INTL 06.30.2012 10-Q
Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________ 
FORM 10-Q
 ____________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2012
OR
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)
____________________ 
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 305 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company.
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 August 6, 2012, there were 19,039,504 shares of the registrant’s common stock outstanding.
 
 
 
 
 

Table of Contents

INTL FCStone Inc.
Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 2012
Table Of Contents
 
 
Page
Part I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
Part II. OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 


Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTL FCStone Inc.
Condensed Consolidated Balance Sheets
(in millions, except par value and share amounts)
June 30,
2012
 
September 30,
2011
 
(Unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
213.7

 
$
220.6

Cash, securities and other assets segregated under federal and other regulations (including $72.8 and $22.7 at fair value at June 30, 2012 and September 30, 2011, respectively)
570.7

 
119.4

Deposits and receivables from:

 
 
Exchange-clearing organizations (including $1,288.1 and $1,408.2 at fair value at June 30, 2012 and September 30, 2011, respectively)
1,292.5

 
1,489.2

Broker-dealers, clearing organizations and counterparties (including $1.0 and $16.2 at fair value at June 30, 2012 and September 30, 2011, respectively)
175.3

 
146.5

Receivables from customers, net
108.8

 
115.9

Notes receivable, net
12.0

 
26.3

Income taxes receivable
8.6

 
8.8

Financial instruments owned, at fair value
130.1

 
223.1

Physical commodities inventory
100.7

 
160.6

Deferred income taxes, net
21.2

 
20.7

Property and equipment, net
18.4

 
15.0

Goodwill and intangible assets, net
56.1

 
56.1

Other assets
26.3

 
33.5

Total assets
$
2,734.4

 
$
2,635.7

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable and other accrued liabilities (including $20.7 and $22.3 at fair value at June 30, 2012 and September 30, 2011, respectively)
$
129.7

 
$
122.0

Payables to:
 
 
 
Customers
1,932.1

 
1,739.8

Broker-dealers, clearing organizations and counterparties
5.2

 
3.4

Lenders under loans
175.4

 
77.4

Income taxes payable
4.0

 
4.6

Financial instruments sold, not yet purchased, at fair value
176.5

 
390.9

Total liabilities
2,422.9

 
2,338.1

Commitments and contingencies (Note 11)
 
 
 
Equity:
 
 
 
INTL FCStone Inc. stockholders’ equity:
 
 
 
Preferred stock, $.01 par value. Authorized 1,000,000 shares; no shares issued or outstanding
—

 
—

Common stock, $.01 par value. Authorized 30,000,000 shares; 19,166,799 issued and 19,005,242 outstanding at June 30, 2012 and 18,653,964 issued and 18,642,407 outstanding at September 30, 2011
0.2

 
0.2

Common stock in treasury, at cost - 161,557 shares at June 30, 2012 and 11,557 shares at September 30, 2011, respectively
(2.9
)
 
(0.1
)
Additional paid-in capital
210.7

 
205.2

Retained earnings
103.7

 
97.0

Accumulated other comprehensive loss, net
(0.2
)
 
(6.0
)
Total INTL FCStone Inc. stockholders’ equity
311.5

 
296.3

Noncontrolling interests
—

 
1.3

Total equity
311.5

 
297.6

Total liabilities and equity
$
2,734.4

 
$
2,635.7

See accompanying notes to condensed consolidated financial statements.

1
Table of Contents

INTL FCStone Inc.
Condensed Consolidated Income Statements
(Unaudited)
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
(in millions, except share and per share amounts)
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
 
Sales of physical commodities
 
$
17,201.0

 
$
20,464.7

 
$
51,238.5

 
$
51,179.9

Trading gains
 
94.8

 
70.0

 
206.2

 
117.9

Commission and clearing fees
 
45.4

 
31.1

 
118.9

 
105.6

Consulting and management fees
 
7.1

 
5.2

 
20.6

 
15.2

Interest income
 
2.7

 
2.3

 
7.7

 
7.8

Other income
 
0.1

 
0.1

 
0.6

 
0.8

Total revenues
 
17,351.1

 
20,573.4

 
51,592.5

 
51,427.2

Cost of sales of physical commodities
 
17,227.3

 
20,468.0

 
51,252.8

 
51,112.1

Operating revenues
 
123.8

 
105.4

 
339.7

 
315.1

Interest expense
 
2.6

 
2.0

 
8.3

 
9.1

Net revenues
 
121.2

 
103.4

 
331.4

 
306.0

Non-interest expenses:
 
 
 
 
 
 
 
 
Compensation and benefits
 
54.6

 
44.0

 
155.5

 
129.6

Clearing and related expenses
 
30.6

 
18.0

 
80.4

 
58.4

Introducing broker commissions
 
7.9

 
6.3

 
21.7

 
17.7

Communication and data services
 
6.3

 
4.2

 
16.5

 
11.1

Occupancy and equipment rental
 
2.7

 
2.1

 
8.2

 
6.1

Professional fees
 
3.3

 
2.9

 
9.6

 
6.9

Depreciation and amortization
 
1.9

 
1.3

 
5.3

 
3.4

Bad debts and impairments
 
0.6

 
1.2

 
0.6

 
5.7

Other
 
7.4

 
6.1

 
24.8

 
20.6

Total non-interest expenses
 
115.3

 
86.1

 
322.6

 
259.5

Income from continuing operations, before tax
 
5.9

 
17.3

 
8.8

 
46.5

Income tax expense
 
1.2

 
7.0

 
2.2

 
17.1

Net income from continuing operations
 
4.7

 
10.3

 
6.6

 
29.4

Income from discontinued operations, net of tax
 
—

 
—

 
—

 
0.2

Net income
 
4.7

 
10.3

 
6.6

 
29.6

Add: Net loss attributable to noncontrolling interests
 
—

 
0.1

 
0.1

 
0.2

Net income attributable to INTL FCStone Inc. common stockholders
 
$
4.7

 
$
10.4

 
$
6.7

 
$
29.8

Basic earnings per share:
 
