10-K 1 intl0930201410-k.htm FORM 10-K INTL 09.30.2014 10-K
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
 x    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended September 30, 2014
 o    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
 
59-2921318
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
708 Third Avenue, Suite 1500
New York, NY 10017
(Address of principal executive offices) (Zip Code)
(212) 485-3500
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.01 par value
 
NASDAQ Global Market
8.5% Senior Notes due 2020
 
NASDAQ Global Market
Securities registered under Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  o    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o    No  x
Indicate by check mark 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.    Yes  x    No  o
Indicate by check mark 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).    Yes  x No o
Indicate by check mark 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. x
Indicate by check mark 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
o
  
Accelerated filer
x
 
 
 
 
 
Non-accelerated filer
o
  
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o No  x
As of March 31, 2014, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $236.9 million.
As of December 8, 2014, there were 19,037,019 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 26, 2015 are incorporated by reference into Part III of this Annual Report on Form 10-K.


INTL FCStone Inc.
Annual Report on Form 10-K for the Fiscal Year Ended September 30, 2014
Table Of Contents
 
 
 
Page
PART I
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
PART II
 
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
 
 
 
 
PART III
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
 
 
 
 
PART IV
 
 
 
 
Item 15.
 
 
 
 



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.
PART I
Item 1. Business
Overview of Business and Strategy
We are a diversified, global financial services organization providing financial products and advisory and execution services that help our clients 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 clients’ real needs and provide bottom-line benefits to their businesses. We create added value for our clients 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 client-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; 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 1,100 employees. We currently maintain more than 20,000 accounts representing approximately 11,000 clients, located in more than 100 countries.
Our clients 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, brokers, institutional investors and major investment banks. We believe our clients 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; 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, as well as other kinds of customers that have risk management needs that could be effectively met by our services. 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.

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Available Information
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 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.
Capabilities
Clearing and Execution
We provide execution services on a wide variety of technology platforms in a number of markets. We provide clearing and execution of listed futures and options on futures contracts on all major commodity exchanges worldwide, and are a member of all major United States (“U.S.”) and European commodity exchanges. We provide global payments and treasury services in more than 150 countries to a broad array of commercial customers, including financial institutions, multi-national corporations, and governmental and charitable organizations.
Advisory Services
We provide value-added advisory services in a variety of financial markets by working with commercial clients to systematically identify and quantify exposures to commodity price risks. We then develop strategic plans to effectively manage these risks with a view to protecting margins and mitigating exposures through our proprietary Integrated Risk Management Program (“IRMP®”).
We provide commercial customers with a full range of investment banking services from optimizing the customer’s capital structure through the issuance of loans, debt or equity securities, and advisory services including mergers, acquisitions and restructurings.
Through our asset management activities, we leverage our specialist expertise in niche markets to provide institutional investors with tailored investment products.
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. We offer customers efficient off-take or supply services, as well as logistics management. 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.
OTC / Market-Making
We offer customized and complex solutions in the OTC markets designed to help customers mitigate their specific market risks. We offer these solutions on a global basis across many markets, including virtually all traded commodities, foreign currencies and interest rates. We integrate this process from product design through execution of the underlying components of the structured risk product to transaction reporting and valuation.
We also provide market-making and execution in a variety of financial products including commodity options, unlisted American Depository Receipts (“ADRs”), foreign common shares, and foreign currencies.
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 divide our activities into five functional areas: Commercial Hedging, Global Payments, Securities, Physical Commodities and Clearing and Execution Services.
Commercial Hedging
We serve our commercial clients 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 clients. 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 client

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objectives. Our clients 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 as well as a wide range of structured product solutions to our commercial customers who are seeking cost-effective hedging strategies. Generally, our clients direct their own trading activity, and our risk management consultants do not have discretionary authority to transact trades on behalf of our clients.
Within this segment, our risk management consultants organize their marketing efforts into customer industry product lines, and currently serve customers in the following areas:
•
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.
◦
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.
•
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.
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 150 countries, which we believe is more than any other payments solution provider, and provide competitive and transparent pricing. Through our technology platform, full-service electronic execution capability and 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 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 clients 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. 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.

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Securities
Through INTL FCStone Securities Inc., we provide value-added solutions that facilitate cross-border trading. We believe our clients 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 clients include U.S.-based regional and national broker-dealers and institutions investing or executing client 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 and foreign ordinary shares. We make markets in approximately 800 ADRs and foreign ordinary shares traded in the OTC market and will, on request, make prices in more than 8,000 other ADRs and foreign common shares. In addition, we are a broker-dealer in Argentina where we are active in providing institutional executions in the local capital markets.
We provide a full range of corporate finance advisory services to our middle market clients, including capital market solutions and a wide array of advisory services across a broad spectrum of industries. Our advisory services span mergers and acquisitions, liability management, restructuring opinions and valuations. We also originate, structure and place a wide array of debt instruments in the international and domestic capital markets. These instruments include complex asset-backed securities (primarily in Argentina), unsecured bond and loan issues, negotiable notes and other trade-related debt instruments used in cross-border trade finance. 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 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 agricultural and 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. These transactions are accounted for as product financing arrangements, and accordingly no commodity inventory, purchases or sales are recorded. Additionally, we engage as a principal in physical purchase and sale transactions related to inputs to the renewable fuels and feed ingredient industries.
During the second quarter of fiscal 2013, as a result of a change in management strategy in our base metals product line, we elected to pursue an exit of our physical base metals business through the sale and orderly liquidation of then-current open positions. We completed the exit of the physical base metals business during the second quarter of fiscal 2014. We have reclassified the physical base metals activities in the financial statements for all periods presented as discontinued operations.
We record our physical commodities revenues on a gross basis. Operating revenues and losses from our commodities derivatives activities are included in ‘trading gains, net’ in the consolidated income statements. Inventory for the commodities business is valued at the lower of cost or fair value under the provisions of the Inventory Topic of the ASC. 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. In such situations, unrealized gains in inventory 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 physical commodities trading may be subject to significant volatility, and these requirements may have a temporary impact on our reported earnings.
Following the discontinuance of our physical base metals business, we believe the effects of these requirements on our results have lessened and whereas we previously managed this business segment as well as assessed our overall performance on an adjusted marked-to-market basis, we now manage both on a U.S. GAAP basis.
Clearing and Execution Services (“CES”)
We seek to provide competitive and efficient clearing and execution of exchange-traded futures and options for the institutional and professional trader market segments. Through our platform, client orders are accepted and directed to the appropriate exchange for execution. We then facilitate the clearing of clients’ transactions. Clearing involves the matching of clients’ trades with the exchange, the collection and management of client margin deposits to support the transactions, and the accounting and reporting of the transactions to clients. We seek to leverage our capabilities and capacity by offering facilities management or outsourcing solutions to other FCMs.
In addition, we provide prime brokerage foreign exchange services to financial institutions and professional traders. We provide our clients with the full range of OTC products, including 24-hour a day execution of spot, forwards and options as well as

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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.
FCStone, LLC is a registered FCM and a clearing member of all major U.S. commodity futures exchanges including the Chicago Mercantile Exchange and its divisions: the Chicago Board of Trade, the New York Mercantile Exchange and the COMEX Division; InterContinental Exchange, Inc. (“ICE”) Futures US, and the Minneapolis Grain Exchange (“MGEX”). FCStone, LLC is also a member of ICE Europe Ltd. As of September 30, 2014, FCStone, LLC was the third largest independent FCM in the United States, as measured by required customer segregated assets, not affiliated with a major financial institution or commodity intermediary, end-user or producer. As of September 30, 2014, FCStone, LLC had $1.8 billion in required customer segregated assets.
Acquisitions and Disposals during Fiscal Year 2014
Forward Insight Commodities, LLC
On April 2, 2014, we acquired the outstanding member interests of Forward Insight Commodities, LLC (“FIC”). FIC is a brokerage firm focused on the structuring and execution of transactions in the energy derivative space. The consideration to be paid for the acquisition consists of contingent payments based on the pre-tax earnings of the business for the twelve month period following the acquisition and is estimated to be $0.5 million as of September 30, 2014. The purchase price for the acquisition is not material to the consolidated financial statements. Our consolidated financial statements include the operating results of the acquired business from the date of acquisition.
Completed Exit of Physical Base Metals Business
During the second quarter of fiscal 2013, as a result of a change in management strategy in our base metals product line, we elected to pursue an exit of our physical base metals business through the sale and orderly liquidation of then-current open positions. During the following months, we completed a sale of a portion of the physical base metals open contract positions, and the liquidation of the majority of the remaining physical base metals open contract positions and inventory. In July 2013, we elected to allow the $100.0 million credit facility which supported this business to expire without renewal. The exit of the physical base metals business was substantially completed by the end of fiscal 2013, including the termination of the physical base metals trading team and certain operational support personnel. The remaining open contract positions were fulfilled during the second quarter of 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 London Metals Exchange.
Acquisitions and Disposals during Fiscal Year 2013
Tradewire Acquisition
In December 2012, we acquired certain institutional accounts from Tradewire Securities, LLC (“Tradewire Securities”), a Miami-based securities broker-dealer servicing customers throughout Latin America and a wholly owned subsidiary of Tradewire Group Ltd. We transferred these accounts to our broker-dealer subsidiary, INTL FCStone Securities. As part of the transaction, we hired more than 20 professional staff from Tradewire Securities’ securities broker-dealer business based in Miami, Florida. These professionals provide global brokerage services to a wide range of customers, including hedge funds, pension funds, broker-dealers and banks located in Latin America, the Caribbean, North America and Europe. This acquisition was not significant. Our consolidated financial statements include the operating results of the acquired accounts from the date of acquisition.
Gletir Agente De Valores S.A. Disposal
In February 2013, we sold all of our ownership interest in Gletir Agente De Valores S.A., to Gletir Financial Corp, an non-affiliated third party. Previously the ownership interest was held by our subsidiaries INTL Netherlands B.V. and Gainvest Asset Management Ltda.
Acquisitions during Fiscal Year 2012
During fiscal year 2012, we acquired three businesses (Coffee Network, TRX Futures Limited and Aporte DTVM) and certain assets of the Metals Division of MF Global UK Limited. These acquisitions were not considered significant on an individual or aggregate basis. Our consolidated financial statements include the operating results of the acquired businesses from the dates of acquisition.
The Metals Division of MF Global UK Limited
In November 2011, we arranged with the trustee of MF Global’s UK operations to hire more than 50 professionals from MF Global’s metals trading business based in London. This business serves institutional investors and financial services firms in the

