter commencing
after the closing date. This payment is estimated to be $1.0 million,
if the acquired business has generated accumulated after-tax net
income of greater than $30.0 million over the twelve full fiscal quarters
commencing after the closing date.
Acquisition in Fiscal 2014
The Company’s consolidated financial statements include the operating
results of the acquired businesses from the dates of acquisition.
Forward Insight Commodities LLC
In April 2014, the Company’s wholly owned subsidiary, FCStone
Group, Inc. (“FCG”), acquired all of the outstanding member interests
of Forward Insight Commodities, LLC (“FIC”). FIC was a brokerage
firm focused on the structuring and execution of transactions in the
energy derivative space.
The consideration paid for the acquisition consisted of contingent
payments based on the pre-tax earnings of the business for the twelve
month period following the acquisition and was estimated to be
$0.5 million as of the acquisition date. The purchase price for the
acquisition was not material to the consolidated financial statements.
The intangible assets recognized in this transaction of $0.5 million
were assigned to the Clearing and Execution Services segment and
were amortized over a 12 month useful life.
Form 10K 89
PART II
ITEM 8 Financial Statements and Supplementary Data
NOTE 19 Accumulated Other Comprehensive Income (Loss)
Comprehensive income consists of net income and other gains and losses affecting stockholders’ equity that, under U.S. GAAP, are excluded
from net income. Other comprehensive income (loss) includes net actuarial losses from defined benefit pension plans and gains and losses on
foreign currency translations.
The following table summarizes the changes in accumulated other comprehensive income (loss) for the year ended September 30, 2016.
(in millions)
Balances as of September 30, 2015
Other comprehensive income (loss), net of tax before reclassifications
Amounts reclassified from AOCI, net of tax
Other comprehensive income (loss), net of tax
Balances as of September 30, 2016
NOTE 20 Discontinued Operations
Foreign
Currency
Translation
Adjustment
Pension
Benefits
Adjustment
Accumulated Other
Comprehensive
Loss
$
$
(12.7) $
(7.4)
—
(7.4)
(20.1) $
(4.8)
(0.2)
0.5
0.3
(4.5)
$
$
(17.5)
(7.6)
0.5
(7.1)
(24.6)
Exit of Physical Base Metals Business
During fiscal 2014, the Company completed its exit of the physical
base metals business, that began in fiscal 2013, through the sale and
orderly liquidation of then-current open positions. Under existing
accounting guidance, before the implementation of ASU 2014-08,
the Company reclassified the physical base metals activities in the
financial statements as discontinued operations for all periods presented.
The Company continues to operate the portion of its base metals
business related to non-physical assets, conducted primarily through
the London Metals Exchange.
Summarized below are the components of the Company’s loss from discontinued operations for the years ended September 30, 2016, 2015, and 2014:
(in millions)
Revenues from discontinued operations
Cost of sales of physical commodities from discontinued operations
Operating revenues
Loss from discontinued operations before income taxes
Income tax benefit
Loss from discontinued operations, net of tax
Year Ended September 30,
2016
2015
2014
$
$
$
$
— $
—
— $
— $
—
— $
— $
—
— $
— $
—
— $
40.9
40.2
0.7
(0.5)
0.2
(0.3)
NOTE 21 Quarterly Financial Information (Unaudited)
The Company has set forth certain quarterly unaudited financial data for the past two years in the tables below:
(in millions, except per share amounts)
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Compensation and other expenses
Gain on acquisition
Income before tax
Income tax expense
Net income
Net basic earnings per share
Net diluted earnings per share
90
Form 10K
September 30
2,777.6
2,599.0
178.6
32.0
28.1
7.5
111.0
98.0
6.2
19.2
2.4
16.8
0.91
0.90
$
$
$
$
For the 2016 Fiscal Quarter Ended
June 30
March 31
$
$
$
$
4,868.5
4,693.5
175.0
35.2
14.8
7.7
117.3
95.9
—
21.4
6.8
14.6
0.79
0.78
$
$
$
$
3,708.9
3,542.8
166.1
32.9
13.2
7.1
112.9
92.9
—
20.0
5.5
14.5
0.77
0.76
$
$
$
December 31
$
3,399.9
3,248.6
151.3
29.8
12.8
6.0
102.7
90.6
—
12.1
3.3
8.8
0.47
0.46
(in millions, except per share amounts)
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Compensation and other expenses
Income before tax
Income tax expense
Net income
Net basic earnings per share
Net diluted earnings per share
PART II
ITEM 8 Financial Statements and Supplementary Data
September 30
2,628.4
$
2,449.7
178.7
31.3
15.1
5.0
127.3
98.1
29.2
8.1
21.1
1.12
1.09
$
$
$
For the 2015 Fiscal Quarter Ended
March 31
June 30
December 31
$
$
$
$
3,995.1 $
3,843.5
151.6
30.2
13.1
4.9
103.4
86.2
17.2
5.0
12.2 $
0.64 $
0.62 $
14,442.0 $
14,285.5
156.5
31.8
12.3
4.5
107.9
89.8
18.1
5.1
13.0 $
0.68 $
0.67 $
13,627.7
13,490.2
137.5
29.4
12.2
2.7
93.2
79.6
13.6
4.2
9.4
0.50
0.49
As discussed further in Note 22, during fiscal year 2015, the Company
transitioned the portion of its precious metals business conducted
through its unregulated domestic subsidiary, INTL Commodities
Inc., to its U.K. based broker-dealer subsidiary, INTL FCStone
Ltd. Prior to the transfer, INTL Commodities Inc.’s precious metals
sales and costs of sales were recorded on a gross basis in accordance
with the Revenue Recognition Topic of the ASC. Subsequent to the
transfer, INTL FCStone Ltd’s precious metals sales and cost of sales
are presented on a net basis and included as a component of ‘trading
gains, net’ on the consolidated income statements, in accordance
with U.S GAAP accounting requirements for broker-dealers. Precious
metals sales and cost of sales for subsidiaries that are not broker-dealers
continue to be recorded on a gross basis.
NOTE 22 Segment and Geographic Information
The Company reports its operating segments based on services provided
to customers. The Company’s business activities are managed as
operating segments and organized into reportable segments as follows:
(cid:116) Commercial Hedging (includes components Financial Agricultural
(Ag) & Energy and LME Metals)
(cid:116) Global Payments
(cid:116) Securities (includes components Equity Market-Making, Debt
Trading, Investment Banking, and Asset Management)
(cid:116) Physical Commodities (includes components Precious Metals and
Physical Ag & Energy)
(cid:116) Clearing and Execution Services (includes components Exchange-
traded Futures and Options, FX Prime Brokerage, Correspondent
Clearing and Independent Wealth Management)
The Company’s services span virtually all traded commodity markets,
with the largest concentrations in agricultural and energy commodities
(consisting primarily of grains, energy and renewable fuels, coffee,
sugar, cotton, and food service) and base metals. The Company’s base
metals business includes a position as a Category One ring dealing
member of the LME, providing execution, clearing and advisory
services in exchange-traded futures and OTC products. The Company
also provides execution of foreign currency forwards and options
and interest rate swaps as well as a wide range of structured product
solutions to commercial customers who are seeking cost-effective
hedging strategies. Generally, customers direct their own trading
activity and the Company’s risk management consultants do not
have discretionary authority to transact trades on behalf of customers.