 
 
 
 
 
 
 
Income from continuing operations attributable to INTL FCStone Inc. common stockholders
 
$
0.24

 
$
0.58

 
$
0.35

 
$
1.67

Income from discontinued operations attributable to INTL FCStone Inc. common stockholders
 
—

 
—

 
—

 
0.01

Net income attributable to INTL FCStone Inc. common stockholders
 
$
0.24

 
$
0.58

 
$
0.35

 
$
1.68

Diluted earnings per share:
 
 
 
 
 
 
 
 
Income from continuing operations attributable to INTL FCStone Inc. common stockholders
 
$
0.23

 
$
0.55

 
$
0.33

 
$
1.56

Income from discontinued operations attributable to INTL FCStone Inc. common stockholders
 
—

 
—

 
—

 
0.01

Net income attributable to INTL FCStone Inc. common stockholders
 
$
0.23

 
$
0.55

 
$
0.33

 
$
1.57

Weighted-average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
18,392,823

 
17,901,613

 
18,286,308

 
17,714,916

Diluted
 
19,098,667

 
19,280,696

 
19,156,471

 
19,308,661

Amounts attributable to INTL FCStone Inc. common stockholders:
 
 
 
 
 
 
 
 
Income from continuing operations, net of tax
 
$
4.7

 
$
10.4

 
$
6.7

 
$
29.6

Income from discontinued operations, net of tax
 
—

 
—

 
—

 
0.2

Net income
 
$
4.7

 
$
10.4

 
$
6.7

 
$
29.8

See accompanying notes to condensed consolidated financial statements.

2
Table of Contents

INTL FCStone Inc.
Condensed Consolidated Cash Flows Statements
(Unaudited)
 
Nine Months Ended June 30,
(in millions)
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
6.6

 
$
29.6

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
5.3

 
3.4

Provision for bad debts and impairments
0.6

 
5.7

Deferred income taxes
(2.4
)
 
1.6

Amortization of debt issuance costs and debt discount
1.2

 
0.1

Convertible debt interest settled in company stock upon conversion
—

 
0.1

Amortization of stock-based compensation expense
3.8

 
1.6

Gain on acquisition of INTL Provident
—

 
(0.4
)
Changes in operating assets and liabilities, net:

 

Cash, securities and other assets segregated under federal and other regulations
(413.2
)
 
(49.5
)
Deposits and receivables from exchange-clearing organizations
229.3

 
(914.5
)
Deposits and receivables from broker-dealers, clearing organizations, and counterparties
(5.2
)
 
(7.9
)
Receivable from customers, net
7.1

 
(32.3
)
Notes receivable from customers, net
14.3

 
6.1

Income taxes receivable
0.2

 
0.8

Financial instruments owned and securities purchased under agreements to resell, at fair value
100.9

 
377.7

Physical commodities inventory
59.9

 
(122.9
)
Other assets
6.9

 
1.3

Accounts payable and other accrued liabilities
9.5

 
25.8

Payable to customers
106.3

 
622.5

Payable to broker-dealers, clearing organizations and counterparties
1.8

 
0.6

Income taxes payable
(0.1
)
 
4.1

Financial instruments sold, not yet purchased, at fair value
(214.4
)
 
126.1

Net cash (used in) provided by operating activities
(81.6
)
 
79.6

Cash flows from investing activities:
 
 
 
Deconsolidation of affiliates
0.4

 
—

Cash paid for acquisitions, net
(11.7
)
 
(13.5
)
Purchase of exchange memberships and common stock
—

 
(3.4
)
Sale of exchange memberships and common stock
—

 
1.3

Purchase of property and equipment
(6.9
)
 
(7.0
)
Net cash used in investing activities
(18.2
)
 
(22.6
)
Cash flows from financing activities:
 
 
 
Net change in payable to lenders under loans
98.0

 
5.6

Payments related to earn-outs on acquisitions
(3.4
)
 
—

Repayment of subordinated debt
—

 
(0.5
)
Debt issuance costs
—

 
(1.3
)
Exercise of stock options
1.7

 
1.3

Share repurchase
(2.8
)
 
—

Income tax benefit on stock options and awards
—

 
0.1

Net cash provided by financing activities
93.5

 
5.2

Effect of exchange rates on cash and cash equivalents
(0.6
)
 
—

Net (decrease) increase in cash and cash equivalents
(6.9
)
 
62.2

Cash and cash equivalents at beginning of period
220.6

 
81.9

Cash and cash equivalents at end of period
$
213.7

 
$
144.1

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
5.7

 
$
5.6

Income taxes paid, net of cash refunds
$
4.0

 
$
7.0

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Conversion of subordinated notes to common stock, net
$
—

 
$
7.7

Identified intangible assets and goodwill on acquisitions
$
1.8

 
$
—

Additional consideration payable related to acquisitions, net
$
1.8

 
$
4.5

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

INTL FCStone Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(in millions)
Common
Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interests
 
Total
Balances as of September 30, 2011
$
0.2

 
$
(0.1
)
 
$
205.2

 
$
97.0

 
$
(6.0
)
 
$
1.3

 
$
297.6

Components of comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
6.7

 
 
 
(0.1
)
 
6.6

Change in foreign currency translation, net of tax
 
 
 
 
 
 
 
 
(0.6
)
 
 
 
(0.6
)
Change in pension liabilities, net of tax
 
 
 
 
 
 
 
 
0.2

 
 
 
0.2

Change in unrealized gain or loss on available-for-sale securities, net of tax
 
 
 
 
 
 
 
 
6.2

 
 
 
6.2

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
12.4

Exercise of stock options
 
 
 
 
1.7

 
 
 
 
 
 
 
1.7

Stock-based compensation
 
 
 
 
3.8

 
 
 
 
 
 
 
3.8

Repurchase of stock
 
 
(2.8
)
 
 
 
 
 
 
 
 
 
(2.8
)
Disposition or de-consolidation
 
 
 
 
 
 
 
 
 
 
(1.2
)
 