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Americas, Europe and the Asia-Pacific region. As part of this transaction, INTL FCStone Ltd. upgraded its LME Category Two membership to a LME Category One ring dealing membership.
Coffee Network
In November 2011, we acquired 100% of the ownership interests in Coffee Network LLC (“Coffee Network”), an online news and analysis portal for the global coffee industry. Coffee Network provides up-to-the-minute news and in-depth analysis to subscribers around the globe from a network of correspondents and commodity analysts located in key coffee producing and consuming regions. These services provide a unique information solution to subscribers and a competitive advantage in today’s information-driven marketplace which we intend to expand into other commodity markets. Following the acquisition, we reorganized the activities of Coffee Network as a division of FCStone, LLC.
TRX Futures Limited
In April 2012, our wholly owned subsidiary in the UK, INTL Holding (UK) Limited, acquired 100% of the outstanding shares of TRX Futures Limited (“TRX”) from Neumann Grupe GmbH. TRX was a London-based niche clearing firm for commercial coffee and cocoa customers, as well as energy and financial products. During fiscal 2013, we reorganized the activities of TRX Futures Limited within INTL FCStone Ltd.
Aporte DTVM
In February 2012, our subsidiaries, INTL Participacoes LTDA and FCStone do Brasil, acquired 100% of the shares of Aporte DTVM. Following the acquisition, Aporte DTVM was renamed INTL FCStone DTVM Ltda. INTL FCStone DTVM Ltda. is based in Brazil and is a broker-dealer regulated by the Central Bank of Brazil.
Subsequent Acquisition
On November 12, 2014, we reached an agreement to acquire G.X. Clarke & Co, an SEC registered institutional dealer in fixed income securities. The closing of the transaction is subject to conditions precedent, including regulatory filings, and is expected to occur in the second quarter of fiscal 2015. G.X. Clarke & Co. is based in New Jersey, transacts in U.S. treasuries, federal agency and mortgage-backed securities, and is a FINRA member with an institutional client base consisting of asset managers, commercial bank trust and investment departments, broker-dealers, and insurance companies.
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. The financial crisis has produced opportunities for us to expand our activities and may produce further opportunities. 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 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 brokerage firms, national brokerage firms, regional brokerage firms (both cooperatives and non-cooperatives) 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.
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.

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INTL FCStone Securities’ securities transactions are cleared through Broadcourt, a division of Merrill Lynch, Pierce, Fenner & Smith, Inc and Pershing LLC, a subsidiary of The Bank of New York Mellon Corporation. INTL FCStone Securities does not hold customer funds or directly clear or settle securities transactions.
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, internal risk controls, and reporting to government and regulatory entities, corporate managers, risk managers and customers. A third-party service bureau located in Chicago, Illinois maintains our futures and options back office system. It has a disaster recovery site in New York, New York.
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, 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 and Financial Industry Regulatory Authority (“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 activities of our broker-dealer subsidiaries in the U.S., INTL FCStone Securities and FCC Investments, Inc., are primarily regulated by FINRA and the SEC.
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 daily regulatory capital, as well as conduct of business, governance, and other requirements. The conduct of business rules include those that govern the treatment of client money and other assets which, under certain circumstances for certain classes of clients must be segregated from the firm’s own assets.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (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 wholly owned subsidiary, INTL FCStone Markets, LLC, is registered as a swap dealer. Most of the rules affecting this business are now final, and external business conduct rules came into effect on May 1, 2013. Nevertheless, 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. We will continue to monitor all applicable developments in the implementation of the Dodd-Frank Act. The legislation and implementing regulations affect not only us, but also many of our customers and counterparties. 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.
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.

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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
FCStone, LLC is subject to minimum capital requirements under Section 4(f)(b) of the Commodity Exchange Act and Part 1.17 of the rules and regulations of the CFTC. These rules specify the minimum amount of capital that must be available to support our clients’ open trading positions, including the amount of assets that FCStone, LLC 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. 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.
INTL FCStone Ltd., a Financial Services Firm regulated by the FCA is subject to a daily net capital requirement.
INTL FCStone Securities is subject to the SEC Uniform Net Capital Rule 15c3-1 under the Securities Exchange Act of 1934. These requirements ensure the financial integrity and liquidity of broker-dealers. They establish minimum levels of capital and liquid assets. The net capital requirements restrict the payments of dividends, redemption of stock, the prepayment of subordinated indebtedness and the making of any unsecured advances or loans to any stockholder, employee or affiliate, if such payment would reduce the broker-dealer’s net capital below required levels. The net capital requirements restrict the ability of INTL FCStone Securities to make distributions to us. They also restrict the ability of INTL FCStone Securities to expand its business beyond a certain point without additional capital.
FCC Investments, Inc., a broker-dealer subsidiary, is subject to the net capital requirements of the SEC relating to liquidity and net capital levels.
The Australian Securities and Investment Commission regulates FCStone Australia Pty, Ltd (“FCStone Australia”). It is subject to a net tangible asset capital requirement. New Zealand Clearing Limited, also regulates FCStone Australia. It is subject to a capital adequacy 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 Gainvest S.A. Sociedad Gerente de FCI 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, 2014. Additional information on these net capital and minimum net capital requirements can be found in Note 12 to the Consolidated Financial Statements.
Segregated Customer Assets
FCStone, LLC maintains customer segregated deposits from its customers relating to their trading of futures and options on futures on U.S. commodities exchanges held with FCStone, LLC, 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. FCStone, LLC 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, 2014, FCStone, LLC maintained $36.5 million in segregated assets in excess of its segregated liabilities.
In addition, FCStone, LLC 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

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including U.S. Treasury 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. FCStone, LLC predominately invests its customer segregated assets in U.S. Treasury securities and money market mutual funds.
INTL FCStone Ltd. is subject to certain business rules, including those that govern the treatment of client money and other assets which under certain circumstances for certain classes of client must be segregated from the firm’s own assets. INTL FCStone Ltd. currently maintains segregated funds in excess of all applicable requirements.
Secured Customer Assets
FCStone, LLC 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 FCStone, LLC, 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 FCStone LLC’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, 2014, FCStone, LLC maintained $19.9 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 Mexico, 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.
INTL FCStone Securities and INTL Commodities, Inc. each have branch offices in the United Kingdom. As a result, their activities are also subject to regulation by the FCA.
In Argentina, the activities of Gainvest S.A. Sociedad Gerente de FCI 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.
FCStone Australia Pty. Ltd. is subject to regulation by the Australian Securities and Investments Commission and New Zealand Clearing Ltd.
INTL FCStone (Hong Kong) Limited holds a type 2 derivatives license and is subject to regulation by the Securities & Futures Commission of Hong Kong.
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, 2014, we employed 1,141 people globally: 754 in the U.S., 1 in Canada, 64 in Argentina, 84 in Brazil, 10 in Paraguay, 160 in the United Kingdom, 13 in Dubai, 25 in Singapore, 9 in China, 17 in Australia, and 4 in Hong Kong. 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.

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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, 2014 we recorded net income of $19.3 million, compared to net income of $19.3 million in fiscal 2013, and net income of $12.8 million in fiscal 2012.
Our revenues and operating results may fluctuate significantly in the future because of the following factors:
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Market conditions, such as price levels and volatility in the commodities, securities and foreign exchange markets in which we operate;
•
Changes in the volume of our market-making and trading activities;
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Changes in the value of our financial instruments, currency and commodities positions and our ability to manage related risks;
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The level and volatility of interest rates;
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The availability and cost of funding and capital;
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Our ability to manage personnel, overhead and other expenses;
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Changes in execution and clearing fees;
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The addition or loss of sales or trading professionals;
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Changes in legal and regulatory requirements; and
•
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.
The manner in which we account for our commodities inventory and forward commitments may increase the volatility of our reported earnings. Our net income is subject to volatility due to the manner in which we report our commodities inventory. This inventory is stated at the lower of cost or fair value. We generally mitigate the price risk associated with our commodities inventory through the use of derivatives. This price risk mitigation does not generally qualify for hedge accounting under U.S. GAAP. In such situations, any unrealized gains in inventory are not recognized under U.S. GAAP, but unrealized gains and losses in related derivative positions are recognized under U.S. GAAP. Additionally, in certain circumstances, U.S. GAAP does not permit us to reflect changes in estimated values of forward commitments to purchase and sell commodities. The forward commitments to purchase and sell commodities, which we do not reflect in our consolidated balance sheets, do not qualify as a derivative under the Derivatives and Hedging Topic of the ASC. 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, 2014, our total consolidated indebtedness was $68.0 million, and we expect to increase our indebtedness in the future as we continue to expand our business. Our indebtedness could have important consequences, including:
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increasing our vulnerability to general adverse economic and industry conditions;
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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;
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limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions and general corporate requirements;
•
limiting our flexibility in planning for, or reacting to, changes in our business and the securities industry; and
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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 $270.0 million, consisting of:
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a $140.0 million facility available to INTL FCStone Inc., for general working capital requirements, committed until September 20, 2016.
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a $75.0 million facility available to our wholly owned subsidiary, FCStone, LLC, for short-term funding of margin to commodity exchanges, committed until April 9, 2015.
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a $30.0 million committed facility available to our wholly owned subsidiary, FCStone Merchant Services, LLC, for financing traditional commodity financing arrangements and commodity repurchase agreements, committed until May 1, 2015.