Global Payments
Commercial Hedging
The Company serves its commercial customers through its team of
risk management consultants, providing a high-value-added service
that we believe differentiates it from its competitors and maximizes
the opportunity to retain customers. The Company’s risk management
consulting services are designed to quantify and monitor commercial
entities’ exposure to commodity and financial risk. Upon assessing this
exposure the Company develops a plan to control and hedge these
risks with post-trade reporting against specific ccustomer objectives.
Customers are assisted in the execution of their hedging strategies
through a wide range of products from listed exchange-traded futures
and options, to basic OTC instruments that offer greater flexibility,
to structured OTC products designed for customized solutions.
The Company provides global payment solutions to banks and
commercial businesses as well as charities and non-governmental
organizations and government organizations. The Company offers
payments services in over 175 countries and 140 currencies, which it
believes is more than any other payments solution provider, and provides
competitive and transparent pricing. Its proprietary FXecute global
payments platform is integrated with a financial information exchange
(“FIX”) protocol. This FIX protocol is an electronic communication
method for the real-time exchange of information, and the Company
believes it represents one of the first FIX offerings for cross-border
payments in exotic currencies. FIX functionality allows customers to
view real time market rates for various currencies, execute and manage
orders in real-time, and view the status of their payments through
the easy-to-use portal.
Form 10K 91
PART II
ITEM 8 Financial Statements and Supplementary Data
Additionally, as a member of SWIFT (Society for Worldwide Interbank
Financial Telecommunication), the Company is able to offer its services
to large money center and global banks seeking more competitive
international payments services.
Through this single comprehensive platform and our commitment
to customer service, the Company believes it is able to provide
simple and fast execution, ensuring delivery of funds in any of
these countries quickly through its global network of approximately
300 correspondent banks. In this business, the Company primarily
acts as a principal in buying and selling foreign currencies on a spot
basis. The Company derives revenue from the difference between the
purchase and sale prices.
The Company believes its customers value its ability to provide
exchange rates that are significantly more competitive than those
offered by large international banks, a competitive advantage that
stems from its years of foreign exchange expertise focused on smaller,
less liquid currencies.
Securities
The Company provides value-added solutions that facilitate cross-
border trading and believes its customers value the Company’s ability
to manage complex transactions, including foreign exchange, utilizing
its local understanding of market convention, liquidity and settlement
protocols around the world. The Company’s customers include U.S.-
based regional and national broker-dealers and institutions investing
or executing customer transactions in international markets and
foreign institutions seeking access to the U.S. securities markets. The
Company is one of the leading market makers in foreign securities,
including unlisted ADRs, GDRs and foreign ordinary shares. The
Company makes markets in over 3,600 ADRs, GDRs and foreign
ordinary shares , of which over 2,000 trade in the OTC market. In
addition, it will, on request, make prices in more than 10,000 unlisted
foreign securities. The Company is a broker-dealer in Argentina
where we are active in providing institutional executions in the local
capital markets.
The Company acts as an institutional dealer in fixed income securities,
including U.S. Treasury, U.S. government agency, agency mortgage-
backed and asset-backed securities to a customer base including asset
managers, commercial bank trust and investment departments,
broker-dealers and insurance companies.
The Company also originates, structures and places debt instruments
in the international and domestic capital markets. These instruments
include complex asset-backed securities (primarily in Argentina)
and domestic municipal securities. On occasion, the Company
may invest its own capital in debt instruments before selling them.
The Company also actively trades in a variety of international debt
instruments and operates an asset management business in which it
earns fees, commissions and other revenues for management of third
party assets and investment gains or losses on its investments in funds
and proprietary accounts managed either by its investment managers
or by independent investment managers.
Physical Commodities
This segment consists of the Company’s physical Precious Metals
trading and Physical Agricultural and Energy commodity businesses.
In Precious Metals, the Company provides a full range of trading and
hedging capabilities, including OTC products, to select producers,
consumers, and investors. In the Company’s trading activities, it acts
as a principal, committing its own capital to buy and sell precious
metals on a spot and forward basis.
The Company’s Physical Ag & Energy commodity business provides
financing to commercial commodity-related companies against physical
inventories, including grain, lumber, meats, energy products and
renewable fuels. The Company uses sale and repurchase agreements
to purchase commodities evidenced by warehouse receipts, subject
to a simultaneous agreement to sell such commodities back to the
original seller at a later date. Transactions where the sale and repurchase
price are fixed upon execution are accounted for as product financing
arrangements, and accordingly no commodity inventory, purchases or
sales are recorded. Transactions where the repurchase price is not fixed
upon execution do not meet all of the criteria to be accounted for as
product financing arrangements and, thus, are recorded as commodity
inventory, purchases, and sales. Additionally, the Company engages as
a principal in physical purchase and sale transactions related to inputs
to the renewable fuels and feed ingredient industries.
On April 10, 2015 (the “transfer date”), the Company transitioned
the portion of its Precious Metals business conducted through its
unregulated domestic subsidiary, INTL Commodities Inc., to its U.K.
based broker-dealer subsidiary, INTL FCStone Ltd. INTL FCStone
Ltd is regulated by the Financial Conduct Authority (“FCA”), the
regulator of the financial services industry in the U.K. Subsequent
to the transfer, precious metals inventory held by INTL FCStone
Ltd is measured at fair value, with changes in fair value included
as a component of ‘trading gains, net’ on the consolidated income
statement, in accordance with U.S. GAAP accounting requirements
for broker-dealers. Precious metals inventory held by subsidiaries
that are not broker-dealers continues to be valued at the lower of
cost or market value.
Prior to the transfer, INTL Commodities Inc.’s precious metals
sales and costs of sales were recorded on a gross basis in accordance
with the Revenue Recognition Topic of the ASC. Subsequent to the
transfer, INTL FCStone Ltd’s precious metals sales and cost of sales
are presented on a net basis and included as a component of ‘trading
gains, net’ on the consolidated income statements, in accordance
with U.S GAAP accounting requirements for broker-dealers. Precious
metals sales and cost of sales for subsidiaries that are not broker-dealers
continue to be recorded on a gross basis.