(1.2
)
Balances as of June 30, 2012
$
0.2

 
$
(2.9
)
 
$
210.7

 
$
103.7

 
$
(0.2
)
 
$
—

 
$
311.5

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

INTL FCStone Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1 – Basis of Presentation and Consolidation and Recently Issued Accounting Standards
INTL FCStone Inc., a Delaware corporation, and its consolidated subsidiaries (collectively “INTL” or “the Company”), form a financial services group focused on domestic and select international markets. The Company’s services include comprehensive risk management advisory services for commercial customers; execution of listed futures and options on futures contracts on all major commodity exchanges; structured over-the-counter (“OTC”) products in a wide range of commodities; physical trading and hedging of precious and base metals and select other commodities; trading of more than 130 foreign currencies; market-making in international equities; debt origination and asset management.
The Company provides these services to a diverse group of more than 20,000 customers located throughout the world, including producers, processors and end-users of nearly all widely-traded physical commodities to manage their risks and enhance margins; to commercial counterparties who are end-users of the firm’s products and services; to governmental and non-governmental organizations; and to commercial banks, brokers, institutional investors and major investment banks.
Basis of Presentation and Consolidation
The accompanying condensed consolidated balance sheet as of September 30, 2011, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to those rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the condensed consolidated financial statements for the interim periods presented have been reflected as required by Rule 10-01 of Regulation S-X.
Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. It is suggested that these interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes contained in the Company’s Form 10-K for the fiscal year ended September 30, 2011 filed with the SEC.
These condensed consolidated financial statements include the accounts of INTL FCStone Inc. and its subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. In accordance with the Consolidation Topic of the Accounting Standards Codification ("ASC"), the Company consolidates any variable interest entities for which it is the primary beneficiary, as defined.
The Company applies the equity method of accounting when the Company does not have a controlling interest in an entity, but exerts significant influence over the entity.
The Company's fiscal year end is September 30, and the fiscal quarters end on December 31, March 31, June 30 and September 30. Unless otherwise stated, all dates refer to fiscal years and fiscal interim periods.
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant of these estimates and assumptions relate to fair value measurements for financial instruments and investments, revenue recognition, the provision for potential losses from bad debts, valuation of inventories, valuation of goodwill and intangible assets, incomes taxes and contingencies. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board ("FASB") issued new guidance on the presentation of comprehensive income. This guidance eliminates the current option to report comprehensive income and its components in the statement of changes in equity. Under this guidance, an entity can elect to present items of net income and comprehensive income in one continuous statement or in two separate, but consecutive, statements. In addition, the guidance requires entities to show the effects of items reclassified from accumulated other comprehensive loss to net income on the face of the financial statements. This guidance is effective for fiscal years beginning after December 15, 2011 and interim and annual periods thereafter. Early adoption is permitted, but full retrospective application is required. This guidance is effective for the Company's fiscal year

5
Table of Contents

beginning October 1, 2012 and all interim periods within that fiscal year. In December 2011, the FASB issued guidance that deferred the portion of the original guidance that required a company to separately present within net income reclassification adjustments of items out of accumulated other comprehensive loss. The deferral is intended to be temporary until the FASB has time to reconsider these changes. The other provisions of the guidance will become effective as originally planned by the FASB. The Company is expecting to adopt this guidance in the first quarter of fiscal year 2013. As the Company reports comprehensive income within its condensed consolidated statements of stockholders' equity, the adoption of this guidance will result in a change in the presentation of comprehensive income in the Company's condensed consolidated financial statements.
On December 16, 2011, the FASB issued new guidance on the disclosures about offsetting assets and liabilities. While the FASB retained the existing offsetting models under U.S. GAAP, the new standard requires disclosures to allow investors to better compare and understand significant quantitative differences in financial statements prepared under U.S. GAAP. The new standard is effective for annual periods beginning after January 1, 2013, and interim periods within those annual periods. Retrospective application is required. This guidance is effective for the Company's fiscal year beginning October 1, 2013. The Company is expecting to adopt this guidance starting with the first quarter of fiscal year 2014. The adoption of this guidance is expected to change some of the Company's disclosures within the notes to the condensed consolidated financial statements.
In July 2012, the FASB issued final guidance on indefinite-lived intangible assets impairment testing. Under the guidance, entities testing indefinite-lived intangibles for impairment have the option of first performing a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If a company determines that it is more likely than not that the fair value of such an asset exceeds its carrying amount, it would not need to calculate the fair value of the asset in that year. However, if a company concludes otherwise, it must calculate the fair value of the asset, compare that value with its carrying amount and record an impairment charge, if any. The guidance does not revise the requirement to test indefinite-lived intangible assets annually for impairment. In addition, the guidance does not amend the requirement to test indefinite-lived intangible assets for impairment between annual tests if events or circumstances warrant, however, it does revise the examples of events and circumstances that an entity should consider. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company is currently evaluating the impact of this guidance, however, it is expected that the adoption of this guidance will not have a material impact on the Company's condensed consolidated financial statements.

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Table of Contents

Note 2 – Earnings per Share
The Company presents basic and diluted earnings per share ("EPS") using the two-class method which requires all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends and therefore participate in undistributed earnings with common stockholders be included in computing earnings per share. Under the two-class method, net earnings are reduced by the amount of dividends declared in the period for each class of common stock and participating security. The remaining undistributed earnings are then allocated to common stock and participating securities, based on their respective rights to receive dividends. Restricted stock awards granted to certain employees and directors and shares held in trust for the Provident Group acquisition contain non-forfeitable rights to dividends at the same rate as common stock, and are considered participating securities.
Basic EPS has been computed by dividing net income by the weighted-average number of common shares outstanding. The following is a reconciliation of the numerator and denominator of the diluted net income per share computations for the periods presented below.
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
(in millions, except share amounts)
2012
 
2011
 
2012
 
2011
 Numerator:
 
 
 
 
 
 
 
 Income from continuing operations attributable to INTL FCStone Inc. stockholders
$
4.7

