INTL 03.31.2015 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 March 31, 2015
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 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 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
(Do not check if a smaller reporting company)
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 May 4, 2015, there were 18,981,079 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 March 31, 2015
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)
March 31,
2015
 
September 30,
2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
243.5

 
$
231.3

Cash, securities and other assets segregated under federal and other regulations (including $509.0 and $15.3 at fair value at March 31, 2015 and September 30, 2014, respectively)
687.3

 
448.0

Securities purchased under agreements to resell
336.9

 
—

Deposits and receivables from:
 
 
 
Exchange-clearing organizations (including $1,008.7 and $1,255.4 at fair value at March 31, 2015 and September 30, 2014, respectively)
1,420.5

 
1,731.4

Broker-dealers, clearing organizations and counterparties (including $(28.6) and $(1.1) at fair value at March 31, 2015 and September 30, 2014, respectively)
193.1

 
123.0

Receivables from customers, net
72.2

 
55.6

Notes receivable, net
76.0

 
65.2

Income taxes receivable
11.0

 
10.8

Financial instruments owned, at fair value (includes securities pledged as collateral that can be sold or repledged of $183.4 at March 31, 2015)
1,217.1

 
197.9

Physical commodities inventory
59.6

 
40.0

Deferred income taxes, net
27.5

 
32.0

Property and equipment, net
15.4

 
15.9

Goodwill and intangible assets, net
60.2

 
58.0

Other assets
42.3

 
30.6

Total assets
$
4,462.6

 
$
3,039.7

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable and other accrued liabilities (including $3.1 and $5.5 at fair value at March 31, 2015 and September 30, 2014, respectively)
$
112.4

 
$
114.1

Payables to:
 
 
 
Customers
2,225.0

 
2,228.7

Broker-dealers, clearing organizations and counterparties (including $1.5 at fair value at March 31, 2015)
135.7

 
11.9

Lenders under loans
45.8

 
22.5

Senior unsecured notes
45.5

 
45.5

Income taxes payable
6.5

 
7.6

Payables under repurchase agreements
908.9

 
—

Financial instruments sold, not yet purchased, at fair value
613.3

 
264.0

Total liabilities
4,093.1

 
2,694.3

Commitments and contingencies (Note 11)

 

Stockholders' Equity:
 
 
 
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; no shares issued or outstanding
—

 
—

Common stock, $0.01 par value. Authorized 30,000,000 shares; 20,132,970 issued and 18,965,488 outstanding at March 31, 2015 and 19,826,635 issued and 18,883,662 outstanding at September 30, 2014
0.2

 
0.2

Common stock in treasury, at cost - 1,167,482 shares at March 31, 2015 and 942,973 shares at September 30, 2014, respectively
(22.0
)
 
(17.5
)
Additional paid-in capital
233.5

 
229.6

Retained earnings
167.1

 
144.7

Accumulated other comprehensive loss, net
(9.3
)
 
(11.6
)
Total stockholders' equity
369.5

 
345.4

Total liabilities and stockholders' equity
$
4,462.6

 
$
3,039.7

See accompanying notes to condensed consolidated financial statements.

1
Table of Contents

INTL FCStone Inc.
Condensed Consolidated Income Statements
(Unaudited)
 
Three Months Ended March 31,
 
Six Months Ended March 31,
(in millions, except share and per share amounts)
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Sales of physical commodities
$
14,291.6

 
$
8,329.4

 
$
27,785.9

 
$
16,130.6

Trading gains, net
84.8

 
64.7

 
155.1

 
116.4

Commission and clearing fees
47.2

 
47.3

 
96.7

 
89.5

Consulting and management fees
9.3

 
9.5

 
19.7

 
21.5

Interest income
9.0

 
1.9

 
12.1

 
3.3

Other income
0.1

 
0.1

 
0.2

 
0.3

Total revenues
14,442.0

 
8,452.9

 
28,069.7

 
16,361.6

Cost of sales of physical commodities
14,285.5

 
8,323.7

 
27,775.7

 
16,119.5

Operating revenues
156.5

 
129.2

 
294.0

 
242.1

Transaction-based clearing expenses
31.8

 
27.7

 
61.2

 
52.9

Introducing broker commissions
12.3

 
12.8

 
24.5

 
24.4

Interest expense
4.5

 
2.8

 
7.2

 
5.5

Net operating revenues
107.9

 
85.9

 
201.1

 
159.3

Compensation and other expenses:
 
 
 
 
 
 
 