The Company records its Physical Ag & Energy commodities revenues
on a gross basis. Operating revenues and losses from its precious metals
commodities derivatives activities are included in ‘trading gains, net’
in the consolidated income statements. Operating revenues and losses
from its agricultural and energy commodities derivative activities are
included in ‘cost of sales of physical commodities’ in the consolidated
income statements. The agricultural commodity inventories are carried
92
Form 10K
at net realizable value, which approximates fair value less disposal costs.
The agricultural inventories have reliable, readily determinable and
realizable market prices, have relatively insignificant costs of disposal
and are available for immediate delivery.
The Company generally mitigates the price risk associated with
commodities held in inventory through the use of derivatives. The
Company does not elect hedge accounting under U.S. GAAP in
accounting for this price risk mitigation.
Clearing and Execution Services (CES)
The Company provides competitive and efficient clearing and execution
in all major futures and securities exchanges globally as well as prime
brokerage in all major foreign currency pairs and swap transactions.
Through its platform, customer orders are accepted and directed to the
appropriate exchange for execution. The Company then facilitates the
clearing of customers’ transactions. Clearing involves the matching of
customers’ trades with the exchange, the collection and management
of customer margin deposits to support the transactions, and the
accounting and reporting of the transactions to customers.
As of September 30, 2016, the Company held $2.1 billion in required
customer segregated assets, which it believes makes it the third largest
independent futures commission merchant (“FCM”) in the United
States not affiliated with a major financial institution or commodity
intermediary, end-user or producer, as measured by required customer
segregated assets. The Company seeks to leverage its capabilities and
capacity by offering facilities management or outsourcing solutions
to other FCM’s.
Following the Company’s acquisition of the Sterne Agee correspondent
securities clearing business, it is an independent full-service provider
to introducing broker-dealers (“IBD’s”) of clearing, custody, research,
syndicated and security-based lending products and services, including
a proprietary technology platform which offers seamless connectivity
to ensure a positive customer experience through the clearing and
settlement process. Also as part of this transaction, the Company
acquired Sterne Agee’s independent wealth management business
which offers a comprehensive product suite to retail customers
nationwide. As a result it is one of the leading mid-market clearer’s
in the securities industry, clearing for 50 correspondent clearing
customers and in aggregate over 120,000 underlying individual retail
securities accounts with over $12 billion in assets under management
(“AUM”) as of September 30, 2016.
In addition, the Company believes it is one of the largest non-bank
prime brokers and swap dealers in the world. Through this offering,
it provides prime brokerage foreign exchange services to financial
PART II
ITEM 8 Financial Statements and Supplementary Data
institutions and professional traders. The Company provides its
customers with the full range of OTC products, including 24-hour a
day execution of spot, forwards and options as well as non-deliverable
forwards in both liquid and exotic currencies. The Company also
operates a proprietary foreign exchange desk that arbitrages the
exchange-traded foreign exchange markets with the cash markets.
********
The total revenues reported combine gross revenues for the physical
commodities business and net revenues for all other businesses. In
order to reflect the way that the Company’s management views the
results, the tables below also reflect the segment contribution to
‘operating revenues’, which is shown on the face of the consolidated
income statements and which is calculated by deducting physical
commodities cost of sales from total revenues.
Segment data includes the profitability measure of net contribution
by segment. Net contribution is one of the key measures used by
management to assess the performance of each segment and for
decisions regarding the allocation of the Company’s resources. Net
contribution is calculated as revenue less direct cost of sales, transaction-
based clearing expenses, variable compensation, introducing broker
commissions, and interest expense. Variable compensation paid to
risk management consultants/traders generally represents a fixed
percentage of an amount equal to revenues generated, and in some
cases, revenues produced less transaction-based clearing charges, base
salaries and an overhead allocation.
Segment data also includes segment income which is calculated as
net contribution less non-variable direct expenses of the segment.
These non-variable direct expenses include trader base compensation
and benefits, operational employee compensation and benefits,
communication and data services, business development, professional
fees, bad debts and other direct expenses.
Inter-segment revenues, charges, receivables and payables are eliminated
upon consolidation, except revenues and costs related to foreign
currency transactions undertaken on an arm’s length basis by the
foreign exchange trading business for the securities business. The
foreign exchange trading business competes for this business as it does
for any other business. If its rates are not competitive, the securities
businesses buy or sell their foreign currency through other market
counterparties.
On a recurring basis, the Company sweeps excess cash from certain
operating segments to a centralized corporate treasury function in
exchange for an intercompany receivable asset. The intercompany
receivable asset is eliminated during consolidation, and therefore this
practice may impact reported total assets between segments.
Form 10K 93
PART II
ITEM 8 Financial Statements and Supplementary Data
Information concerning operations in these segments of business is shown in accordance with the Segment Reporting Topic of the ASC as follows:
Year Ended September 30,
2016
2015
2014
$
$
$
$
$
$
$
$
$
$
$
$
236.1
73.2
175.2
14,120.5
151.1
(1.2)
14,754.9
236.1
73.2
175.2
36.6
151.1
(1.2)
671.0
188.2
65.3
121.9
31.5
48.8
(11.8)
443.9
134.4
52.2
97.5
23.4
39.5
347.0
68.7
39.8
69.4
13.3
14.8
206.0
206.0
133.3
72.7
$
$
$
$
$
$
$
$
$
$
$
$
262.4 $
77.1
129.8
34,092.0
123.4
8.5
34,693.2 $
224.0
55.4
80.3
33,552.1
113.7
(3.1)
34,022.4
262.4 $
77.1
129.8
23.1
123.4
8.5
624.3 $
214.7 $
68.5
88.6
21.2
38.3
0.5
431.8 $