 
$
10.4

 
$
6.7

 
$
29.6

 Less: Allocation to participating securities
(0.2
)
 
(0.3
)
 
(0.1
)
 
(0.8
)
Interest on convertible debt, net of tax
—

 
—

 
—

 
0.6

Less: Allocation to participating securities
—

 
—

 
—

 
—

Income from continuing operations allocated to common stockholders
$
4.5

 
$
10.1

 
$
6.6

 
$
29.4

Income from discontinued operations
$
—

 
$
—

 
$
—

 
$
0.2

 Less: Allocation to participating securities
—

 
—

 
—

 
—

 Income from discontinued operations allocated to common stockholders
$
—

 
$
—

 
$
—

 
$
0.2

 Diluted net income
$
4.7

 
$
10.4

 
$
6.7

 
$
30.4

 Less: Allocation to participating securities
(0.2
)
 
(0.3
)
 
(0.1
)
 
(0.8
)
Diluted net income allocated to common stockholders
$
4.5

 
$
10.1

 
$
6.6

 
$
29.6

 Denominator:
 
 
 
 
 
 
 
 Weighted average number of:
 
 
 
 
 
 
 
 Common shares outstanding
18,392,823


17,901,613

 
18,286,308

 
17,714,916

 Dilutive potential common shares outstanding:
 
 
 
 

 

 Share-based awards
705,844

 
932,765

 
870,163

 
952,813

 Convertible debt
—

 
446,318

 
—

 
640,932

Total dilutive potential common shares outstanding
705,844

 
1,379,083

 
870,163

 
1,593,745

 Diluted weighted-average shares
19,098,667

 
19,280,696

 
19,156,471

 
19,308,661

The dilutive effect of share-based awards is reflected in diluted net income per share by application of the treasury stock method, which includes consideration of unamortized share-based compensation expense required under the Compensation – Stock Compensation Topic of the ASC. The dilutive effect of convertible debt is reflected in diluted net income per share by application of the if-converted method.
Options to purchase 634,766 and 384,183 shares of common stock for the three months ended June 30, 2012 and 2011, respectively, and 749,413 and 391,031 shares of common stock for the nine months ended June 30, 2012 and 2011, respectively, were excluded from the calculation of diluted earnings per share because they would have been anti-dilutive.
Note 3 – Assets and Liabilities, at Fair Value
The Company’s financial and nonfinancial assets and liabilities reported at fair value are included within the following captions on the condensed consolidated balance sheets:
•
Cash and cash equivalents
•
Cash, securities and other assets segregated under federal and other regulations

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•
Deposits and receivables from exchange-clearing organizations
•
Deposits and receivables from broker-dealers, clearing organizations and counterparties
•
Notes receivable
•
Financial instruments owned
•
Accounts payable and other accrued liabilities
•
Payables to customers
•
Financial instruments sold, not yet purchased
The table below sets forth an analysis of the carrying value of financial instruments owned and financial instruments sold, not yet purchased as of June 30, 2012 and September 30, 2011. This is followed by tables that provide the information required by the Fair Value Measurements and Disclosures Topic of the ASC for all financial assets and liabilities that are carried at fair value.
 
June 30, 2012
 
September 30, 2011
(in millions)
Owned
 
Sold, not yet
purchased
 
Owned
 
Sold, not yet
purchased
Common stock and American Depositary Receipts ("ADRs")
$
17.1

 
$
13.7

 
$
46.9

 
$
23.4

Exchangeable foreign ordinary equities and ADRs
7.9

 
5.1

 
9.8

 
23.8

Corporate and municipal bonds
9.5

 
—

 
8.7

 
—

U.S. government obligations
0.8

 
—

 
0.8

 
—

Foreign government obligations
10.1

 
—

 
6.7

 
—

Derivatives
47.8

 
43.1

 
101.9

 
122.9

Commodities leases and unpriced positions
17.9

 
114.6

 
26.1

 
220.8

Commodities warehouse receipts
5.3

 
—

 
16.2

 
—

Exchange firm common stock
12.0

 
—

 
3.7

 
—

Mutual funds and other
1.7

 
—

 
1.0

 
—

Investment in managed funds
—

 
—

 
1.3

 
—

 
$
130.1

 
$
176.5

 
$
223.1

 
$
390.9

Fair Value Hierarchy
The majority of financial assets and liabilities on the condensed consolidated balance sheets are reported at fair value. Cash is reported at the balance held at financial institutions. Cash equivalents include the value of money market funds and certificates of deposit. Cash, securities and other assets segregated under federal and other regulations include the value of cash collateral as well as the value of other pledged investments, primarily U.S. Treasury bills and obligations issued by government sponsored entities and commodities warehouse receipts. Deposits with and receivables from exchange-clearing organizations and broker-dealers, clearing organizations and counterparties and payables to customers and broker-dealers, clearing organizations and counterparties include the value of cash collateral as well as the value of money market funds and other pledged investments, primarily U.S. Treasury bills and obligations issued by government sponsored entities and mortgage-backed securities. These balances also include the fair value of exchange-traded futures and options on futures and exchange-cleared swaps and options. Notes receivable includes sale/repurchase agreements with customers whereby the customers sell certain commodity inventory and agree to repurchase the commodity inventory at a future date at a floating rate. The notes are carried at a value that is equivalent to the market price of the underlying commodities at the balance sheet date plus accrued interest and other fees. These notes are short-term in nature and this method approximates fair value. Financial instruments owned and sold, not yet purchased include the value of U.S. and foreign government obligations, corporate debt securities, derivative financial instruments, commodities, mutual funds and investments in managed funds. Notes payable and subordinated debt carry variable rates of interest and thus approximate fair value.
The fair value estimates presented in the financial statements are based on pertinent information available to management as of June 30, 2012 and September 30, 2011. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented in the financial statements.
Cash equivalents, securities, commodities warehouse receipts, derivative financial instruments and contingent liabilities are carried at fair value, on a recurring basis, and are classified and disclosed into three levels within the fair value hierarchy. The Company did not have any fair value adjustments for assets or liabilities measured at fair value on a non-recurring basis during the nine months ended June 30, 2012. The three levels of the fair value hierarchy under the Fair Value Measurements and Disclosures Topic of the ASC are:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

8
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Level 2 - Quoted prices for identical or similar assets or liabilities in markets that are less active, that is, markets in which there are few transactions for the asset or liability that are observable for substantially the full term; and
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The following tables set forth the Company’s financial and nonfinancial assets and liabilities accounted for at fair value, on a recurring basis, as of June 30, 2012 and September 30, 2011 by level within the fair value hierarchy.
 