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•
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 November 5, 2015.
During fiscal 2015, $105 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, 2013, we have acquired Forward Insight Commodities, LLC. Additionally, subsequent to September 30, 2014, we have reached an agreement to acquire G.X. Clarke & Co. We will need to meet challenges to realize the expected benefits and synergies of these acquisitions, including:
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integrating the management teams, strategies, cultures, technologies and operations of the acquired companies;
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retaining and assimilating the key personnel of acquired companies;
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retaining existing clients of the acquired companies;
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creating uniform standards, controls, procedures, policies and information systems; and
•
achieving revenue growth because of risks involving (1) the ability to retain clients, (2) the ability to sell the services and products of the acquired companies to the existing clients of our other business segments, and (3) the ability to sell the services and products of our other business segments to the existing clients of the acquired companies.
The accomplishment of these objectives will involve considerable risk, including:
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the potential disruption of each company’s ongoing business and distraction of their respective management teams;
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unanticipated expenses related to technology integration; and
•
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:
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the price volatility of specific financial instruments, currencies and commodities,
•
our ability to attract order flow;
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the skill of our personnel;
•
the availability of capital; and
•
general market conditions.
To attract market-trading, market-making and trading business, we must be competitive in:
•
providing enhanced liquidity to our customers;
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the efficiency of our order execution;
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the sophistication of our trading technology; and
•
the quality of our customer service.
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:
•
match the quotes other market makers display; and

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•
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.
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 $258.5 million in fiscal 2010 to $490.9 million in fiscal 2014. We expect the acquisition of additional businesses since September 30, 2012 to increase operating revenues in fiscal 2015.
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 clients' 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

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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, we conduct the majority of our securities transactions as principal with broker-dealer counterparties. We clear our securities transactions through unaffiliated clearing brokers. Substantially all of our 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.
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.
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, clients 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 trading 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.
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

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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:
•
illiquid markets;
•
fair value losses arising from positions held by us;
•
the failure of buyers and sellers of securities and commodities to fulfill their settlement obligations,
•
redemptions from funds managed in our asset management business segment and consequent reductions in management fees;
•
reductions in accrued performance fees in our asset management business segment; and
•
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 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:
•
supply and demand of commodities;
•
weather conditions affecting certain commodities;
•
national and international economic and political conditions;
•
perceived stability of commodities and financial markets;
•
the level and volatility of interest rates and inflation; and
•
financial strength of market participants.
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:
•
economic, political and market conditions;
•
the availability of short-term and long-term funding and capital;
•
the level and volatility of interest rates;
•
legislative and regulatory changes; and
•
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.

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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 clients 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 clients 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.
Computer systems failures, capacity constraints and breaches of security could increase our operating costs and cause us to lose clients. 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. 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:
•
unanticipated disruptions in service to our clients;
•
slower response times;
•
delays in our clients’ trade execution;
•
failed settlement of trades;
•
decreased client satisfaction with our services;
•
incomplete, untimely or inaccurate accounting, recording, reporting or processing of trades;
•
financial losses;
•
litigation or other client claims; and
•
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 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, the NFA, the CME Group and other self-regulatory organizations, commonly referred to as SROs, state securities commissions, and foreign securities 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:
•
trade practices;
•
the way we communicate with, and disclose risks to clients;
•
financial and reporting requirements and practices;
•
client identification and anti-money laundering requirements;
•
capital structure;
•
record retention; and
•
the conduct of our directors, officers and employees.

17

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. In this regard, in May 2013, we settled claims made by the CFTC, that our subsidiary, FCStone LLC, failed to diligently supervise its officers’ and employees’ activities relating to risks associated with its customers’ accounts. The claims of the CFTC arose out of transactions by former FCStone customers that took place between January 1, 2008 and March 1, 2009. In the settlement, FCStone agreed to cease and desist from violating certain regulations of the CFTC, to pay $1.5 million to the CFTC, and appoint an independent third party reviewer to review and evaluate FCStone’s existing policies and procedures relating to certain risks, to ensure that we had made sufficient modifications to our risk controls since 2008. We paid the fine of $1.5 million in fiscal 2013. An independent third party reviewer was appointed, and the mandated review has been completed.
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. On November 14, 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 or FINRA could have a material adverse effect on our business, financial condition and operating results. Changes in the interpretation or enforcement of existing laws and rules by these governmental authorities, SROs 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 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.

18

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. We registered our subsidiary, INTL FCStone Markets, LLC, as a swap dealer on December 31, 2012. Most of the rules affecting this business have now been finalized, and external business conduct rules came into effect on May 1, 2013. Nevertheless, 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.
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 various other regulatory agencies require our broker-dealer subsidiaries, INTL FCStone Securities Inc. and FCC Investments, Inc. to maintain specific levels of net capital. Failure to maintain the required net capital may subject these subsidiaries to suspension or revocation of registration by the SEC and suspension or expulsion by FINRA and other regulatory bodies.
The CFTC and various other self-regulatory organizations require our futures commission merchant subsidiary, FCStone, LLC, to maintain specific levels of net capital. Failure to maintain the required net capital 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.
The FCA requires our UK 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 securities broker-dealer subsidiaries, or our FCM subsidiary or our UK 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, 2014, we had $1.8 billion in customer segregated assets, the majority of which are generally invested in short-term treasury securities and money market funds. 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

19

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 both the Company and FCStone. 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, 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.
A number of our competitors have significantly greater financial, technical, marketing and other resources than we have. Some of them may:
•
offer alternative forms of financial intermediation as a result of superior technology and greater availability of information;
•
offer a wider range of services and products than we offer;
•
be larger and better capitalized;
•
have greater name recognition; and
•
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.
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

20

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:
•
actual or anticipated variations in our results of operations;
•
announcements of new products by us or our competitors;
•
technological innovations by us or our competitors;
•
changes in earnings estimates or buy/sell recommendations by financial analysts;
•
the operating and stock price performance of other companies;
•
general market conditions or conditions specific in specific markets;
•
conditions or trends affecting our industry or the economy generally;
•
announcements relating to strategic relationships or acquisitions; and
•
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’s 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:
•
the inability to manage and coordinate the various regulatory requirements of multiple jurisdictions that are constantly evolving and subject to unexpected change;
•
tariffs and other trade barriers;
•
difficulties in recruiting and retaining personnel, and managing international operations;
•
difficulties of debt collection in foreign jurisdictions;
•
potentially adverse tax consequences; and
•
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 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.

21

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 the Markets in Financial Instruments Directive (“MIFID 2”) and the Markets in Financial Instruments Regulation (“MIFIR”) to assess the impact this legislation is likely to have on our United Kingdom business when implemented in 2016 and 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 organized trading facilities (“OTFs”).
If we are unable to manage any of these risks effectively, our business could be adversely affected.
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 2014 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; New Smyrna Beach, Florida; Indianapolis, Indiana; Spirit Lake, Iowa; Bowling Green, Ohio; Nashville, Tennessee; Golden, Colorado; Lawrence, Kansas; Mobile, Alabama; Winnipeg, Canada; Buenos Aires, Argentina; Campinas, Brazil; Sao Paulo, Brazil; Maringa, Brazil; Porto Alegre, Brazil; Goianai, Brazil; Recife, Brazil; Cuiaba, 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 our significant legal matters.
Securities Litigation and Regulatory Proceedings
In August 2008, shareholders filed a derivative action against FCStone and certain directors of FCStone in the Circuit Court of Platte County, Missouri, alleging breaches of fiduciary duties, waste of corporate assets and unjust enrichment. Shareholders subsequently filed an amended complaint in May 2009 to add claims based upon the losses sustained by FCStone arising out of a customer’s energy trading account. In July 2009, the same plaintiff filed a motion for leave to amend the existing case to add a purported class action claim on behalf of the holders of FCStone common stock.
In July 2009, plaintiffs filed a purported shareholder class action complaint against FCStone and its directors, as well as the Company in the Circuit Court of Clay County, Missouri. The complaint alleged that FCStone and its directors breached their fiduciary duties by failing to maximize stockholder value in connection with the contemplated acquisition of FCStone by the Company. This complaint was subsequently consolidated with the complaint filed in the Circuit Court of Platte County, Missouri. The plaintiffs subsequently filed an amended consolidated complaint which does not assert any claims against the Company. This complaint purported to be filed derivatively on FCStone’s and our behalf against certain of FCStone’s current and former directors and officers and directly against the same individuals. We, FCStone, and the defendants filed motions to dismiss on multiple grounds. The parties to the litigation reached an agreement in principle to settle this matter, the terms of

22

which were finally approved on March 19, 2014, resulting in our incurrence of a legal cost of $265,000 after consideration of expected insurance coverage.
In November 2011, the Commodity Futures Trading Commission (“CFTC”) Division of Enforcement Staff (“Staff”) requested we voluntarily produce specified documents to the Staff in connection with its then informal investigation of the losses that occurred in 2008 and 2009 in the customer energy trading account of FCStone, LLC. In September 2012, the Staff provided us with a Wells notice, indicating the Staff’s intention to recommend that the CFTC bring certain charges against FCStone, LLC. We filed our Wells submission with the Staff in October 2012. On May 29, 2013, we reached a settlement with the CFTC in this matter. The CFTC’s findings, neither admitted nor denied by us, were that FCStone, LLC violated CFTC Regulation 166.3 in that it failed to diligently supervise its officers’ and employees’ activities relating to risks associated with its customers’ accounts, and in particular one account controlled by two of FCStone’s customers who traded in natural gas futures, swaps and option contracts.
The settlement, with appropriate waivers and consents, required FCStone, LLC to cease and desist from violating CFTC Regulation 166.3; pay $1.5 million to the CFTC; and appoint an independent third party reviewer to review and evaluate FCStone, LLC’s existing policies and procedures relating to certain risks, to ensure that we had made sufficient modifications to our risk controls since 2008. We paid the fine of $1.5 million in full in fiscal 2013. An independent third party reviewer was appointed, and the mandated review was successfully completed.
On January 13, 2014, a purported class action was filed in the United States District Court for the Southern District of New York against the Company and certain of our officers and directors. The complaint alleges violations of federal securities laws, and claims that the Company has issued false and misleading information concerning its business and prospects. The action seeks unspecified damages on behalf of persons who purchased the Company's shares between February 17, 2010 and December 16, 2013. During March 2014, three motions for appointment as lead plaintiff were filed; two were subsequently withdrawn, leaving a single unopposed bid for lead plaintiff appointment, an appointment that was approved by the court on April 29, 2014. The lead plaintiff’s amended complaint was filed on June 13, 2014. Our motion to dismiss the complaint was filed on July 28, 2014 and briefing on the motion to dismiss was completed on October 14, 2014. A hearing date has been set for December 10, 2014. We have determined that losses related to this matter are not probable. Because the matter is in the early stages of litigation and no discovery has been commenced, together with the inherent difficulty of predicting the outcome of litigation generally, we do not have sufficient information to determine the amount or range of reasonably possible loss with respect to these matters. We believe the case is without merit and intend to defend ourselves vigorously. Our Directors’ and Officers’ insurance policy is expected to cover any liability and litigation costs in excess of the $0.5 million policy retention amount.
Sentinel Litigation
Our 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 and $15.5 million of FCStone, LLC’s $21.9 million in invested funds were returned to it.
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 United States 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. In April 2009, the trustee filed an amended complaint adding a claim for unjust enrichment. FCStone, LLC answered the complaints and all parties entered into the discovery phase of the litigation. In January 2011, the trustee filed a motion for summary judgment on various counts in the adversary proceedings filed in August 2008 against FCStone, LLC and a number of other FCMs. In January 2012, FCStone, LLC filed a motion for summary judgment in its favor with respect to the transfer of approximately $1.1 million to its customer segregated account on August 17, 2007, pursuant to the “safe harbor” provisions of Section 546(e) of the U.S. Bankruptcy Code. In April 2012, FCStone, LLC filed a motion to dismiss a portion of the trustee’s claims set forth in its amended complaint. 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. By agreement, FCStone, LLC was required to post an appeal cash deposit of $8.0 million with the court, which was deposited on January 18, 2013. The oral arguments in the appeal were heard on December 10, 2013. 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. On June 5, 2014, the Company’s cash deposit with the court was returned. The trustee did not file a writ for certiorari with the U.S. Supreme Court during the time allotted to do so.