151.7 $
54.5
67.4
16.9
30.1
320.6 $
85.6 $
43.3
40.5
5.8
12.9
188.1 $
188.1 $
110.0
78.1 $
224.0
55.4
80.3
20.6
113.7
(3.1)
490.9
180.5
48.2
54.6
17.9
29.7
(8.9)
322.0
132.6
37.6
40.9
14.1
24.0
249.2
67.3
28.3
21.0
5.9
6.3
128.8
128.8
102.8
26.0
(in millions)
Total revenues:
Commercial Hedging
Global Payments
Securities
Physical Commodities
Clearing and Execution Services
Corporate unallocated
Total
Operating revenues (loss):
Commercial Hedging
Global Payments
Securities
Physical Commodities
Clearing and Execution Services
Corporate unallocated
Total
Net operating revenues (loss):
Commercial Hedging
Global Payments
Securities
Physical Commodities
Clearing and Execution Services
Corporate unallocated
Total
Net contribution:
(Revenues less cost of sales, transaction-based clearing expenses, variable bonus
compensation, introducing broker commissions and interest expense):
Commercial Hedging
Global Payments
Securities
Physical Commodities
Clearing and Execution Services
Total
Segment income:
(Net contribution less non-variable direct segment costs):
Commercial Hedging
Global Payments
Securities
Physical Commodities
Clearing and Execution Services
Total
Reconciliation of segment income to income from continuing operations, before tax:
Segment income
Costs not allocated to operating segments
Income from continuing operations, before tax
94
Form 10K
(in millions)
Total assets:
Commercial Hedging
Global Payments
Securities
Physical Commodities
Clearing and Execution Services
Corporate unallocated
Total
PART II
ITEM 8 Financial Statements and Supplementary Data
As of September 30, 2016
As of September 30, 2015
As of September 30, 2014
$
$
1,637.5
191.4
2,130.7
258.0
1,617.4
116.3
5,951.3
$
$
1,548.1
207.3
1,861.0
190.9
1,163.8
98.9
5,070.0
$
$
1,400.9
51.9
235.5
116.8
1,136.2
98.4
3,039.7
Information regarding revenues and operating revenues for the years ended September 30, 2016, 2015, and 2014, and information regarding
long-lived assets (defined as property, equipment, leasehold improvements and software) as of September 30, 2016, 2015, and 2014 in
geographic areas were as follows:
(in millions)
Total revenues:
United States
Europe
South America
Asia
Other
Total
Operating revenues:
United States
Europe
South America
Asia
Other
Total
(in millions)
Long-lived assets, as defined:
United States
Europe
South America
Asia
Other
Total
2016
Year Ended September 30,
2015
2014
$
$
$
$
817.1
463.5
64.8
13,405.1
4.4
14,754.9
457.0
120.2
64.8
24.6
4.4
671.0
$
$
$
$
25,959.0
121.2
49.0
8,560.0
4.0
34,693.2
424.3
125.0
49.0
21.9
4.1
624.3
$
$
$
$
19,055.3
86.0
53.2
14,822.4
5.5
34,022.4
330.4
86.0
53.2
15.8
5.5
490.9
As of September 30, 2016
As of September 30, 2015
As of September 30, 2014
$
$
23.3
4.8
1.2
0.1
—
29.4
$
$
13.8
4.0
1.7
0.2
—
19.7
$
$
8.5
5.0
2.0
0.3
0.1
15.9
NOTE 23 Subsequent Events
Acquisition of ICAP’s EMEA Oils Broking
Business
In September 2016, the Company’s subsidiary, INTL FCStone
Ltd, reached an agreement to acquire the London-based EMEA oils
business of ICAP plc. INTL FCStone Ltd received approval from the
U.K. Competition and Markets Authority, and acquisition is effective
October 1, 2016. The business includes over 30 front office employees
across the fuel, crude, middle distillates, futures and options desks
with deep-rooted relationships with over 200 well known commercial
and institutional customers throughout Europe, the Middle East
and Africa. The terms of the agreement include a purchase price of
$6.0 million as well as amounts payable to employees acquired based
upon their continued employment.
Redemption of Senior Notes
On September 15, 2016, the Company instructed The Bank of
New York Mellon, as trustee (the “Trustee”) under the Company’s
Indenture dated as of July 22, 2013 for the Company’s 8.5% Senior
Notes (the “Senior Notes”) to provide notice (the “Notice”) to the
holders of the Senior Notes that the Company will redeem the
aggregate outstanding $45.5 million principal amount of the Senior
Notes in full. Pursuant to the terms of the Indenture, the Company
will redeem the outstanding Senior Notes at a price equal to 100%
of the principal amount redeemed plus accrued and unpaid interest
to, but not including, the redemption date. The redemption date is
October 15, 2016. The Notice was provided on September 15, 2016
to record holders of the Senior Notes by the Trustee.
Form 10K 95
PART II
SCHEDULE I INTL FCStone Inc. Condensed Balance Sheets
SCHEDULE I
INTL FCStone Inc. Condensed
Balance Sheets
Parent Company Only
(in millions)
ASSETS
Cash and cash equivalents
Deposits and receivables from broker-dealers, clearing organizations and counterparties
Receivable from subsidiaries, net
Notes receivable, net
Income taxes receivable
Investment in subsidiaries(1)
Financial instruments owned, at fair value
Deferred income taxes, net
Property and equipment, net
Other assets
Total assets
LIABILITIES AND EQUITY
Liabilities:
Accounts payable and other accrued liabilities
Payable to customers
Payable to lenders under loans
Payable to subsidiaries, net
Senior unsecured notes
Financial instruments sold, not yet purchased, at fair value
Total liabilities
EQUITY:
INTL FCStone Inc. (Parent Company Only) stockholders’ equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; no shares issued or outstanding
Common stock, $0.01 par value. Authorized 30,000,000 shares; 20,557,175 issued and
18,435,218 outstanding at September 30, 2016 and 20,184,556 issued and 18,812,803
outstanding at September 30, 2015
Common stock in treasury, at cost - 2,121,957 shares at September 30, 2016 and 1,371,753 shares at
September 30, 2015
Additional paid-in capital
Retained earnings(1)
September 30, 2016
September 30, 2015
$
$
$
$
$
$
1.3
2.9
3.6
6.9
14.0
316.3
1.3
15.7
12.7
17.2
391.9
27.7
4.6
139.3
17.1
45.5
35.9
270.1
—
0.2
2.5
—
0.4
46.4
24.3
286.0
3.0
12.0
9.2
13.1
396.9
29.3
30.7
31.6
123.7
45.5
—
260.8
—
0.2
(46.3)
249.4
(81.5)
121.8
391.9
(26.8)
240.8
(78.1)
136.1
396.9
Total INTL FCStone Inc. (Parent Company Only) stockholders’ equity
Total liabilities and equity
(1) Within the Condensed Balance Sheets and Condensed Statements of Operations of INTL FCStone Inc. - Parent Company Only, the Company has accounted for its investment in
wholly owned subsidiaries using the cost method of accounting. Under this method, the Company’s share of the earnings or losses of such subsidiaries are not included in the Condensed
Balance Sheet or Condensed Statements of Operations. If the accounting for its investment in wholly owned subsidiaries were presented under the equity method of accounting,
investment in subsidiaries and retained earnings would each increase by $336.6 million as of September 30, 2016, respectively, and $278.5 million, as of September 30, 2015,
respectively.