June 30, 2012
(in millions)
Level 1
 
Level 2
 
Level 3
 
Netting and
Collateral (1)
 
Total
Assets:


 


 


 


 


Money market funds
$
0.1

 
$
—

 
$
—

 
$
—

 
$
0.1

Certificate of deposits
10.3

 
—

 
—

 
—

 
10.3

Unrestricted cash equivalents
10.4

 
—

 
—

 
—

 
10.4

Commodities warehouse receipts
24.0

 
—

 
—

 
—

 
24.0

U.S. government obligations
—

 
48.8

 
—

 
—

 
48.8

Securities and other assets segregated under federal and other regulations
24.0

 
48.8

 
—

 
—

 
72.8

Money market funds
674.3

 
—

 
—

 
—

 
674.3

U.S. government obligations
—

 
845.0

 
—

 
—

 
845.0

Mortgage-backed securities
—

 
7.3

 
—

 
—

 
7.3

Derivatives
3,250.5

 
—

 
—

 
(3,489.0
)
 
(238.5
)
Deposits and receivables from exchange-clearing organizations
3,924.8

 
852.3

 
—

 
(3,489.0
)
 
1,288.1

U.S. government obligations
—

 
—

 
—

 
—

 
—

Derivatives
1.9

 
—

 
—

 
(0.9
)
 
1.0

Deposits and receivables from broker-dealers, clearing organizations and counterparties
1.9

 
—

 
—

 
(0.9
)
 
1.0

Common stock and ADRs
23.0

 
0.9

 
1.1

 
—

 
25.0

Corporate and municipal bonds
0.2

 
5.8

 
3.5

 
—

 
9.5

U.S. government obligations
—

 
0.8

 
—

 
—

 
0.8

Foreign government obligations
10.1

 
—

 
—

 
—

 
10.1

Derivatives
305.2

 
938.3

 
—

 
(1,195.7
)
 
47.8

Commodities leases and unpriced positions
—

 
119.7

 
—

 
(101.8
)
 
17.9

Commodities warehouse receipts
5.3

 
—

 
—

 
—

 
5.3

Exchange firm common stock
3.2

 
8.8

 
—

 
—

 
12.0

Mutual funds and other
1.3

 
—

 
0.4

 
—

 
1.7

Financial instruments owned
348.3

 
1,074.3

 
5.0

 
(1,297.5
)
 
130.1

Total assets at fair value
$
4,309.4

 
$
1,975.4

 
$
5.0

 
$
(4,787.4
)
 
$
1,502.4

Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and other accrued liabilities - contingent liabilities
$
—

 
$
—

 
$
20.7

 
$
—

 
$
20.7

Payables to customers - derivatives
3,667.8

 
—

 
—

 
(3,667.8
)
 
—

Common stock and ADRs
18.5

 
0.3

 
—

 
—

 
18.8

Derivatives
305.4

 
970.3

 
—

 
(1,232.6
)
 
43.1

Commodities leases and unpriced positions
—

 
490.3

 
—

 
(375.7
)
 
114.6

Financial instruments sold, not yet purchased
323.9

 
1,460.9

 
—

 
(1,608.3
)
 
176.5

Total liabilities at fair value
$
3,991.7

 
$
1,460.9

 
$
20.7

 
$
(5,276.1
)
 
$
197.2

 
(1)
Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level are included in that level.

9
Table of Contents

 
September 30, 2011
(in millions)
Level 1
 
Level 2
 
Level 3
 
Netting and
Collateral (1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Money market funds
$
0.1

 
$
—

 
$
—

 
$
—

 
$
0.1

Certificate of deposits
12.6

 
—

 
—

 
—

 
12.6

Unrestricted cash equivalents
12.7

 
—

 
—

 
—

 
12.7

Commodities warehouse receipts
19.0

 
—

 
—

 
—

 
19.0

U.S. government obligations
—

 
3.7

 
—

 
—

 
3.7

Securities and other assets segregated under federal and other regulations
19.0

 
3.7

 
—

 
—

 
22.7

Money market funds
1,193.5

 
—

 
—

 
—

 
1,193.5

U.S. government obligations
—

 
470.5

 
—

 
—

 
470.5

Mortgage-backed securities
—

 
8.5

 
—

 
—

 
8.5

Derivatives
7,227.4

 
—

 
—

 
(7,491.7
)
 
(264.3
)
Deposits and receivables from exchange-clearing organizations
8,420.9

 
479.0

 
—

 
(7,491.7
)
 
1,408.2

U.S. government obligations
—

 
0.1

 
—

 
—

 
0.1

Derivatives
47.3

 
1,073.5

 
—

 
(1,104.7
)
 
16.1

Deposits and receivables from broker-dealers, clearing organizations and counterparties
47.3

 
1,073.6

 
—

 
(1,104.7
)
 
16.2

Common stock and ADRs
53.4

 
2.2

 
1.1

 
—

 
56.7

Corporate and municipal bonds
—

 
5.1

 
3.6

 
—

 
8.7

U.S. government obligations
—

 
0.8

 
—

 
—

 
0.8

Foreign government obligations
5.8

 
0.9

 
—

 
—

 
6.7

Derivatives
210.5

 
557.6

 
—

 
(666.2
)
 
101.9

Commodities leases and unpriced positions
—

 
66.3

 
—

 
(40.2
)
 