23

The Company continues to be involved in litigation against the trustee to recover its share of the cash held in reserve accounts under Sentinel’s Fourth Amended Chapter 11 Plan of Liquidation.
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.

24

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, 2014, there were approximately 326 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 2014 and 2013 were as follows:
 
 
Price Range
 
 
High
 
Low
2014:
 
 
 
 
 
Fourth Quarter
$
20.29

 
$
17.32

 
Third Quarter
$
20.20

 
$
17.76

 
Second Quarter
$
19.24

 
$
17.24

 
First Quarter
$
21.10

 
$
17.95

2013:
 
 
 
 
 
Fourth Quarter
$
20.75

 
$
16.73

 
Third Quarter
$
18.00

 
$
16.11

 
Second Quarter
$
19.97

 
$
17.10

 
First Quarter
$
20.08

 
$
16.45

We have never declared any cash dividends on our common stock, and do not currently have any plans to pay dividends on its common stock. The payment of cash dividends in the future is subject to the discretion of the Board of Directors and will

25

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.
On December 11, 2013, our Board of Directors authorized repurchase of up to 1.5 million shares of our outstanding common stock from time to time in open market purchases and private transactions, 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 and regulatory requirements. Our common stock repurchase program activity for the three months ended September 30, 2014 was as follows:
Period
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Program
 
Maximum Number of Shares Remaining to be Purchased Under the Program
July 1, 2014 to July 31, 2014
—

 
$
—

 
—

 
1,036,200

August 1, 2014 to August 31, 2014
—

 
—

 
—

 
1,036,200

September 1, 2014 to September 30, 2014
—

 
—

 
—

 
1,036,200

Total
—

 
$
—

 
—

 

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.

26

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
 
Year Ended September 30,
(in millions, except share and per share amounts)
2014
 
2013
 
2012
 
2011
 
2010
Operating revenues
$
490.9

 
$
468.2

 
$
448.1

 
$
398.9

 
$
258.5

Transaction-based clearing expenses
108.5

 
110.1

 
105.3

 
75.4

 
66.1

Introducing broker commissions
49.9

 
40.5

 
31.0

 
24.0

 
18.9

Interest expense
10.5

 
7.9

 
5.6

 
6.4

 
7.5

Net operating revenues
322.0

 
309.7

 
306.2

 
293.1

 
166.0

Compensation and other expenses:
 
 
 
 
 
 
 
 
 
Compensation and benefits
201.9

 
198.7

 
197.2

 
170.6

 
100.3

Communication and data services
25.8

 
23.1

 
22.4

 
15.4

 
11.0

Occupancy and equipment rental
12.3

 
12.0

 
11.0

 
8.9

 
6.2

Professional fees
14.9

 
12.4

 
12.6

 
10.3

 
7.9

Travel and business development
9.9

 
10.4

 
10.4

 
8.0

 
5.7

Depreciation and amortization
7.3

 
8.0

 
7.2

 
4.7

 
1.6

Bad debts and impairments
5.5

 
0.8

 
1.5

 
5.8

 
5.3

Other
18.4

 
23.1

 
21.4

 
21.3

 
12.5

Total compensation and other expenses
296.0

 
288.5

 
283.7

 
245.0

 
150.5

Income from continuing operations, before tax
26.0

 
21.2

 
22.5

 
48.1

 
15.5

Income tax expense
6.4

 
2.6

 
5.5

 
18.2

 
5.5

Net income from continuing operations
19.6

 
18.6

 
17.0

 
29.9

 
10.0

(Loss) income from discontinued operations, net of tax
(0.3
)
 
0.7

 
(4.3
)
 
4.8

 
0.9

Income before extraordinary loss
19.3

 
19.3

 
12.7

 
34.7

 
10.9

Extraordinary loss
—

 
—

 
—

 
—

 
(7.0
)
Net income
19.3

 
19.3

 
12.7

 
34.7

 
3.9

Add: Net loss attributable to noncontrolling interests
—

 
—

 
0.1

 
0.1

 
0.3

Net income attributable to INTL FCStone Inc. common stockholders (a)
$
19.3

 
$
19.3

 
$
12.8

 
$
34.8

 
$
4.2

Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
1.01

 
$
1.01

 
$
0.67

 
$
1.93

 
$
0.24

Diluted
$
0.98

 
$
0.97

 
$
0.64

 
$
1.83

 
$
0.23

Number of shares:
 
 
 
 
 
 
 
 
 
Basic
18,528,302

 
18,443,233

 
18,282,939

 
17,618,085

 
17,306,019

Diluted
19,132,302

 
19,068,497

 
19,156,899

 
18,567,454

 
17,883,233

Selected Balance Sheet Information:
 
 
 
 
 
 
 
 
 
Total assets
$
3,039.7

 
$
2,848.0

 
$
2,953.0

 
$
2,632.0

 
$
2,019.8

Lenders under loans
$
22.5

 
$
61.0

 
$
218.2

 
$
77.4

 
$
114.9

Senior unsecured notes
$
45.5

 
$
45.5

 
$
—

 
$
—

 
$
—

Convertible notes
$
—

 
$
—

 
$
—

 
$
16.7

 
$
16.7

Stockholders’ equity (a)
$
345.4

 
$
335.4

 
$
313.2

 
$
292.6

 
$
240.1

 
 
 
 
 
 
 
 
 
 
Other Data:
 
 
 
 
 
 
 
 
 
Return on average stockholders’ equity (from continuing operations) (b)
5.8
%
 
5.7
%
 
5.6
%
 
11.2
%
 
4.2
%
EBITDA (c)
$
43.8

 
$
37.1

 
$
35.3

 
$
59.2

 
$
24.6

Employees, end of period
1,141

 
1,094

 
1,074

 
904

 
729

Compensation and benefits as a percentage of net operating revenues
62.7
%
 
64.2
%
 
64.4
%
 
58.2
%
 
60.4
%
(a)
Net income and stockholders’ equity for fiscal 2010 includes a $7.0 million extraordinary loss resulting from purchase price adjustments and the correction of immaterial errors related to the acquisition of FCStone Group, Inc. on September 30, 2009.

27

(b)
For all periods presented, the return on average stockholders’ equity (from continuing operations) excludes the effects of discontinued operations, extraordinary loss and net loss attributable to noncontrolling interests.
(c)
See “Non-GAAP Financial Measure” below.
As discussed in previous filings and elsewhere in this Form 10-K, U.S. GAAP requires us to carry derivatives at fair value but physical commodities inventory at the lower of cost or fair value. Under U.S. GAAP, gains and losses on commodities inventory and derivatives which we intend to be offsetting are often recognized in different periods. Additionally, in certain circumstances, U.S. GAAP does not permit us to reflect changes in estimated values of forward commitments to purchase and sell commodities. In such circumstances, the forward commitments to purchase and sell commodities, which we do not reflect in the consolidated balance sheets, do not qualify as a derivative under the Derivatives and Hedging Topic of the ASC.
These requirements may have a temporary impact on our reported earnings. Following the discontinuance of our physical base metals business, we believe the effects of these requirements on our results have lessened and whereas we previously managed our Physical Commodities business segment as well as assessed our overall performance on an adjusted marked-to-market basis, we now manage both on a U.S. GAAP basis.
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.
 
Year Ended September 30,
(in millions)
2014
 
2013
 
2012
 
2011
 
2010
Net income from continuing operations
$
19.6

 
$
18.6

 
$
17.0

 
$
29.9

 
$
10.0

Plus: interest expense
10.5

 
7.9

 
5.6

 
6.4

 
7.5

Plus: depreciation and amortization
7.3

 
8.0

 
7.2

 
4.7

 
1.6

Plus: income taxes
6.4

 
2.6

 
5.5

 
18.2

 
5.5

EBITDA
$
43.8

 
$
37.1

 
$
35.3

 
$
59.2

 
$
24.6


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.
Overview
INTL FCStone Inc. is a diversified, global financial services organization providing financial products and advisory and execution services that help our clients access market liquidity, maximize profits and manage risk.
INTL FCStone Inc. is 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 clients’ real needs and provide bottom-line benefits to their businesses. We create added value for our clients 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 client-first approach differentiates us from large banking institutions,

28

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; 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 1,000 employees. We currently maintain more than 20,000 accounts representing approximately 11,000 clients, located in more than 100 countries.
Our clients 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, brokers, institutional investors and major investment banks. We believe our clients 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; 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 clients. Our activities are divided into the following functional areas consisting of Commercial Hedging, Global Payments, Securities, Physical Commodities, and Clearing and Execution Services (“CES”).
Recent Events Affecting the Financial Services Industry
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 registered swap dealer. Most of the rules affecting this business are now final, and external business conduct rules came into effect on May 1, 2013. Nevertheless, 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. We will continue to monitor all applicable developments in the implementation of the Dodd-Frank Act. The legislation and implementing regulations affect not only us, but also many of our customers and counterparties.
We are reviewing the regulatory changes that will be introduced by the Markets in Financial Instruments Directive (“MIFID 2”)
and the Markets in Financial Instruments Regulation (“MIFIR”) to assess the impact this legislation is likely to have on our
United Kingdom business when implemented in 2016 and 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 organized trading facilities (“OTFs”).
On November 14, 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. The majority of these rules came into effect on January 13, 2014, however, certain remaining provisions were effective as of November 14, 2014.
Fiscal 2014 Highlights
•
Record overall operating revenues of $490.9 million, as well as record operating revenues in the Global Payments and Securities segments.
•
Fixed expenses declined 2%, versus fiscal 2013.
•
Average customer segregated deposits returned to record fiscal 2011 levels at $1.8 billion, with fourth quarter of fiscal 2014 averaging $2.0 billion.
•
Global Payments segment operating revenues increased 35% over fiscal 2013 to reach $55.4 million.
•
Completed the consolidation of our U.K. Subsidiaries, forming one financial services firm permitted to provide all financial services except deposit taking and fund management.
•
Realized the benefits of the restructuring of our bank facilities and issuance of Senior Notes in fiscal 2013, ending the year with $22.5 million in outstanding borrowings versus $270.0 million in committed facilities.
•
Completed our planned exit of the physical base metals business.