$
$
96
Form 10K
PART II
SCHEDULE I INTL FCStone Inc. Condensed Statements of Operations
SCHEDULE I
INTL FCStone Inc. Condensed
Statements of Operations
Parent Company Only
(in millions)
Revenues:
Management fees from affiliates
Trading gains, net
Consulting fees
Interest income
Dividend income from subsidiaries(2)
Interest expense
Net revenues
Non-interest expenses:
Compensation and benefits
Clearing and related expenses
Introducing broker commissions
Communication and data services
Occupancy and equipment rental
Professional fees
Travel and business development
Depreciation and amortization
Bad debts and impairments
Management services fees to affiliates
Other
2016
Year Ended September 30,
2015
2014
$
$
30.1
0.7
2.2
1.8
31.0
65.8
13.4
52.4
$
26.6
3.2
2.1
4.6
6.0
42.5
12.7
29.8
9.5
—
1.6
4.3
—
15.4
10.6
4.8
52.8
1.7
0.6
6.7
2.8
4.8
1.7
2.5
0.2
1.2
11.7
86.7
6.2
(28.1)
24.7
(3.4)
43.5
1.2
0.5
5.7
2.1
4.6
1.4
1.8
1.6
4.3
10.2
76.9
—
(47.1)
19.4
(27.7)
29.8
0.3
0.3
1.3
2.0
5.0
1.1
1.8
0.1
2.9
3.5
48.1
—
(43.3)
17.1
(26.2)
Total non-interest expenses
Gain on acquisition
Loss from continuing operations, before tax
Income tax benefit
Net loss
(2) Within the Condensed Balance Sheets and Condensed Statements of Operations of INTL FCStone Inc. - Parent Company Only, the Company has accounted for its investment
in wholly owned subsidiaries using the cost method of accounting. Under this method, the Company’s share of the earnings or losses of such subsidiaries are not included in the
Condensed Balance Sheet or Condensed Statements of Operations. If the accounting for its investment in wholly owned subsidiaries were presented under the equity method of
accounting, revenues would include income from investment in subsidiaries of $58.1 million, $83.4 million, and $45.5 million, for the years ended September 30, 2016, 2015,
and 2014, respectively.
$
$
$
Form 10K 97
PART II
SCHEDULE I INTL FCStone Inc. Condensed Statements of Cash Flows
SCHEDULE I
INTL FCStone Inc. Condensed
Statements of Cash Flows
Parent Company Only
(in millions)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation and amortization
Provision for impairments
Deferred income taxes
Amortization of debt issuance costs and debt discount
Amortization of share-based compensation expense
Gain on acquisition
Changes in operating assets and liabilities:
Deposits and receivables from broker-dealers, clearing organizations, and
counterparties
Receivables from subsidiaries, net
Due to/from subsidiaries
Notes receivable, net
Income taxes receivable
Financial instruments owned, at fair value
Other assets
Accounts payable and other accrued liabilities
Payable to customers
Financial instruments sold, not yet purchased, at fair value
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Capital contribution in affiliates
Capital withdrawals from affiliates
Purchase of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Payable to lenders under loans
Proceeds from note payable
Payments of notes payable
Payments related to earn-outs on acquisitions
Share repurchase
Debt issuance costs
Exercise of stock options
Income tax benefit on stock options and awards
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Cash paid for interest
Income taxes (received) paid, net of cash refunds
Supplemental disclosure of non-cash investing and financing activities:
Additional consideration payable related to acquisitions
98
Form 10K
2016
Year Ended September 30,
2015
2014
$
(3.4)
$
(27.7)
$
(26.2)
2.5
0.2
(3.3)
1.0
5.1
(6.2)
(2.8)
(3.1)
(86.6)
39.1
10.3
1.7
0.3
0.4
(26.1)
35.9
(35.0)
(48.4)
—
(5.5)
(53.9)
108.5
—
(0.8)
(2.9)
(19.5)
(1.9)
3.5
0.8
87.7
(1.2)
2.5
1.3
9.0
(33.8)
(0.4)
$
$
$
$
1.8
1.6
4.6
0.8
3.6
—
—
—
33.2
(7.8)
(11.4)
(3.0)
(3.9)
12.6
4.9
—
9.3
(22.4)
7.8
(7.8)
(22.4)
13.0
4.0
(0.4)
(2.2)
(4.7)
(0.1)
2.5
0.5
12.6
(0.5)
3.0
2.5
11.9
(12.9)
1.9
$
$
$
$
1.8
0.1
(9.6)
0.8
4.3
—
—
—
84.6
(12.8)
4.6
—
(1.1)
(1.1)
7.1
(0.6)
51.9
(0.5)
—
(1.8)
(2.3)
(40.0)
—
—
(1.1)
(9.7)
(0.2)
1.4
(0.1)
(49.7)
(0.1)
3.1
3.0
6.9
(5.3)
(3.0)
$
$
$
$
PART II
ITEM 9A Controls and Procedures
ITEM 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
ITEM 9A Controls and Procedures
a
Evaluation of Disclosure Controls and Procedures
In connection with the filing of this Form 10-K, our management,
including the principal executive officer and principal financial officer,
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) as of September 30, 2016. We seek to design
our disclosure controls and procedures to provide reasonable assurance
that the reports we file or submit under the Exchange Act contain
the required information and that we submit these reports within
the time periods specified in SEC rules and forms. We also seek to
design these controls and procedures to ensure that we accumulate
and communicate correct information to our management, including
our principal executive and principal financial officers, as appropriate,
to allow timely decisions regarding required disclosure.
Based on the evaluation, our principal executive officer and principal
financial officer have concluded that our disclosure controls and
procedures were effective as of September 30, 2016.
b Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is
defined in Exchange Act Rule 13a-15(f ). Our internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S.
generally accepted accounting principles (“GAAP”). Our internal
control over financial reporting includes those policies and procedures
that: (i) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the assets
of the Company; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements
in accordance with GAAP, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
management and directors of the Company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could
have a material effect on the financial statements.
There are limitations inherent in any internal control, such as the
possibility of human error and the circumvention or overriding
of controls. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met, and may not prevent or
detect misstatements. As conditions change over time, so too may the
effectiveness of internal controls. A material weakness is a deficiency,
or a combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not
be prevented or detected on a timely basis.
Management (with the participation of our principal executive officer
and principal financial officer) evaluated the Company’s internal
control over financial reporting as of September 30, 2016, based
on the framework in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations (COSO) of
the Treadway Commission.
Management’s assessment of the effectiveness of the Company’s internal
control over financial reporting as of September 30, 2016 excluded
Sterne Agee & Leach, Inc., Sterne Agee Clearing, Inc. and Sterne
Agee Financial Services, Inc., acquired with effect from July 1, 2016,
and Sterne Agee Asset Management, Inc. and Sterne Agee Investment
Advisor Services, Inc., acquired with effect from August 1, 2016.