Compensation and benefits
63.1

 
52.7

 
119.5

 
99.0

Communication and data services
7.2

 
6.2

 
13.9

 
12.4

Occupancy and equipment rental
3.8

 
3.2

 
6.9

 
6.2

Professional fees
3.1

 
4.1

 
6.4

 
8.4

Travel and business development
2.5

 
2.0

 
5.3

 
4.8

Depreciation and amortization
1.8

 
1.7

 
3.7

 
3.6

Bad debts and impairments
2.8

 
0.4

 
2.8

 
0.7

Other
5.5

 
5.3

 
10.9

 
10.0

Total compensation and other expenses
89.8

 
75.6

 
169.4

 
145.1

Income from continuing operations, before tax
18.1

 
10.3

 
31.7

 
14.2

Income tax expense
5.1

 
2.6

 
9.3

 
4.1

Net income from continuing operations
13.0

 
7.7

 
22.4

 
10.1

Loss from discontinued operations, net of tax
—

 
(0.2
)
 
—

 
(0.1
)
Net income
$
13.0

 
$
7.5

 
$
22.4

 
$
10.0

Basic earnings per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.68

 
$
0.40

 
$
1.18

 
$
0.53

Loss from discontinued operations
—

 
(0.01
)
 
—

 
(0.01
)
Net income per common share
$
0.68

 
$
0.39

 
$
1.18

 
$
0.52

Diluted earnings per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.67

 
$
0.40

 
$
1.16

 
$
0.52

Loss from discontinued operations
—

 
(0.01
)
 
—

 
(0.01
)
Net income per common share
$
0.67

 
$
0.39

 
$
1.16

 
$
0.51

Weighted-average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
18,599,011

 
18,609,550

 
18,546,377

 
18,627,383

Diluted
18,957,780

 
18,955,128

 
18,743,033

 
19,274,153

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

INTL FCStone Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 
Three Months Ended March 31,
 
Six Months Ended March 31,
(in millions)
2015
 
2014
 
2015
 
2014
Net income
$
13.0

 
$
7.5

 
$
22.4

 
$
10.0

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(0.8
)
 
(2.7
)
 
(1.1
)
 
(3.9
)
Pension liabilities adjustment
—

 
0.1

 
—

 
0.1

Net unrealized gain or loss on available-for-sale securities
2.3

 
(0.2
)
 
3.4

 
—

Reclassification of adjustments included in net income:


 


 


 


Periodic pension costs (included in compensation and benefits)
—

 
—

 
—

 
0.1

Reclassification adjustment for gains included in net income:
—

 
—

 
—

 
0.1

Other comprehensive income (loss)
1.5

 
(2.8
)
 
2.3

 
(3.7
)
Comprehensive income
$
14.5

 
$
4.7

 
$
24.7

 
$
6.3

 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.

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INTL FCStone Inc.
Condensed Consolidated Cash Flows Statements
(Unaudited)
 
Six Months Ended March 31,
(in millions)
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
22.4

 
$
10.0

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
3.7

 
3.5

Provision for bad debts and impairments
2.8

 
0.7

Deferred income taxes
2.3

 
(3.5
)
Amortization of debt issuance costs and debt discount
0.5

 
0.5

Amortization of share-based compensation
1.8

 
2.2

Loss on sale of property and equipment
0.4

 
0.2

Changes in operating assets and liabilities, net:
 
 
 
Cash, securities and other assets segregated under federal and other regulations
(244.8
)
 
(266.3
)
Securities purchased under agreements to resell
3.6

 
—

Deposits and receivables from exchange-clearing organizations
313.0

 
86.7

Deposits and receivables from broker-dealers, clearing organizations, and counterparties
(66.5
)
 
41.6

Receivable from customers, net
(18.1
)
 
22.4

Notes receivable, net
(11.9
)
 
(27.6
)
Income taxes receivable
(0.3
)
 
2.3

Financial instruments owned, at fair value
(356.6
)
 
(2.7
)
Physical commodities inventory
(19.6
)
 
(8.9
)
Other assets
(15.7
)
 
(5.0
)
Accounts payable and other accrued liabilities
(9.6
)
 
(16.9
)
Payable to customers
(36.5
)
 
177.1

Payable to broker-dealers, clearing organizations and counterparties
123.8

 
(12.4
)
Income taxes payable
(1.0
)
 
3.0

Payables under repurchase agreements
87.6

 
—

Financial instruments sold, not yet purchased, at fair value
222.5

 
37.6

Net cash provided by operating activities
3.8

 
44.5

Cash flows from investing activities:
 