29

Executive Summary
We experienced modest growth in operating revenues during fiscal 2014, driven by record operating revenues in our Global Payments and Securities segments as well as improved performance in our Commercial Hedging segment. These increases were tempered by declines in our Physical Commodities and Clearing and Execution Services (“CES”) segments. Interest income on customer deposits remained constrained by historically low short term interest rates, however, average customer equity, which generates interest income for us, increased 7% to $1.8 billion compared to fiscal 2013. It is also of note that fiscal 2013 operating revenues include a $9.2 million gain recognized during the first quarter of fiscal 2013 on the sale of our shares in the LME and the Board of Trade of Kansas City, Missouri, Inc. (“KCBT”), following their acquisitions by the Hong Kong Exchanges & Clearing Limited and the Chicago Mercantile Exchange (“CME”), respectively.
The increase in our core Commercial Hedging operating revenues was primarily a result of an increase in exchange-traded and OTC customer volumes. The increase in exchange-traded volumes was driven by improving domestic agricultural markets as well as continued volume growth in the LME metals business, partially attributed to expansion in the Far East markets. OTC volume growth was driven by increases in energy and renewable fuels customer activity, partially offset by a decline in Brazil FX hedging volumes.
Operating revenues in our Global Payments segment experienced strong growth compared to the prior year. This sustained growth has resulted from the continued acquisition of commercial bank clients and the successful implementation of a new back office platform which enables us to process increased volumes, including smaller notional payments, without requiring the hiring of additional support personnel.
All product lines within our Securities segment experienced growth in fiscal 2014, highlighted by double digit growth in debt trading and asset management revenues resulting from favorable market conditions both domestically and in South America. Performance declined in both our Physical Commodities and CES segments, driven by low market volatility in exchange-traded and cash foreign exchange markets as well as a decline in customer transactions in physical commodities’ businesses.
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 56% of total expenses in fiscal 2014 compared to 54% in fiscal 2013, while non-variable expenses increased by 1% between the two periods. Non-variable expense include both fixed expenses as well as bad debts and impairments. Fixed expenses declined $3.1 million versus the prior year to $196.6 million, while bad debts and impairments increased $4.7 million to $5.5 million in fiscal 2014.
Overall, income from continuing operations before tax increased $4.8 million to $26.0 million in fiscal 2014 compared to $21.2 million in fiscal 2013, however excluding the $9.2 million gain on the LME and KCBT shares in fiscal 2013, income from continuing operations before tax increased $14.0 million. Net income from continuing operations increased $1.0 million to $19.6 million in fiscal 2014 compared to $18.6 million in fiscal 2013, which included the $5.8 million after tax gain on the sale of LME and KCBT shares.
Selected Summary Financial Information
As discussed in previous filings and elsewhere in this report on Form 10-K, U.S. GAAP requires us to carry derivatives at fair value but physical commodities inventory at the lower of cost or fair value. Under U.S. GAAP, gains and losses on commodities inventory and derivatives which we intend to be offsetting are often recognized in different periods. Additionally, in certain circumstances, U.S. GAAP does not permit us to reflect changes in estimated values of forward commitments to purchase and sell commodities. In such circumstances, the forward commitments to purchase and sell commodities, which we do not reflect in the consolidated balance sheets, do not qualify as a derivative under the Derivatives and Hedging Topic of the Accounting Standards Codification (“ASC”).
These requirements may have a temporary impact on our reported earnings. Following the discontinuance of our physical base metals business, we believe the effects of these requirements on our results have lessened and whereas we previously managed our Physical Commodities business segment as well as assessed our overall performance on an adjusted marked-to-market basis, we now manage both on a U.S. GAAP basis.
Discontinued Operations and Operating Segment Reorganization
During the second quarter of fiscal 2013, as a result of a change in management strategy in our base metals product line, we elected to pursue an exit of our physical base metals business through the sale and orderly liquidation of then-current open positions. We completed the exit of the physical base metals business during the second quarter of fiscal 2014. We have reclassified the physical base metals activities in the financial statements for all periods 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.

30

Following the discontinuance of the physical base metals business and commencing during the second quarter of fiscal 2014, we reorganized our operating segments into the following reportable segments: Commercial Hedging, Global Payments, Securities, Physical Commodities and Clearing and Execution Services. All segment information has been revised to reflect the operating segment reorganization retroactive to October 1, 2011. See Note 22 – Segment and Geographic Information for further discussion of the operating segment reorganization.
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, 2014, 2013 and 2012.
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 in all periods, and are reported net in our consolidated income statements in “(Loss) income from discontinued operations, net of tax”.
Financial Overview
The following table shows an overview of our financial results:
Financial Overview (Unaudited) 
 
Year Ended September 30,
(in millions)
2014
 
%
Change
 
2013
 
%
Change
 
2012
Operating revenues
$
490.9

 
5
 %
 
$
468.2

 
4
 %
 
$
448.1

Transaction-based clearing expenses
108.5

 
(1
)%
 
110.1

 
5
 %
 
105.3

Introducing broker commissions
49.9

 
23
 %
 
40.5

 
31
 %
 
31.0

Interest expense
10.5

 
33
 %
 
7.9

 
41
 %
 
5.6

Net operating revenues
322.0

 
4
 %
 
309.7

 
1
 %
 
306.2

Compensation and other expenses
296.0

 
3
 %
 
288.5

 
2
 %
 
283.7

Income from continuing operations, before tax
$
26.0

 
23
 %
 
$
21.2

 
(6
)%
 
$
22.5

The selected data table below reflects key operating metrics used by management in evaluating our product lines, for the periods indicated:
 
Year Ended September 30,
 
2014
 
%
Change
 
2013
 
%
Change
 
2012
Volumes and Other Data:
 
 
 
 
 
 
 
 
 
Exchange-traded volume (contracts, 000’s)
93,566.6

 
(7
)%
 
100,749.9

 
3
 %
 
97,349.6

OTC volume (contracts, 000’s)
1,342.1

 
8
 %
 
1,245.1

 
(23
)%
 
1,619.6

Global payments (# of payments, 000’s)
191.5

 
36
 %
 
140.8

 
16
 %
 
121.7

Gold equivalent ounces traded (000’s)
79,127.1

 
(15
)%
 
93,256.8

 
(28
)%
 
129,140.1

Equity market-making (gross dollar volume, millions)
$
74,162.9

 
29
 %
 
$
57,705.8

 
126
 %
 
$
25,553.8

Foreign exchange prime brokerage volume (U.S. notional, millions)
$
310,297.5

 
6
 %
 
$
292,526.7

 
(21
)%
 
$
371,637.7

Average assets under management (U.S. dollar, millions)
$
530.9

 
15
 %
 
$
462.3

 
8
 %
 
$
428.6

Average customer segregated equity (millions)
$
1,789.9

 
7
 %
 
$
1,674.9

 
5
 %
 
$
1,592.7

Operating Revenues
Year Ended September 30, 2014 Compared to Year Ended September 30, 2013
Operating revenues for fiscal 2014 and fiscal 2013 were $490.9 million and $468.2 million, respectively. This $22.7 million, or 5% increase in operating revenues primarily resulted from strong revenue growth in our Commercial Hedging, Global Payments and Securities segments. Operating revenues in the Commercial Hedging and Securities segments increased $22.0 million and $10.3 million, respectively, while Global Payments increased $14.5 million, or 35%, over the prior year. These increases were partially offset by declines in our Physical Commodities and CES segments of $6.2 million and $7.6 million, respectively. Also, fiscal 2013 operating revenues included a $9.2 million realized gain on the sale of shares of the LME and Kansas City Board of Trade.

31

Operating revenues in our Commercial Hedging segment increased 11% to $224.0 million, primarily as a result of a $15.6 million increase in exchange-traded revenues driven by growth in growth in the agricultural commodity and LME metals markets, as the agricultural market conditions improved and our LME product line expanded into the Far Eastern markets. Also contributing to this growth was a $6.0 million increase in OTC revenues, driven by growth in the energy and renewable fuels markets.
Operating revenues in our Global Payments segment increased $14.5 million to $55.4 million in fiscal 2014, compared to fiscal 2013, driven by a 36% increase in the number of global payments made as we continue to be successful in adding and on-boarding financial institutions to our electronic transaction order system.
The increase in operating revenues in our Securities segment was primarily a result of $5.2 million increase in asset management revenues in Argentina, as well as a $3.9 million increase in debt trading revenues. Debt trading revenues increased from continued growth in our export financing business, as well as from increased customer activity in the Latin American and Argentina markets. Physical Commodity segment operating revenues decreased as the result of a 15% decline in the number of ounces traded in our precious metals product line, particularly in the Far Eastern markets, as well as diminished customer activity in our physical agricultural and energy business.
Operating revenues in our CES segment decreased as exchange-traded commission and clearing fee revenues decreased $1.1 million, primarily as a result of a 10% decline in exchange-traded volumes and partially offset by an improvement in the overall average commission rate per contract. In addition, operating revenues in our customer prime brokerage product line declined $6.5 million as a result of a narrowing of spreads in the foreign exchange markets and declining performance on our arbitrage desk. See Segment Information below for additional information on activity in each of the segments.
Year Ended September 30, 2013 Compared to Year Ended September 30, 2012
Operating revenues for fiscal 2013 and fiscal 2012 were $468.2 million and $448.1 million, respectively. The $20.1 million, or 4%, increase in operating revenue primarily resulted from revenue growth in our Securities, CES and Physical Commodity segments. Operating revenues in the CES and Physical Commodity segments segments increased $9.4 million and $7.7 million, respectively, while Securities segment revenues increased $22.4 million or 47% over the prior year. In addition, Global Payments revenues increased $1.9 million over the prior year. These increases were partially offset by a $28.7 million decline in our Commercial Hedging segment. In addition, fiscal 2013 operating revenues included a $9.2 million realized gain on the sale of shares of the LME and KCBT.
Operating revenues in our Commercial Hedging segment decreased 12% to $202.0 million, primarily as a result of a $36.1 million decline in OTC revenues driven by a 23% decline in OTC volumes, as well as a $2.9 million decline in agricultural exchange-traded revenues as a result of the consecutive droughts of 2011 and 2012 in the U.S. grain markets. OTC volumes declined as a result of a reduction in customer activity, primarily in the Latin American and Brazilan markets. These declines were partially offset by an $8.0 million increase in LME metals revenues as that product line continued to grow following the acquisition of the business in early fiscal 2012.
Operating revenues in our Global Payments segment increased $1.9 million to $40.9 million in fiscal 2013 compared to fiscal 2012, driven by a 16% increase in the number of global payments made as we had continued success in on-boarding financial institutions to our electronic transaction order system, however these volume gains were tempered by a decline in spreads in this business.
Our Securities segment experienced strong revenue growth of 47%, or $22.4 million, primarily driven by a 126% increase in the gross dollar volume traded, as a result of improved market conditions and the acquisition of accounts from Tradewire Securities late in the first quarter of fiscal 2013. The addition of the accounts of Tradewire Securities added $4.3 million incremental debt-trading revenues, as well as expansion of our export financing business. Investment banking revenues increased $2.9 million, while asset management revenues increased $1.1 million.
Physical Commodity segment operating revenues increased as the result of a 35% increase in precious metals revenues despite a 28% decline in the number of ounces traded, while physical agricultural and energy revenues increased $4.0 million, or 51%, as revenues in both commodity financing arrangements and commodity origination sales increased over the prior year.
Operating revenues in our CES segment increased as exchange-traded commission and clearing fee revenues increased $9.4 million as a result of a 5% increase in our average rate per contract while volumes remained relatively flat with the prior year. In addition, operating revenues in our customer prime brokerage product line increased $2.5 million, despite a 21% decrease in foreign exchange volumes as a result of an increase in spreads realized in that business. See Segment Information below for additional information on activity in each of the segments.
In fiscal 2013, operating revenues included realized gains of $1.4 million and unrealized losses of $1.3 million on interest rate swap derivative contracts used to manage a portion of our aggregate interest rate position. In fiscal 2012, operating revenues included realized gains of $2.5 million and unrealized losses of $1.1 million on interest rate swap derivative contracts. These