Based on its assessment, management has concluded that our internal
control over financial reporting was effective as of September 30, 2016.
KPMG LLP, an independent registered public accounting firm, audited
the effectiveness of our internal control over financial reporting as
of September 30, 2016, and KPMG LLP issued a report on the
effectiveness of the Company’s internal control over financial reporting
as of September 30, 2016, which is included in Item 8 “Consolidated
Financial Statements and Supplementary Data” of this Annual Report
on Form 10-K.
Form 10K 99
PART II
ITEM 9B Other Information
c
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2016 that
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B Other Information
None.
100
Form 10K
PART III
PART III
ITEM 10 Directors, Executive Officers and Corporate
Governance
We will include a list of our executive officers and biographical and
other information about them and our directors in the definitive
Proxy Statement for our 2017 Annual Meeting of Stockholders
to be held on February 23, 2017. We will file the proxy within
120 days of the end of our fiscal year ended September 30, 2016 (the
“2017 Proxy Statement”). The 2017 Proxy Statement is incorporated
herein by reference. Information about our Audit Committee may
be found in the Proxy Statement. That information is incorporated
herein by reference.
We adopted a code of ethics that applies to the directors, officers and
employees of the Company and each of its subsidiaries. The code
of ethics is publicly available on our Website at www.intlfcstone.
com/ethics.aspx. If we make any substantive amendments to the
code of ethics or grant any waiver, including any implicit waiver,
from a provision of the code to our Chief Executive Officer, Chief
Financial Officer, or Chief Accounting Officer, we will disclose the
nature of the amendment or waiver on that website or in a report
on Form 8-K.
ITEM 11 Executive Compensation
We will include information relating to our executive officer and director compensation and the compensation committee of our board of
directors in the 2017 Proxy Statement and is incorporated herein by reference.
Form 10K 101
PART III
ITEM 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
ITEM 12 Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters
We will include information relating to security ownership of certain
beneficial owners of our common stock and information relating to the
security ownership of our management in the 2017 Proxy Statement
and is incorporated herein by reference.
The following table provides information generally as of September 30,
2016, the last day of fiscal 2016, regarding securities to be issued
on exercise of stock options, and securities remaining available for
issuance under our equity compensation plans that were in effect
during fiscal 2016.
Plan Category
Equity compensation plans approved by stockholders
Equity compensation plans not approved by stockholders
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under equity
compensation plans
1,215,821 $
—
1,215,821 $
29.55
—
29.55
754,163
—
754,163
ITEM 13 Certain Relationships and Related Transactions,
and Director Independence
We will include information regarding certain relationships and related transactions and director independence in the 2017 Proxy Statement
and is incorporated herein by reference.
ITEM 14 Principal Accountant Fees and Services
Information regarding principal accountant fees and services will be included in the 2017 Proxy Statement and is incorporated herein by reference.
102
Form 10K
PART IV
ITEM 15 Exhibits
PART IV
ITEM 15 Exhibits
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
Amended and Restated Certificate of Incorporation (incorporated by reference from the Company’s Form 8-K filed with the SEC on
October 9, 2009).
Amended and Restated By-laws (incorporated by reference from the Company’s Quarterly Report on Form 10-Q filed with the SEC on
August 14, 2007).
International Assets Holding Corporation 2003 Stock Option Plan (incorporated by reference from the Company’s Proxy Statement on
Schedule 14A filed on January 14, 2003).
Amendment to International Assets Holding Corporation 2003 Stock Option Plan (incorporated by reference from the Company’s Proxy
Statement on Form 14A filed with the SEC on February 11, 2004).
Amendment to International Assets Holding Corporation 2003 Stock Option Plan (incorporated by reference from the Company’s Proxy
Statement on Form 14A filed with the SEC on January 23, 2006).
FCStone Group, Inc. 2006 Equity Incentive Plan (incorporated by reference from the Registration Statement on Form S-8 filed by FCStone
Group, Inc. with the SEC on June 12, 2006).
INTL FCStone Inc. 2013 Stock Option Plan (incorporated by reference from the Company’s Proxy Statement on Schedule 14A filed on
January 11, 2013).
Registration Rights Agreement, dated October 22, 2002, by and between the Company, and Sean O’Connor (incorporated by reference from
the Company’s Form 8-K filed with the SEC on October 24, 2002).
First Amendment to Registration Rights Agreement, dated December 6, 2002, by and between the Company and Sean O’Connor
(incorporated by reference from the Company’s Form 8-K filed with the SEC on December 10, 2002).
Registration Rights Agreement, dated October 22, 2002, by and between the Company and Scott Branch (incorporated by reference from the
Company’s Form 8-K filed with the SEC on October 24, 2002).
First Amendment to Registration Rights Agreement, dated December 6, 2002, by and between the Company and Scott Branch (incorporated
by reference from the Company’s Form 8-K filed with the SEC on December 10, 2002).
Registration Rights Agreement, dated October 22, 2002, by and between the Company and John Radziwill (incorporated by reference from
the Company’s Form 8-K filed with the SEC on October 24, 2002).
First Amendment to Registration Rights Agreement, dated December 6, 2002, by and between the Company and John Radziwill
(incorporated by reference from the Company’s Form 8-K filed with the SEC on December 10, 2002).
Employment Agreement, effective December 1, 2004, by and between the Company and Brian T. Sephton (incorporated by reference from
the Company’s Form 8-K, as filed with the SEC on November 24, 2004).
2012 Restricted Stock Plan (incorporated by reference from the Company’s Proxy Statement on Form 14A filed with the SEC on
January 13, 2012).
INTL FCStone Inc. 2016 Executive Performance Plan (incorporated by reference from the Company’s Proxy Statement on Form 14A filed
with the SEC on January 15, 2016).
INTL FCStone Inc. 2016 Long-Term Performance Incentive Plan (incorporated by reference from the Company’s Proxy Statement on
Form 14A filed with the SEC on January 15, 2016).
Farmers Commodities Corporation Supplemental Nonqualified Pension Plan (incorporated by reference from Amendment No. 2 to the
Registration Statement on Form S-4 filed by FCStone Group, Inc. with the SEC on December 9, 2004)
Form of Director Indemnification Agreement (incorporated by reference from Amendment No. 3 to the Registration Statement on Form S-4
filed by FCStone Group, Inc. with the SEC on December 30, 2004)
Credit Agreement made as of September 20, 2013 by and between INTL FCStone Inc. as Borrower, the Subsidiaries of INTL FCStone
Inc. identified therein, as guarantors, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, Bank of America
Merrill Lynch and Capital One, N.A., as Joint Lead Arrangers and Joint Book Managers, Bank Hapoalim B.M., BMO Harris Bank N.A. and
The Korea Development Bank, New York Branch, as additional Lenders, and with the lenders from time to time parties thereto (incorporated
by reference from the Company’s Current Report on Form 8-K filed with the SEC on September 24, 2013).