26.1

Commodities warehouse receipts
16.2

 
—

 
—

 
—

 
16.2

Exchange firm common stock
3.0

 
0.7

 
—

 
—

 
3.7

Mutual funds and other
0.6

 
—

 
0.4

 
—

 
1.0

Investment in managed funds
—

 
1.3

 
—

 
—

 
1.3

Financial instruments owned
289.5

 
634.9

 
5.1

 
(706.4
)
 
223.1

Total assets at fair value
$
8,789.4

 
$
2,191.2

 
$
5.1

 
$
(9,302.8
)
 
$
1,682.9

Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and other accrued liabilities - contingent liabilities
$
—

 
$
—

 
$
22.3

 
$
—

 
$
22.3

Payables to customers - derivatives
6,234.7

 
—

 
—

 
(6,234.7
)
 
—

Common stock and ADRs
44.9

 
2.3

 
—

 
—

 
47.2

Derivatives
219.9

 
1,679.1

 
—

 
(1,776.1
)
 
122.9

Commodities leases and unpriced positions
—

 
431.9

 
—

 
(211.1
)
 
220.8

Financial instruments sold, not yet purchased
264.8

 
2,113.3

 
—

 
(1,987.2
)
 
390.9

Total liabilities at fair value
$
6,499.5

 
$
2,113.3

 
$
22.3

 
$
(8,221.9
)
 
$
413.2

(1)
Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level are included in that level.
Realized and unrealized gains and losses are included within ‘trading gains’ in the condensed consolidated income statements.

10
Table of Contents

Information on Level 3 Financial Assets and Liabilities
The Company’s financial assets at fair value classified within level 3 of the fair value hierarchy as of June 30, 2012 and September 30, 2011 are summarized below:
 
(in millions)
June 30, 2012
 
September 30, 2011
Total level 3 assets
$
5.0

 
$
5.1

Level 3 assets for which the Company bears economic exposure
$
5.0

 
$
5.1

Total assets
$
2,734.4

 
$
2,635.7

Total financial assets at fair value
$
1,502.4

 
$
1,682.9

Total level 3 assets as a percentage of total assets
0.2
%
 
0.2
%
Level 3 assets for which the Company bears economic exposure as a percentage of total assets
0.2
%
 
0.2
%
Total level 3 assets as a percentage of total financial assets at fair value
0.3
%
 
0.3
%
The following tables set forth a summary of changes in the fair value of the Company’s level 3 financial assets and liabilities during the three and nine months ended June 30, 2012 and 2011, including a summary of unrealized gains (losses) during the respective periods on the Company’s level 3 financial assets and liabilities still held as of June 30, 2012.
 
Level 3 Financial Assets and Financial Liabilities
For the Three Months Ended June 30, 2012
(in millions)
Balances at
beginning of
period
 
Realized gains
(losses) during
period
 
Unrealized
gains (losses)
during period
 
Settlements
 
Transfers in
or (out) of
Level 3
 
Balances at
end of period
Assets:
 
 
 
 
 
 
 
 
 
 
 
Common stock and ADRs
$
1.1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1.1

Corporate and municipal bonds
3.6

 
—

 
(0.1
)
 
—

 
—

 
3.5

Mutual funds and other
0.4

 
—

 
—

 
—

 
—

 
0.4

 
$
5.1

 
$
—

 
$
(0.1
)
 
$
—

 
$
—

 
$
5.0

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Contingent liabilities
$
23.3

 
$
—

 
$
0.5

 
$
(3.1
)
 
$
—

 
$
20.7

 
Level 3 Financial Assets and Financial Liabilities
For the Nine Months Ended June 30, 2012
(in millions)
Balances at
beginning of
period
 
Realized gains
(losses) during
period
 
Unrealized
gains (losses)
during period
 
Settlements
 
Transfers in
or (out) of
Level 3
 
Balances at
end of period
Assets:
 
 
 
 
 
 
 
 
 
 
 
Common stock and ADRs
$
1.1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1.1

Corporate and municipal bonds
3.6

 
—

 
(0.1
)
 
—

 
—

 
3.5

Mutual funds and other
0.4

 
—

 
—

 
—

 
—

 
0.4

 
$
5.1

 
$
—

 
$
(0.1
)
 
$
—

 
$
—

 
$
5.0

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Contingent liabilities
$
22.3

 
$
—

 
$
1.8

 
$
(3.4
)
 
$
—

 
$
20.7

 
Level 3 Financial Assets and Financial Liabilities
For the Three Months Ended June 30, 2011
(in millions)
Balances at
beginning of
period
 
Realized gains
(losses) during
period
 
Unrealized
gains (losses)
during period
 
Settlements
 
Transfers in
or (out) of
Level 3
 
Balances at
end of period
Assets:
 
 
 
 
 
 
 
 
 
 
 
Common stock and ADRs
$
1.2

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1.2

Corporate and municipal bonds
5.3

 
—

 
(0.6
)
 
(0.9
)
 
—

 
3.8

Mutual funds and other
0.4

 
—

 
—

 
—

 
—

 
0.4

Investment in managed funds
0.8

 
—

 
—

 
(0.8
)
 
—

 
—

 
$
7.7

 
$
—

 
$
(0.6
)
 
$
(1.7
)
 
$
—

 
$
5.4

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Contingent liabilities
$
30.5

 
$
—

 
$
0.3

 
$
(3.1
)
 
$
—

 
$
27.7


11
Table of Contents

 
Level 3 Financial Assets and Financial Liabilities
For the Nine Months Ended June 30, 2011
(in millions)
Balances at
beginning of
period
 
Realized gains
(losses) during
period
 
Unrealized
gains (losses)
during period
 
Settlements
 
Transfers in
or (out) of
Level 3
 
Balances at
end of period
Assets:
 
 
 
 
 
 
 
 
 
 
 
Common stock and ADRs
$
1.2

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1.2

Corporate and municipal bonds
8.0

 
—

 
(3.3
)
 
(0.9
)
 