32

interest rate swaps were not designated for hedge accounting treatment, and changes in the fair values of the interest rate swaps, which can be volatile and can fluctuate from period to period, were recorded in earnings on a quarterly basis. The last remaining interest rate swap expired in the fourth quarter of fiscal 2013.
Interest and Transactional Expenses
Year Ended September 30, 2014 Compared to Year Ended September 30, 2013
Transaction-based clearing expenses: Transaction-based clearing expenses decreased 1% to $108.5 million in fiscal 2014 compared to $110.1 million in fiscal 2013, and were 22% of operating revenues in fiscal 2014 compared to 24% in fiscal 2013. Decreases in expense in our CES segment, resulting from lower exchange-traded contract volumes and FX prime brokerage activities, were nearly offset by higher ADR conversion fees in our Securities segment’s equity market-making business and exchange clearing costs in our LME metals activities in our Commercial Hedging segment.
Introducing broker commissions: Introducing broker commissions increased 23% to $49.9 million in fiscal 2014 compared to $40.5 million in fiscal 2013, and were 10% of operating revenues in fiscal 2014 compared to 9% in fiscal 2013. This increase is primarily due to the higher volume of payments in our Global Payments segment, and an increase in LME metals activity. Also, increased activity in our Financial Ag’s & Energy component of our Commercial Hedging segment resulted in an increase in introducing broker commission expenses.
Interest expense: Interest expense increased to $10.5 million in fiscal 2014 compared to $7.9 million in fiscal 2013. This increase is primarily related to the coupon interest and amortization of related debt financing costs, which aggregate to $1.1 million per quarter, related to our offering of 8.5% Senior Notes due July 2020 completed during the fourth quarter of fiscal 2013. The increase was partially offset by a decrease in interest expense related to commodity financing and facilitation activities due to lower average outstanding borrowings during fiscal 2014.
Year Ended September 30, 2013 Compared to Year Ended September 30, 2012
Transaction-based clearing expenses: Transaction-based clearing expenses increased 5% to $110.1 million in fiscal 2013 compared to $105.3 million in fiscal 2012, and were 24% of operating revenues in fiscal 2013 compared to 23% in fiscal 2012. The increase in expense was primarily related to higher ADR conversion and exchange fees in the Securities segment activities, which resulted from internal revenue growth as well as the acquisition of the accounts of Tradewire Securities in the Securities segment.
Introducing broker commissions: Introducing broker commissions increased 31% to $40.5 million in fiscal 2013 compared to $31.0 million in fiscal 2012, and were 9% of operating revenues in fiscal 2013 compared to 7% in fiscal 2012. The increase was primarily due to the addition of several new introducing broker relationships, particularly in our CES segment, that followed the bankruptcy filing of MF Global in October 2011. Additionally, expanded activities through our acquisitions of the LME metals team and the accounts of Tradewire Securities resulted in an increase in introducing broker commission expenses.
Interest expense: Interest expense increased to $7.9 million in fiscal 2013 compared to $5.6 million during fiscal 2012. The increase was primarily due to higher average outstanding borrowings during fiscal 2013 compared to fiscal 2012, on our loan facilities used for working capital needs and commodity financing and facilitation. On July 22, 2013, we completed the offering of $45.5 million aggregate principal amount of our 8.5% Senior Notes due July 2020, which added $0.8 million of interest expense in fiscal 2013.
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, 2014 Compared to Year Ended September 30, 2013
Net operating revenues increased $12.3 million, or 4%, to $322.0 million in fiscal 2014 compared to $309.7 million in fiscal 2013.

33

Year Ended September 30, 2013 Compared to Year Ended September 30, 2012
Net operating revenues increased $3.5 million, or 1%, to $309.7 million in fiscal 2013 compared to $306.2 million in fiscal 2012.
Compensation and Other Expenses
The following table shows a summary of expenses, other than interest and transactional expenses.
 
Year Ended September 30,
(in millions)
2014
 
%
Change
 
2013
 
%
Change
 
2012
Compensation and benefits:
 
 
 
 
 
 
 
 
 
Fixed compensation and benefits
$
108.0

 
(2
)%
 
$
110.7

 
10
 %
 
$
100.8

Variable compensation and benefits
93.9

 
7
 %
 
88.0

 
(9
)%
 
96.4

 
201.9

 
2
 %
 
198.7

 
1
 %
 
197.2

Other non-compensation expenses:
 
 
 
 
 
 
 
 
 
Communication and data services
25.8

 
12
 %
 
23.1

 
3
 %
 
22.4

Occupancy and equipment rental
12.3

 
3
 %
 
12.0

 
9
 %
 
11.0

Professional fees
14.9

 
20
 %
 
12.4

 
(2
)%
 
12.6

Travel and business development
9.9

 
(5
)%
 
10.4

 
—
 %
 
10.4

Depreciation and amortization
7.3

 
(9
)%
 
8.0

 
11
 %
 
7.2

Bad debts and impairments
5.5

 
588
 %
 
0.8

 
(47
)%
 
1.5

Other expense
18.4

 
(20
)%
 
23.1

 
8
 %
 
21.4

 
94.1

 
5
 %
 
89.8

 
4
 %
 
86.5

Total compensation and other expenses
$
296.0

 
3
 %
 
$
288.5

 
2
 %
 
$
283.7

Year Ended September 30, 2014 Compared to Year Ended September 30, 2013
Compensation and Other Expenses: Compensation and other expenses increased $7.5 million, or 3%, to $296.0 million in fiscal 2014 compared to $288.5 million in fiscal 2013.
Compensation and Benefits: Total compensation and benefits expenses increased 2% to $201.9 million in fiscal 2014 compared to $198.7 million in fiscal 2013. Total compensation and benefits were 63% of net operating revenues in fiscal 2014 compared to 64% of net operating revenues in fiscal 2013. The variable portion of compensation and benefits increased 7% to $93.9 million in fiscal 2014 compared to $88.0 million in fiscal 2013. Variable compensation and benefits were 29% of net operating revenues in fiscal 2014 compared to 28% in fiscal 2013. Administrative and executive incentive compensation was $12.2 million in fiscal 2014 compared to $11.5 million in fiscal 2013.
The fixed portion of compensation and benefits decreased 2% to $108.0 million in fiscal 2014 compared to $110.7 million in fiscal 2013. Non-variable salaries increased $1.1 million, or 1%. Employee benefits increased $1.7 million in fiscal 2014. Share-based compensation is also a component of the fixed portion, and includes stock option and restricted stock expense. Stock option expense was $1.4 million in fiscal 2014 compared to $1.9 million in fiscal 2013. Restricted stock expense was $2.9 million in fiscal 2014 compared to $7.4 million in fiscal 2013. The decrease in restricted stock expense is primarily related to the acceleration of expense in the fourth quarter of fiscal 2013, resulting from the retirement of an executive of one of our wholly owned subsidiaries. The number of employees increased 4% to 1,141 at the end of fiscal 2014 compared to 1,094 at the end of fiscal 2013.
Other Non-Compensation Expenses: Other non-compensation expenses increased by 5% to $94.1 million in fiscal 2014 compared to $89.8 million in fiscal 2013. Communication and data services expenses increased $2.7 million, primarily due to increases in market information expenses and trading software costs among the Financial Ag’s & Energy OTC and LME businesses and higher costs in our foreign exchange prime brokerage business related to trade system conversions. Professional fees increased $2.5 million, primarily due to consultancy costs for the FCStone risk review, service costs related to our restatement of the 2012 and 2011 consolidated financial statements, and higher legal costs. Depreciation and amortization decreased $0.7 million, primarily due to lower amortization of intangible assets, as certain intangibles became fully amortized during fiscal 2013.
Bad debts and impairments increased $4.7 million year-over-year. 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’s & Energy customers. Additionally, we recorded bad debts of $0.9 million in our Physical Commodities segment related to renewable fuels activity in our Physical