First Amendment to Credit Agreement, made as of April 18, 2014, by and between INTL FCStone Inc., as Borrower, the Subsidiaries of
INTL FCStone Inc. identified therein, as Guarantors, with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C
Issuer, Bank of America Merrill Lynch and Capital One, N.A., as Joint Lead Arrangers and Joint Book Managers, Bank Hapoalim B.M.,
BMO Harris Bank N.A. and The Korea Development Bank, New York Branch, as additional Lenders (incorporated by reference from the
Company’s Current Report on Form 8-K filed with the SEC on April 22, 2014).
Form 10K 103
PART IV
ITEM 15 Exhibits
10.15
Second Amendment to Credit Agreement entered into as of May 12, 2015 with Bank of America, N.A., as Administrative Agent, Lender,
L/C Issuer and Swing Line Lender, Capital One, N.A., Bank Hapoalim B.M., BMO Harris Bank N.A. and The Korea Development
Bank, New York Branch, as additional Lenders, and with the lenders from time to time parties thereto (incorporated by reference from the
Company’s Current Report on Form 8-K filed with the SEC on May 18, 2015).
10.17
10.16 Third Amendment to Credit Agreement entered into as of March 18, 2016 with Bank of America, N.A., as Administrative Agent, Lender,
L/C Issuer and Swing Line Lender, Capital One, N.A., as Syndication Agent and a Lender, Bank Hapoalim B.M., BMO Harris Bank N.A.
BankUnited, N.A., and Barclays Bank PLC, as additional Lenders, and with the lenders from time to time parties thereto (incorporated by
reference from the Company’s Current Report on Form 8-K filed with the SEC on March 23, 2016).
Amended and Restated Credit Agreement, made as of June 21, 2010, by and between FCStone, LLC, as borrower, FCStone Group, Inc., as
a guarantor, International Assets Holding Corporation, as a guarantor, Bank of Montreal, as administrative agent, BMO Capital Markets, as
Sole Lead Arranger, and the lenders party thereto (incorporated by reference from the Company’s Current Report on Form 8-K filed with the
SEC on June 24, 2010).
Loan Authorization Agreement entered into as of May 5, 2015, by and between FCStone, LLC, as Borrower, and BMO Harris Bank N.A., as
Bank (incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on May 8, 2015).
Reaffirmation and Assumption entered into as of June 30, 2015 with BMO Harris Bank N.A. (incorporated by reference from the Company’s
Current Report on Form 8-K filed with the SEC on July 7, 2015).
10.19
10.18
10.20 Ninth Amendment to Amended and Restated Credit Agreement entered into as of March 16, 2016 with Bank of Montreal, as Administrative
10.21
10.22
10.23
10.24
10.25
Agent, and BMO Harris Financing, Inc., as a lender party thereto. *
Amended and Restated Credit Agreement, entered into as of March 15, 2016, by and among FCStone Merchant Services, LLC, as Borrower,
INTL FCStone Inc., as Guarantor, Bank of Montreal, as Administrative Agent and a Lender, BMO Capital Markets, as Sole Lead Arranger
and Sole Book Runner, and the lenders party thereto). *
First Amendment to Amended and Restated Credit Agreement, entered into as of April 29, 2016, by and among FCStone Merchant Services,
LLC, as Borrower, INTL FCStone Inc., as Guarantor, Bank of Montreal, as Administrative Agent and a Lender, BMO Capital Markets, as
Sole Lead Arranger and Sole Book Runner, and the lenders party thereto). *
Second Amendment to Amended and Restated Credit Agreement, entered into as of November 14, 2016, by and among FCStone Merchant
Services, LLC, as Borrower, INTL FCStone Inc., as Guarantor, Bank of Montreal, as Administrative Agent and a Lender, BMO Capital
Markets, as Sole Lead Arranger and Sole Book Runner, and the lenders party thereto). *
Credit Agreement, made as of November 15, 2013, by and between INTL FCStone Ltd, as Borrower, INTL FCStone Inc., as Guarantor,
Bank of America, N.A., as Administrative Agent and a Lender, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Sole Lead Arranger
and Sole Book Manager, and with the lenders party thereto (incorporated by reference from the Company’s Current Report on Form 8-K filed
with the SEC on November 20, 2013).
Second Amendment to Credit Agreement, made as of November 5, 2015, by and between INTL FCStone Ltd, as Borrower, INTL FCStone
Inc., as Guarantor, Bank of America, N.A., as Administrative Agent and a Lender, and with the lenders party thereto (incorporated by
reference from the Company’s Current Report on Form 8-K filed with the SEC on November 10, 2015).
10.26 Third Amendment to Credit Agreement, made as of April 14, 2016, by and between INTL FCStone Ltd, as Borrower, INTL FCStone Inc.,
10.27
14
21
23.1
31.1
31.2
32.1
32.2
as Guarantor, Bank of America, N.A., as Administrative Agent and a Lender, and with the lenders party thereto. *
Fourth Amendment to Credit Agreement, made as of October 27, 2016, by and between INTL FCStone Ltd, as Borrower, INTL FCStone
Inc., as Guarantor, Bank of America, N.A., as Administrative Agent and a Lender, and with the lenders party thereto. *
International Assets Holding Corporation Code of Ethics (incorporated by reference from the Company’s Form 10-KSB filed with the SEC
on December 29, 2003).
List of the Company’s subsidiaries. *
Consent of KPMG LLP *
Certification of Chief Executive Officer, pursuant to Rule 13a—14(a). *
Certification of Chief Financial Officer, pursuant to Rule 13a—14(a). *
Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. *
Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. *
*
Filed as part of this report.
Schedules and Exhibits Excluded
All schedules and exhibits not included are not applicable, not required or would contain information which is included in the Consolidated
Financial Statements, Summary of Significant Accounting Policies, or the Notes to the Consolidated Financial Statements.
104
Form 10K
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PART IV
ITEM 15 Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
INTL FCStone Inc.