 
 
Cash paid for acquisitions, net
(7.8
)
 
—

Purchase of property and equipment
(1.9
)
 
(3.1
)
Net cash used in investing activities
(9.7
)
 
(3.1
)
Cash flows from financing activities:
 
 
 
Net change in payable to lenders under loans
23.3

 
(20.5
)
Payments related to earn-outs on acquisitions
(2.2
)
 
(0.3
)
Debt issuance costs
(0.1
)
 
(0.3
)
Exercise of stock options
1.9

 
1.2

Share repurchases
(4.7
)
 
(7.2
)
Income tax benefit on stock options and awards
0.4

 
—

Net cash provided by (used in) financing activities
18.6

 
(27.1
)
Effect of exchange rates on cash and cash equivalents
(0.5
)
 
(1.2
)
Net increase in cash and cash equivalents
12.2

 
13.1

Cash and cash equivalents at beginning of period
231.3

 
156.1

Cash and cash equivalents at end of period
$
243.5

 
$
169.2

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
5.0

 
$
5.0

Income taxes paid, net of cash refunds
$
7.6

 
$
1.6

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Identified intangible assets and goodwill on acquisitions
$
3.0

 
$
—

Additional consideration payable related to acquisitions, net
$
1.7

 
$
0.3

Acquisition of business:
 
 
 
Assets acquired
1,011.4

 
—

Liabilities assumed
(995.1
)
 
—

Total net assets acquired
$
16.3

 
$
—

Deferred consideration payable related to acquisitions
$
5.0

 
$
—

Escrow deposits related to acquisitions
$
5.0

 
$
—

See accompanying notes to condensed consolidated financial statements.

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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
 
Total
Balances as of September 30, 2014
$
0.2

 
$
(17.5
)
 
$
229.6

 
$
144.7

 
$
(11.6
)
 
$
345.4

Net income
 
 
 
 
 
 
22.4

 
 
 
22.4

Other comprehensive loss
 
 
 
 
 
 
 
 
2.3

 
2.3

Exercise of stock options
 
 
 
 
2.3

 
 
 
 
 
2.3

Share-based compensation
 
 
 
 
1.8

 
 
 
 
 
1.8

Repurchase of stock
 
 
(4.5
)
 
(0.2
)
 
 
 
 
 
(4.7
)
Balances as of March 31, 2015
$
0.2

 
$
(22.0
)
 
$
233.5

 
$
167.1

 
$
(9.3
)
 
$
369.5

See accompanying notes to condensed consolidated financial statements.

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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 diversified, global financial services organization providing financial products and advisory and execution services to help clients access market liquidity, maximize profits and manage risk. 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 metals and select other commodities; trading of more than 150 foreign currencies; market-making in international equities; fixed income; debt origination and asset management.
The Company provides these services to a diverse group of more than 20,000 accounts, representing approximately 11,000 consolidated clients 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, 2014, 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, 2014 filed with the SEC.
These condensed consolidated financial statements include the accounts of INTL FCStone Inc. and all other entities in which the Company has a controlling financial interest. All material intercompany transactions and balances have been eliminated in consolidation.
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, self-insurance liabilities, 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 2014, the FASB issued ASU 2014-11, Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, which changes the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Additionally, for repurchase financing arrangements, the amendments of this ASU require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. For public entities, the ASU is effective for the first interim or annual period beginning after December 15, 2014. Earlier application is not permitted. The Company adopted this guidance starting with the second quarter of fiscal year 2015. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern: Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires management to evaluate whether there

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are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or are available to be issued. This ASU also requires management to disclose certain information depending on the results of the going concern evaluation. The provisions of this ASU are effective for annual periods ending after December 15, 2016, and for interim and annual periods thereafter. Early adoption is permitted. This amendment is applicable to the Company for the fiscal year ended September 30, 2017. The adoption of this standard is not expected to have a material impact on the condensed consolidated financial statements.
In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items: Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, which eliminates from U.S. GAAP the concept of extraordinary items.  The ASU retains and expands the existing presentation and disclosure guidance for items that are unusual in nature or occur infrequently to also include items that are both unusual in nature and infrequently occurring. The provisions of this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015.  Early adoption is permitted, provided that presentation applied to the beginning of the fiscal year of adoption.  This amendment is applicable to the Company beginning October 1, 2016. The adoption of this standard is not expected to have a material impact on the condensed consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest- Imputation of Interest (Subtopic 835-03) - Simplifying the Presentation of Debt Issuance Costs which requires unamortized debt issuance costs to be presented as a reduction of the corresponding debt liability rather than a separate asset. Amortization of the costs is reported as interest expense. The provisions of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is allowed for all entities for financial statements that have not been previously issued. Entities should apply the new guidance retrospectively to all prior periods. The guidance is applicable to the Company beginning October 1, 2016. The adoption of this standard is not expected to have a material impact on the condensed consolidated financial statements.
Note 2 – Earnings per Share
The Company presents basic and diluted earnings per share (“EPS”) using the two-class method which requires all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends and therefore participate in undistributed earnings with common stockholders be included in computing earnings per share. Under the two-class method, net earnings are reduced by the amount of dividends declared in the period for each class of common stock and participating security. The remaining undistributed earnings are then allocated to common stock and participating securities, based on their respective rights to receive dividends. Restricted stock awards granted to certain employees and directors 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.