34

Ag’s & Energy component, and $0.7 million in our Securities segment primarily related to a charge-off of uncollectible service fees. During fiscal 2013, bad debts and impairments were $0.8 million, and included $0.1 million of impairment charges on intangible assets and $0.7 million of bad debt expense, net of recoveries of $0.1 million, primarily related to a charge-off of uncollectible service fees in our Securities segment.
Other expense decreased $4.7 million, primarily as a result of the change in the revaluation of contingent liabilities related to certain business combinations. 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 to be paid for the acquisition of Hencorp Futures, netting to an expense recovery of $2.0 million. During fiscal 2013, we accrued additional contingent consideration of $3.0 million primarily related to the acquisitions of the Hanley Companies and Hencorp Futures and the transfer of accounts from Tradewire Securities. Additionally, increases in non-trading technology costs and hosted conferences were partially offset by fiscal 2013 including a regulatory settlement of $1.5 million - See Note 11 to the Consolidated Financial Statements.
Provision for Taxes: The effective income tax rate on income from continuing operations was 25% in fiscal 2014 compared to 13% in fiscal 2013. The effective income tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings. In fiscal 2013, we released a portion of the valuation allowance for state net operating loss carryforwards and changed our state tax rate, resulting in a decrease in the effective tax rate. Generally, when the percentage of pretax earnings generated from the U.S. decreases, our effective income tax rate decreases.
Year Ended September 30, 2013 Compared to Year Ended September 30, 2012
Compensation and Other Expenses: Compensation and other expenses increased $4.8 million, or 2%, to $288.5 million in fiscal 2013 compared to $283.7 million in fiscal 2012.
Compensation and Benefits: Total compensation and benefits expenses increased modestly to $198.7 million in fiscal 2013 compared to $197.2 million in fiscal 2012. Total compensation and benefits were 64% of net operating revenues in fiscal 2013 and fiscal 2012. The variable portion of compensation and benefits decreased 9% to $88.0 million in fiscal 2013 compared to $96.4 million in fiscal 2012. Administrative and executive incentive compensation was $11.5 million in fiscal 2013 compared to $14.1 million in fiscal 2012.
The fixed portion of compensation and benefits increased 10% to $110.7 million in fiscal 2013 compared to $100.8 million in fiscal 2012, related to increases in non-variable salaries, share-based compensation and other employee benefits. Non-variable salaries increased $3.8 million, or 5%, primarily related to the acquisition of the LME metals team, TRX Futures Limited and the accounts of Tradewire Securities, as well as staffing additions across administrative departments, primarily in compliance, information technology development and credit and risk departments. Share-based compensation is also a component of the fixed portion, and includes stock option and restricted stock expense. Stock option expense was $1.9 million in fiscal 2013 compared to $1.4 million in fiscal 2012. Restricted stock expense was $7.4 million in fiscal 2013 compared to $4.5 million in fiscal 2012. The increase in restricted stock expense is primarily related to the acceleration of expense in the fourth quarter, resulting from the retirement of an executive of one of our wholly owned subsidiaries. The number of employees increased 2%, to 1,094 at the end of fiscal 2013 compared to 1,074 at the end of fiscal 2012.
Other Non-Compensation Expenses: Other non-compensation expenses increased by 4% to $89.8 million in fiscal 2013 compared to $86.5 million in fiscal 2012. Communication and data services expenses increased $0.7 million, primarily due to increases in market information expenses and trading software costs following the acquisitions of the LME metals team, TRX Futures Limited and the accounts of Tradewire Securities, as well as higher costs related to trade system conversions. Occupancy and equipment rental increased $1.0 million, primarily related to international office space rental and related costs. Depreciation and amortization increased $0.8 million, primarily due to the increase in depreciation of additional information technology infrastructure and software placed into service during fiscal 2013 and fiscal 2012.
Bad debts and impairments decreased $0.7 million year-over-year. During fiscal 2013, bad debts and impairments were $0.8 million and included $0.1 million of impairment charges on intangible assets and $0.7 million of bad debt expense, net of recoveries of $0.1 million. During fiscal 2012, bad debts and impairments were $1.5 million and included $0.8 million of impairment charges on intangible assets, previously determined to have indefinite lives, and $0.7 million of bad debt expense, net of recoveries of $0.1 million.
Other expense increased $1.7 million, primarily related to an increase in non-trading technology costs and a regulatory settlement of $1.5 million incurred during fiscal 2013 - See Note 12 to the Consolidated Financial Statements.
Provision for Taxes: The effective income tax rate on income from continuing operations was 13% in fiscal 2013 compared to 23% in fiscal 2012. The effective income tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings. In fiscal 2013, we released a portion of the valuation allowance for state net

35

operating loss carryforwards and changed our state tax rate, resulting in a decrease in the effective tax rate. Generally, when the percentage of pretax earnings generated from the U.S. decreases, our effective income tax rate decreases.
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.
 
Year Ended September 30,
(in millions)
2014
 
%
Change
 
2013
 
%
Change
 
2012
Compensation and benefits:
 
 
 
 
 
 
 
 
 
Fixed compensation and benefits
$
34.8

 
(7
)%
 
$
37.6

 
40
 %
 
$
26.9

Variable compensation and benefits
12.2

 
7
 %
 
11.4

 
(19
)%
 
14.0

 
47.0

 
(4
)%
 
49.0

 
20
 %
 
40.9

Other non-compensation expenses:
 
 
 
 
 
 
 
 
 
Communication and data services
4.3

 
13
 %
 
3.8

 
(10
)%
 
4.2

Occupancy and equipment rental
12.2

 
2
 %
 
12.0

 
9
 %
 
11.0

Professional fees
9.5

 
44
 %
 
6.6

 
2
 %
 
6.5

Travel and business development
2.2

 
—
 %
 
2.2

 
(15
)%
 
2.6

Depreciation and amortization
6.2

 
(10
)%
 
6.9

 
(1
)%
 
7.0

Bad debts and impairments
—

 
—
 %
 
—

 
(100
)%
 
0.7

Other expense
13.2

 
(19
)%
 
16.2

 
1
 %
 
16.1

 
47.6

 
—
 %
 
47.7

 
(1
)%
 
48.1

Total compensation and other expenses
$
94.6

 
(2
)%
 
$
96.7

 
9
 %
 
$
89.0

Year Ended September 30, 2014 Compared to Year Ended September 30, 2013
Total unallocated costs and other expenses decreased $2.1 million to $94.6 million in fiscal 2014 compared to $96.7 million in fiscal 2013. Compensation and benefits decreased $2.0 million, or 4% to $47.0 million in fiscal 2014 compared to $49.0 million in fiscal 2013. The increase in professional fees is primarily due to legal costs related to regulatory and employment matters and service costs related to our restatement of the 2012 and 2011 consolidated financial statements.
Year Ended September 30, 2013 Compared to Year Ended September 30, 2012
Total unallocated costs and other expenses increased $7.7 million, or 9%, to $96.7 million in fiscal 2013 compared to $89.0 million in fiscal 2012. Compensation and benefits increased $8.1 million, or 20% to $49.0 million in fiscal 2013 compared to $40.9 million in fiscal 2012, primarily due to a 2% increase in headcount and an increase in share-based compensation costs. In fiscal 2012, bad debts and impairments included $0.7 million related to the impairment of intangible assets.

36

Variable vs. Fixed Expenses
 
Year Ended September 30,
(in millions)
2014
 
% of
Total
 
2013
 
% of
Total
 
2012
 
% of
Total
Variable compensation and benefits
$
93.9

 
21
%
 
$
88.0

 
20
%
 
$
96.4

 
23
%
Transaction-based clearing expenses
108.5

 
24
%
 
110.1

 
25
%
 
105.4

 
25
%
Introducing broker commissions
49.9

 
11
%
 
40.5

 
9
%
 
31.0

 
7
%
Total variable expenses
252.3

 
56
%
 
238.6

 
54
%
 
232.8

 
55
%
Fixed compensation and benefits
108.0

 
24
%
 
110.7

 
26
%
 
100.8

 
24
%
Other fixed expenses
88.6

 
19
%
 
89.0

 
20
%
 
84.9

 
20
%
Bad debts and impairments
5.5

 
1
%
 
0.8

 
—
%
 
1.5

 
1
%
Total non-variable expenses
202.1

 
44
%
 
200.5

 
46
%
 
187.2

 
45
%
Total non-interest expenses
$
454.4

 
100
%
 
$
439.1

 
100
%
 
$
420.0

 
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, 2014, 2013 and 2012.
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 56% in fiscal 2014, 54% in fiscal 2013 and 55% in fiscal 2012.
Segment Information
Commencing during the quarter ended March 31, 2014, we reorganized our operating segments into reportable segments as follows:
•
Commercial Hedging which includes Financial Agricultural (Ag’s) & Energy (formerly discussed as the soft commodities product line) and LME metals, previously components of Commodity and Risk Management Services.
•
Global Payments, which was previously a component, along with FX Prime Brokerage, of the Foreign Exchange segment has been broken out as the single component of a segment named Global Payments.
•
Securities now includes Asset Management, previously a component of Other, as an additional component along with Equity market-making, Debt Trading and Investment Banking.
•
Physical Commodities includes physical precious metals, previously a component of Commodity and Risk Management Services along with Physical Ag’s & Energy (formerly discussed as the commodity financing and facilitation business), previously a component of Other. In addition, physical base metals, previously a component of Commodity and Risk Management Services, is now reported as discontinued operations, and is not part of the Physical Commodities segment information.
•
Clearing and Execution Services now includes the FX Prime Brokerage component as an additional component.
All segment information has been revised to reflect the operating segment reorganization retroactive to October 1, 2011.
INTL FCStone Inc.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Hedging
 
Global Payments
 
Securities
 
Physical Commodities
 
Clearing and Execution Services
Components:
 
Component:
 
Components:
 
Components:
 
Components:
- Financial Ag’s
     & Energy
 
- Global Payments
 
- Equity market-
     making
 
- Precious metals
 
- Clearing and
     Execution Services
- LME metals
 
 
 
- Debt Trading
 
- Physical Ag’s
     & Energy
 
- FX Prime Brokerage
 
 

 
- Investment Banking
 
 
 
 
 
 
 
- Asset Management
 
 
 
 

37

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.
 