Dated:
/s/ SEAN M. O’CONNOR
Sean M. O’Connor
Chief Executive Officer
December 14, 2016
Signature
/s/ JOHN RADZIWILL
John Radziwill
/s/ SEAN M. O’CONNOR
Sean M. O’Connor
/s/ SCOTT J. BRANCH
Scott J. Branch
/s/ PAUL G. ANDERSON
Paul G. Anderson
/s/ EDWARD J. GRZYBOWSKI
Edward J. Grzybowski
/s/ JOHN M. FOWLER
John M. Fowler
/s/ BRUCE KREHBIEL
Bruce Krehbiel
/s/ DARYL HENZE
Daryl Henze
/s/ ERIC PARTHEMORE
Eric Parthemore
/s/ WILLIAM J. DUNAWAY
William J. Dunaway
Title
Date
Director and Chairman of the Board
December 14, 2016
Director, President and Chief Executive Officer
(Principal Executive Officer)
Director
Director
Director
Director
Director
Director
Director
Chief Financial Officer
(Principal Financial and Accounting Officer)
December 14, 2016
December 14, 2016
December 14, 2016
December 14, 2016
December 14, 2016
December 14, 2016
December 14, 2016
December 14, 2016
December 14, 2016
Form 10K 105
EXHIBIT 21 Subsidiaries of the Registrant
Name
FCC Futures, Inc.
FCStone Canada ULC
FCStone do Brazil Ltda.
FCStone Group, Inc.
FCStone Merchant Services, LLC
FCStone Paraguay S.R.L.
Gainvest Asset Management Ltd.
INTL Gainvest S.A.
Gainvest Uruguay Asset Management S.A.
INTL Asia Pte. Ltd.
INTL FCStone Nigeria Ltd
INTL Capital S.A.
INTL CIBSA S.A.
INTL FCStone Commodities DMCC
INTL Commodities, Inc.
INTL FCStone Capital Assessoria Financeira Ltda.
INTL FCStone DTVM Ltda.
INTL FCStone Financial Inc.
INTL FCStone (HK) Ltd.
INTL FCStone Ltd
INTL FCStone (Netherlands) B.V.
INTL FCStone Pte. Ltd.
INTL FCStone Pty Ltd
INTL FCStone S.A.
INTL FCStone (Shanghai) Trading Co., Ltd
INTL FCStone Markets, LLC
INTL Korea Limited
INTL Participacoes Ltda.
INTL FCStone Assets, Inc.
INTL Netherlands B.V.
IFCS de Mexico Asesores Independientes
Sterne Agee Clearing, Inc.
Sterne, Agee & Leach, Inc.
Sterne Agee Financial Services, Inc.
Sterne Agee Asset Management, Inc.
Sterne Agee Investment Advisor Services, Inc.
Westown Commodities, LLC
Place of Incorporation
Iowa, US
Nova Scotia, Canada
Brazil
Delaware
Delaware, US
Paraguay
British Virgin Islands
Argentina
Uruguay
Singapore
Nigeria
Argentina
Argentina
Dubai, United Arab Emirates
Delaware, US
Brazil
Brazil
Florida, US
Hong Kong
United Kingdom
The Netherlands
Singapore
Australia
Argentina
China
Iowa, US
Republic of Korea
Brazil
Florida, US
The Netherlands
Mexico
Delaware, US
Delaware, US
Delaware, US
Delaware, US
Delaware, US
Iowa, US
E-1
Form 10K
EXHIBIT 23.1 Consent of Independent Registered Public Accounting Firm
The Board of Directors
INTL FCStone Inc.:
We consent to the incorporation by reference in the registration
statements (Nos. 333-117544, 333-137992, 333-144719, 333-152461,
333-186704, and 333-209912 on Form S-3 and Nos. 333-108332,
333-142262, 333-196413, 333-160832, 333-197773, and 333-10727
on Form S-8) of INTL FCStone Inc. (the Company) of our reports
dated December 14, 2016, with respect to the consolidated balance
sheets of the Company as of September 30, 2016 and 2015, and the
related consolidated statements of income, comprehensive income, cash
flows, and stockholders’ equity for each of the years in the three-year
period ended September 30, 2016, and the related financial statement
schedule, and the effectiveness of internal control over financial reporting
as of September 30, 2016, which reports appear in the September 30,
2016 annual report on Form 10-K of the Company.
Our report dated December 14, 2016, on the effectiveness of internal
control over financial reporting as of September 30, 2016, contains
an explanatory paragraph that states management’s assessment of the
effectiveness of the Company’s internal control over financial reporting
as of September 30, 2016 excluded Sterne Agee & Leach, Inc., Sterne
Agee Clearing, Inc. and Sterne Agee Financial Services, Inc., acquired
with effect from July 1, 2016, and Sterne Agee Asset Management,
Inc. and Sterne Agee Investment Advisor Services, Inc., acquired with
effect from August 1, 2016. Our audit of internal control over financial
reporting of the Company also excluded an evaluation of the internal
control over financial reporting of the aforementioned legal entities.
/s/ KPMG LLP
Kansas City, Missouri
December 14, 2016
Form 10K E-2
EXHIBIT 31.1 Section 302 Certification
I, Sean M. O’Connor, certify that:
1.
2.
3.
I have reviewed this Annual Report on Form 10-K of INTL
FCStone Inc.;
Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d - 15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant’s disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal
control over financial reporting that occurred during the
registrant’s most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee
of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: December 14, 2016
/s/ SEAN M. O’CONNOR
Sean M. O’Connor
Chief Executive Officer
E-3
Form 10K
EXHIBIT 31.2
Section 302 Certification
I, William J. Dunaway certify that:
1.
2.
3.
I have reviewed this Annual Report on Form 10-K of INTL
FCStone Inc.;
Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d - 15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant’s disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal
control over financial reporting that occurred during the
registrant’s most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee
of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: December 14, 2016
/s/ WILLIAM J. DUNAWAY
William J. Dunaway
Chief Financial Officer
Form 10K E-4
EXHIBIT 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of INTL FCStone Inc. (the
Company) on Form 10-K for the period ended September 30, 2016
as filed with the Securities and Exchange Commission on the date
hereof (the Report), I, Sean M. O’Connor, Chief Executive Officer
of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the
best of my knowledge:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: December 14, 2016
/s/ SEAN M. O’CONNOR
Sean M. O’Connor
Chief Executive Officer
A signed original of this written statement required by Section 906 or other document authenticating, acknowledging or otherwise adopting the
signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to INTL
FCStone Inc. and will be retained by INTL FCStone Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
E-5
Form 10K
EXHIBIT 32.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of INTL FCStone Inc. (the
Company) on Form 10-K for the period ended September 30, 2016
as filed with the Securities and Exchange Commission on the date
hereof (the Report), I, William J. Dunaway, Chief Financial Officer
of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the
best of my knowledge:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: December 14, 2016
/s/ WILLIAM J. DUNAWAY
William J. Dunaway
Chief Financial Officer
A signed original of this written statement required by Section 906 or other document authenticating, acknowledging or otherwise adopting
the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided
to INTL FCStone Inc. and will be retained by INTL FCStone Inc. and furnished to the Securities and Exchange Commission or its staff
upon request.
Form 10K E-6
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