—

 
3.8

Mutual funds and other
0.4

 
—

 
—

 
—

 
—

 
0.4

Investment in managed funds
0.6

 
0.2

 
—

 
(0.8
)
 
—

 
—

 
$
10.2

 
$
0.2

 
$
(3.3
)
 
$
(1.7
)
 
$
—

 
$
5.4

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Contingent liabilities
$
32.3

 
$
—

 
$
2.2

 
$
(6.8
)
 
$
—

 
$
27.7

In August 2008, INTL Asia Pte, Ltd., a subsidiary of the Company, arranged a 550 million Thai Baht ("THB"), an $18 million U.S. dollar ("USD") equivalent, issue of debentures for the single asset owning company of Suriwongse Hotel located in Chiang Mai, Thailand. The debentures have a 9.5% coupon and were scheduled to mature in August 2011. The Company arranged for the sale of 375.5 million THB ($12.6 million USD) of the debentures to two investors and the Company retained debentures in the amount of 174.5 million THB ($5.4 million USD). The debentures are secured by a mortgage on the land and hotel buildings, the personal guarantee of the owner, and conditional assignments of accounts and agreements.
The proceeds of this issue were to be used to refinance the previous loan to the hotel owner, finance the hotel's renovation and fund interest up to 50.0 million THB ($1.5 million USD). Renovations were initially planned to be completed by April 2011 and the outstanding debentures were to be refinanced following the completion of renovations.
In addition, the political and economic conditions in Thailand over the past two years have impacted the performance of the hotel. Following the interest capitalization period, the hotel owner was able to meet four quarterly interest payments on the debentures, however the hotel owner defaulted on the interest payment that was due in March 2011. The Company and other debenture holders have exercised their rights under the share pledge provisions of the debentures, and held a share auction of 100% of the shares of the single asset owning company. The debenture holders won the share auction and the previous owner, who is also a personal guarantor of the debentures, has filed a complaint to revoke the completed auction. The Company intends to vigorously defend actions taken in its capacity as a debenture holder. Judgment in the lawsuit filed by the previous owner is expected subsequent to fiscal 2012.
In accordance with the Fair Value Measurements and Disclosures Topic of the ASC, the Company has estimated the fair value of the debentures on a recurring basis each period. The Company has classified its investment in the hotel within level 3 of the fair value hierarchy because the fair value is determined using significant unobservable inputs, which include projected cash flows. These cash flows are discounted employing present value techniques. At March 31, 2011, due to the issues discussed previously, the Company estimated the fair value of its investment in these debentures by using a management-developed forecast, which is based on the income approach. The Company recorded a loss of $1.7 million, representing an other than temporary impairment, during the three months ended March 31, 2011. The Company continues to monitor the hotel renovation process and evaluate the fair value of the debentures. There has been no significant change in the fair value of the debentures, and no additional loss has been recognized during the three and nine months ended June 30, 2012.
The Company is required to make additional future cash payments based on certain financial performance measures of its acquired businesses. The Company is required to remeasure the fair value of the cash earnout arrangements on a recurring basis in accordance with the guidance in the Business Combinations Topic of the ASC. The Company has classified its net liabilities for the contingent earnout arrangements within level 3 of the fair value hierarchy because the fair value is determined using significant unobservable inputs, which include projected cash flows. The estimated fair value of the contingent purchase consideration is based upon management-developed forecasts, a level 3 input in the fair value hierarchy. These cash flows are discounted employing present value techniques in arriving at the acquisition-date fair value. The discount rate was developed using market participant company data and there have been no significant changes in the discount rate environment. From the dates of acquisition to June 30, 2012, certain acquisitions have had changes in the estimates of undiscounted cash flows, based on actual performances fluctuating from estimates. During the three and nine months ended June 30, 2012, the fair value of the contingent consideration increased $0.5 million and $1.8 million, respectively, with the corresponding amount classified as 'other expense' within the condensed consolidated income statements.
The Company reports transfers in and out of levels 1, 2 and 3, as applicable, using the fair value of the securities as of the

12
Table of Contents

beginning of the reporting period in which the transfer occurred.
The Company did not have any transfers between level 1 and level 2 fair value measurements for the three and nine months ended June 30, 2012.
The Company has recorded unrealized gains, net of income tax expense, related to U.S. government obligations and corporate bonds classified as available-for-sale securities in other comprehensive income ("OCI") as of June 30, 2012. The following tables summarize the amortized cost basis, the aggregate fair value and gross unrealized holding gains and losses of the Company’s investment securities classified as available-for-sale as of June 30, 2012 and September 30, 2011:
June 30, 2012
Amounts included in financial instruments owned:
 
 
 
 
 
 
 
 
Amortized
Cost
 
Unrealized Holding (1)
 
Estimated
Fair Value
(in millions)
 
Gains
 
(Losses)
 
U.S. government obligations
$
0.5

 
$
—

 
$
—

 
$
0.5

 
$
0.5

 
$
—

 
$
—

 
$
0.5

 
Amounts included in deposits with and receivables from exchange-clearing organizations:
 
Amortized
Cost
 
Unrealized Holding
 
Estimated
Fair Value
(in millions)
Gains
 
(Losses)
 
U.S. government obligations
$
789.2

 
$
—

 
$
—

 
$
789.2

Mortgage-backed securities
7.2

 
0.1

 
—

 
7.3

 
$
796.4

 
$
0.1

 
$
—

 
$
796.5

 
(1)
Unrealized gain/loss on financial instruments owned as of June 30, 2012 is less than $0.1 million.
September 30, 2011
Amounts included in financial instruments owned:
 
 
 
 
 
 
 
 
Amortized
Cost
 
Unrealized Holding (1)
 
Estimated
Fair Value
(in millions)
Gains
 
(Losses)
 
U.S. government obligations
$
0.5

 
$
—

 
$
—

 
$
0.5

Corporate bonds
5.0

 
—

 
—

 
5.0

 
$
5.5

 
$
—

 
$
—

 
$
5.5

 
(1)
Unrealized gain/loss on financial instruments owned as of September 30, 2011 is less than $0.1 million.