Year Ended September 30,
(in millions)
2014
 
% of
Operating
Revenues
 
2013
 
% of
Operating
Revenues
 
2012
 
% of
Operating
Revenues
Operating revenues
$
494.0

 
100%
 
$
461.0

 
100%
 
$
448.3

 
100%
Transaction-based clearing expenses
107.8

 
22%
 
109.7

 
24%
 
104.3

 
23%
Introducing broker commissions
49.9

 
10%
 
40.5

 
9%
 
31.0

 
7%
Interest expense
5.4

 
1%
 
5.6

 
1%
 
4.1

 
1%
Net operating revenues
330.9

 
 
 
305.2

 
 
 
308.9

 
 
Variable direct compensation and benefits
81.7

 
17%
 
76.5

 
17%
 
82.4

 
18%
Net contribution
249.2

 
 
 
228.7

 

 
226.5

 
 
Non-variable direct expenses
120.4

 
24%
 
115.7

 
25%
 
113.3

 
25%
Segment income
$
128.8

 

 
$
113.0

 

 
$
113.2

 
 
Year Ended September 30, 2014 Compared to Year Ended September 30, 2013
The net contribution of all our business segments increased 9% to $249.2 million in fiscal 2014 compared to $228.7 million in fiscal 2013. Segment income increased 14% to $128.8 million in fiscal 2014 compared to $113.0 million in fiscal 2013.
Year Ended September 30, 2013 Compared to Year Ended September 30, 2012
The net contribution of all our business segments increased 1% to $228.7 million in fiscal 2013 compared to $226.5 million in fiscal 2012. Segment income decreased slightly to $113.0 million in fiscal 2013 compared to $113.2 million in fiscal 2012.
Commercial Hedging
We serve our commercial clients 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 clients. 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 client objectives. Our clients 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 as well as a wide range of structured product solutions to our commercial customers who are seeking cost-effective hedging strategies. Generally, our clients direct their own trading activity, and our risk management consultants do not have discretionary authority to transact trades on behalf of our clients.

38

The following table provides the financial performance for Commercial Hedging for the periods indicated.
 
Year Ended September 30,
(in millions)
2014
 
%
Change
 
2013
 
%
Change
 
2012
Trading gains, net
$
124.3

 
9
 %
 
$
114.3

 
(21
)%
 
$
144.9

Commission and clearing fees
79.9

 
17
 %
 
68.4

 
3
 %
 
66.4

Consulting and management fees
15.7

 
4
 %
 
15.1

 
2
 %
 
14.8

Interest income
4.1

 
(2
)%
 
4.2

 
(9
)%
 
4.6

Operating revenues
224.0

 
11
 %
 
202.0

 
(12
)%
 
230.7

Transaction-based clearing expenses
25.0

 
5
 %
 
23.7

 
2
 %
 
23.3

Introducing broker commissions
18.2

 
21
 %
 
15.0

 
22
 %
 
12.3

Interest expense
0.3

 
—
 %
 
0.3

 
(25
)%
 
0.4

Net operating revenues
180.5

 
11
 %
 
163.0

 
(16
)%
 
194.7

Variable direct compensation and benefits
47.9

 
11
 %
 
43.3

 
(22
)%
 
55.8

Net contribution
132.6

 
11
 %
 
119.7

 
(14
)%
 
138.9

Non-variable direct expenses
65.3

 
4
 %
 
62.6

 
(2
)%
 
63.7

Segment income
$
67.3

 
18
 %
 
$
57.1

 
(24
)%
 
$
75.2

The following tables set forth transactional revenues and selected data for Commercial Hedging for the periods indicated.
 
Exchange-traded
 
Year Ended September 30,
 
2014
 
% Change
 
2013
 
% Change
 
2012
Transactional revenues (in millions):
 
 
 
 
 
 
Agricultural
$
57.9

 
14%
 
$
50.8

 
(5)%
 
53.7

Energy and renewable fuels
5.7

 
(10)%
 
6.3

 
9%
 
5.8

LME metals
38.6

 
30%
 
29.8

 
37%
 
21.8

Other
7.1

 
4%
 
6.8

 
36%
 
5.0

 
$
109.3

 
17%
 
$
93.7

 
9%
 
86.3

Selected data:
 
 
 
 
 
 
Volume (contracts, 000’s)
17,827.2

 
9%
 
16,356.5

 
23%
 
13,254.8

Average rate per contract (1)
$
6.04

 
8%
 
$
5.61

 
(12)%
 
$
6.35

Average customer segregated equity (millions)
$
878.2

 
(3)%
 
$
900.8

 
(2)%
 
$
923.2

(1) Give-up fee revenues included in exchange-traded transactional revenues have been excluded from the calculation of exchange-traded average rate per contract.
 
OTC
 
Year Ended September 30,
 
2014
 
% Change
 
2013
 
% Change
 
2012
Transactional revenues (in millions):
 
 
 
 
 
 
 
 
 
Agricultural
$
54.9

 
—%
 
$
54.9

 
(43)%
 
97.0

Energy and renewable fuels
32.4

 
50%
 
21.6

 
—%
 
21.7

Other
7.6

 
(39)%
 
12.4

 
97%
 
6.3

 
$
94.9

 
7%
 
$
88.9

 
(29)%
 
125.0

Selected data:
 
 
 
 
 
 
 
 
 
Volume (contracts, 000’s)
1,342.1

 
8%
 
1,245.1

 
(23)%
 
1,619.6

Average rate per contract (1)
$
68.25

 
—%
 
$
68.35

 
(9)%
 
$
74.96

(1) Cash brokerage revenues included in OTC transactional revenues have been excluded from the calculation of OTC average rate per contract.

39

For information about the assets of this segment, see Note 22 to the Consolidated Financial Statements.
Year Ended September 30, 2014 Compared to Year Ended September 30, 2013
Operating revenues increased 11% to $224.0 million in fiscal 2014 compared to $202.0 million in fiscal 2013. Exchange-traded revenues increased 17% to $109.3 million in fiscal 2014, driven primarily by growth in agricultural commodity and LME metals revenues. Agricultural commodity exchange-traded revenues benefited from improved market conditions in the domestic grain and global coffee markets. The LME metals revenue growth was driven by increased customer activity and expansion activities in the Far East. Overall exchange-traded contract volume increased 9% and the average rate per contract increased to $6.04 primarily driven by an increase in business from introducing brokers, as evidenced by the $3.2 million increase in introducing broker commission expense and overall business mix.
OTC revenues increased 7% to $94.9 million in fiscal 2014, with growth in energy and renewable fuels revenues offset by declines in foreign exchange hedging revenues, while agricultural commodity hedging revenues were flat. OTC volumes increased 8% to 1.3 million contracts in fiscal 2014 compared to 1.2 million in fiscal 2013.
Consulting and management fees increased 4% to $15.7 million in fiscal 2014 compared to fiscal 2013 while interest income, which remains constrained by low short-term interest rates, declined 2%, to $4.1 million in fiscal 2014 compared to $4.2 million in fiscal 2013, driven by a 3% decrease in average customer equity as a result of lower exchange-traded margin requirements.
Segment income increased 18% to $67.3 million in fiscal 2014 compared to $57.1 million in fiscal 2013, driven by the increase in operating revenues, partially offset by a $3.8 million increase in bad debt expense. Variable expenses expressed as a percentage of operating revenues remained unchanged at 41% in fiscal 2014 and fiscal 2013.
Year Ended September 30, 2013 Compared to Year Ended September 30, 2012
Operating revenues decreased 12% to $202.0 million in fiscal 2013 compared to $230.7 million in fiscal 2012. Exchange-traded revenues increased 9% to $93.7 million in fiscal 2013, driven primarily by a $8.0 million increase in LME metals revenues, which was partially offset by a decline in agricultural exchange-traded revenues as a result of significantly lower customer stocks following the consecutive droughts of 2011 and 2012 as well as the effect of inverted prices on customer trading activity. The LME metals revenue growth resulted from increased customer activity and expansion activities in the Far East. Overall exchange-traded contract volume increased 23% and the average rate per contract decreased 12% to $5.61 per contract.
OTC revenues decreased 29% to $88.9 million in fiscal 2013, primarily driven by a 43% decrease in agricultural OTC revenues as a result of a decline of customer activity in the Latin American and Brazil markets as well as the inverted prices noted above. The decline in agricultural OTC revenues was partially offset by increased in foreign exchange hedging and cash grain brokerage revenues. Overall OTC volumes decreased 23% to 1.2 million contracts in fiscal 2013 compared to 1.6 million contracts in fiscal 2012.
Consulting and management fees increased 2% to $15.1 million in fiscal 2014, while interest income, which remained constrained by low short-term interest rate, declined 9%, to $4.2 million in fiscal 2013 compared to $4.6 million in fiscal 2012, driven by a 2% decrease in average customer equity.
Segment income decreased 15% to $57.1 million in fiscal 2013 compared to $75.2 million in fiscal 2012, driven by the decrease in operating revenues. Variable expenses expressed as a percentage of operating revenues were 41% in fiscal 2013 compared to 40% in fiscal 2012.
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 150 countries, which we believe is more than any other payments solution provider, and provide competitive and transparent pricing. Through our technology platform, full-service electronic execution capability and 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 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 clients 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. 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.

40

The following table provides the financial performance and selected data for Global Payments for the periods indicated.
 
Year Ended September 30,
(in millions)
2014
 
%
Change
 
2013
 
%
Change
 
2012
Operating revenues
$
55.4

 
35
 %
 
$
40.9

 
5
 %
 
$
39.0

Transaction-based clearing expenses
2.6

 
(7
)%
 
2.8

 
33
 %
 
2.1

Introducing broker commissions
4.3

 
378
 %
 
0.9

 
—
 %
 
0.9

Interest expense
0.3

 
(40
)%
 
0.5

 
(44
)%
 
0.9

Net operating revenues
48.2

 
31
 %
 
36.7

 
5
 %

35.1

Variable direct compensation and benefits
10.6

 
22
 %
 
8.7

 
12
 %
 
7.8

Net contribution
37.6

 
34
 %
 
28.0

 
3
 %
 
27.3

Non-variable direct expenses
9.3

 
24
 %
 
7.5

 
32
 %
 
5.7

Segment income
$
28.3

 
38
 %
 
$
20.5

 
(5
)%
 
$
21.6

Selected data:
 
 
 
 
 
 
Global payments (number of trades, 000’s)
191.5

 
36%
 
140.8

 
16
 %
 
121.7

Average revenue per trade
$
289.30

 
—%
 
$
290.48

 
(9
)%
 
$
320.46

For information about the assets of this segment, see Note 22 to the Consolidated Financial Statements.
Year Ended September 30, 2014 Compared to Year Ended September 30, 2013
Operating revenues increased 35% to $55.4 million in fiscal 2014 compared to $40.9 million in fiscal 2013. The operating revenue growth was driven by a 36% increase in the volume of trades while the average revenue per trade remained relatively unchanged. We continue to benefit from an increase in the number of clients transacting, including financial institutions, as well as our ability to offer an electronic transaction order system to our clients.
Segment income increased 38% to $28.3 million in fiscal 2014 compared to $20.5 million in fiscal 2013. The increase primarily resulted from the higher operating revenues partially offset by a $1.3 m