Amounts included in deposits with and receivables from exchange-clearing organizations:
 
Amortized
Cost
 
Unrealized Holding
 
Estimated
Fair Value
(in millions)
Gains
 
(Losses)
 
U.S. government obligations
$
440.6

 
$
0.1

 
$
—

 
$
440.7

Mortgage-backed securities
8.3

 
0.2

 
—

 
8.5

 
$
448.9

 
$
0.3

 
$
—

 
$
449.2

As of June 30, 2012 and September 30, 2011, investments in debt securities classified as available-for-sale ("AFS") mature as follows:
June 30, 2012
 
Due in
 
Estimated
Fair Value
(in millions)
Less than 1 year
 
1 year or more
 
U.S. government obligations
$
789.7

 
$
—

 
$
789.7

Mortgage-backed securities
—

 
7.3

 
7.3

 
$
789.7

 
$
7.3

 
$
797.0


13
Table of Contents

September 30, 2011
 
Due in
 
Estimated
Fair Value
(in millions)
Less than 1 year
 
1 year or more
 
U.S. government obligations
$
441.2

 
$
—

 
$
441.2

Corporate bonds
5.0

 
—

 
5.0

Mortgage-backed securities
—

 
8.5

 
8.5

 
$
446.2

 
$
8.5

 
$
454.7

There were no sales of AFS securities during the three and nine months ended June 30, 2012 and 2011, and as a result, no realized gains or losses were recorded for the three and nine months ended June 30, 2012 and 2011.
For the purposes of the maturity schedule, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the expected maturity of the underlying collateral. Mortgage-backed securities may mature earlier than their stated contractual maturities because of accelerated principal repayments of the underlying loans.
The Company has also classified equity investments in exchange firms' common stock not pledged for clearing purposes as available-for-sale. The investments are recorded at fair value, with unrealized gains and losses recorded, net of taxes, as a component of OCI until realized. As of June 30, 2012, the cost and fair value of all the equity investments in exchange firms was $4.4 million and $12.0 million, respectively.
On June 15, 2012, the board of London Metal Exchange (LME) Holdings Limited, the parent company of the LME, entered into a framework agreement regarding the terms of a recommended cash offer for the entire issued and outstanding ordinary share capital of LME Holdings. On July 23, 2012, the shareholders of LME Holdings voted to approve the sale of the LME to the Hong Kong Exchanges & Clearing Limited. Based on the proposed sale price of the ordinary shares, the shares of the LME held by the Company as available-for-sale are valued at $8.4 million as of June 30, 2012. The Company's shares in the LME reflect an unrealized gain of $6.1 million, net of income tax expense of $1.9 million, that is recorded in OCI as of June 30, 2012. Upon closing of the sale, the Company will reclassify the unrealized gain on the shares in accumulated OCI and recognize the realized gain in the current period's earnings.
The Company recorded unrealized losses of $0.3 million, net of income tax benefit of $0.2 million in OCI related to the remaining equity investments in exchange firms as of June 30, 2012. The Company monitors the fair value of exchange common stock on a periodic basis, and does not consider any current unrealized losses to be anything other than a temporary impairment.
Note 4 – Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk
The Company is party to certain financial instruments with off-balance sheet risk in the normal course of its business. The Company has sold financial instruments that it does not currently own and will therefore be obliged to purchase such financial instruments at a future date. The Company has recorded these obligations in the condensed consolidated financial statements as of June 30, 2012 at the fair values of the related financial instruments. The Company will incur losses if the fair value of the underlying financial instruments increases subsequent to June 30, 2012. The total of $176.5 million as of June 30, 2012 includes $43.1 million for derivative contracts, which represent a liability to the Company based on their fair values as of June 30, 2012.
Derivatives
The Company utilizes derivative products in its trading capacity as a dealer in order to satisfy client needs and mitigate risk. The Company manages risks from both derivatives and non-derivative cash instruments on a consolidated basis. The risks of derivatives should not be viewed in isolation, but in aggregate with the Company’s other trading activities. The majority of the Company’s derivative positions are included in the consolidated balance sheets within ‘financial instruments owned, at fair value’, ‘deposits and receivables from exchange-clearing organizations’ and ‘financial instruments sold, not yet purchased, at fair value’.
The Company continues to employ an interest rate risk management strategy, implemented in April 2010, that uses derivative financial instruments in the form of interest rate swaps to manage a portion of the aggregate interest rate position. The Company’s objective is to invest the majority of customer segregated deposits in high quality, short-term investments and swap the resulting variable interest earnings into the medium-term interest stream, by using a strip of interest rate swaps that mature every quarter, in order to achieve the two year moving average of the two year swap rate. The risk mitigation of these interest rate swaps is not within the documented hedging designation requirements of the Derivatives and Hedging Topic of the ASC, and as a result they are recorded at fair value, with changes in the fair value of the financial instruments recorded within 'trading gains' in the condensed consolidated income statements. As of June 30, 2012, approximately $765 million in notional principal of interest rate swaps were outstanding with a weighted-average life of 9 months.

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Table of Contents

Listed below are the fair values of the Company's derivative assets and liabilities as of June 30, 2012 and September 30, 2011. Assets represent net unrealized gains and liabilities represent net unrealized losses.
 
June 30, 2012
 
September 30, 2011
(in millions)
Assets (1)
 
Liabilities (1)
 
Assets (1)
 
Liabilities (1)
Derivative contracts not accounted for as hedges:
 
 
 
 
 
 
 
Exchange-traded commodity derivatives
$
3,164.4

 
$
3,594.6

 
$
7,074.2

 
$
6,062.4

OTC commodity derivatives
818.7

 
813.3

 
763.7

 
780.1

Exchange-traded foreign exchange derivatives
73.6

 
54.2

 
126.9

 
89.8

OTC foreign exchange derivatives (2)(3)
423.2

 
462.4

 
1,074.3

 
1,118.9

Interest rate derivatives
3.0

 
1.6