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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 March 31,
 
Six Months Ended March 31,
(in millions, except share amounts)
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
13.0

 
$
7.7

 
$
22.4

 
$
10.1

Less: Allocation to participating securities
(0.3
)
 
(0.2
)
 
(0.5
)
 
(0.3
)
Income from continuing operations allocated to common stockholders
$
12.7

 
$
7.5

 
$
21.9

 
$
9.8

(Loss) income from discontinued operations
$
—

 
$
(0.2
)
 
$
—

 
$
(0.1
)
Less: Allocation to participating securities
—

 
—

 
—

 
—

(Loss) income from discontinued operations allocated to common stockholders
$
—

 
$
(0.2
)
 
$
—

 
$
(0.1
)
Diluted net income
$
13.0

 
$
7.5

 
$
22.4

 
$
10.0

Less: Allocation to participating securities
(0.3
)
 
(0.2
)
 
(0.5
)
 
(0.3
)
Diluted net income allocated to common stockholders
$
12.7

 
$
7.3

 
$
21.9

 
$
9.7

Denominator:
 
 
 
 
 
 
 
Weighted average number of:
 
 
 
 
 
 
 
Common shares outstanding
18,599,011


18,609,550

 
18,546,377

 
18,627,383

Dilutive potential common shares outstanding:
 
 
 
 

 

Share-based awards
358,769

 
345,578

 
196,656

 
646,770

Diluted weighted-average shares
18,957,780

 
18,955,128

 
18,743,033

 
19,274,153

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 Accounting Standards Codification (“ASC”).
Options to purchase 999,125 and 1,332,197 shares of common stock for the three months ended March 31, 2015 and 2014, respectively, and options to purchase 1,275,944 and 1,132,782 shares of common stock for the six months ended March 31, 2015 and 2014, 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 in the following captions on the condensed consolidated balance sheets:
•
Cash and cash equivalents
•
Cash, securities and other assets segregated under federal and other regulations
•
Deposits and receivables from exchange-clearing organizations, broker-dealers, clearing organizations and counterparties
•
Financial instruments owned
•
Accounts payable and other accrued liabilities
•
Payables to customers
•
Payables to broker-dealers, clearing organizations and counterparties
•
Financial instruments sold, not yet purchased
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 includes money market funds, which are valued at period-end at the net asset value provided by the fund’s administrator, and certificates of deposit, which are stated at cost plus accrued interest, which approximates fair value. Cash, securities and other assets segregated under federal and other regulations include the value of cash collateral as well as the value of other pledged investments, primarily U.S. Treasury bills and obligations issued by government sponsored entities and commodities warehouse receipts. Deposits with and receivables from exchange-clearing organizations and broker-dealers, clearing organizations and counterparties and payable to customers and broker-dealers, clearing organizations and counterparties include the value of cash collateral as well as the value of money market funds and other pledged investments, primarily U.S. Treasury bills and obligations issued by government sponsored entities. These

8
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balances also include the fair value of exchange-traded futures and options on futures and exchange-cleared swaps and options determined by prices on the applicable exchange. Financial instruments owned and sold, not yet purchased include the value of U.S. and foreign government obligations, corporate debt securities, derivative financial instruments, commodities and mutual funds. The fair value of exchange common stock is determined by quoted market prices, and the fair value of exchange memberships is determined by recent sale transactions. The carrying value of receivables from customers, net and notes receivable, net approximates fair value, given their short duration. Payables to lenders under loans carry variable rates of interest and thus approximate fair value. The fair value of the Company’s senior unsecured notes is estimated to be $47.8 million (carrying value of $45.5 million) as of March 31, 2015, based on the transaction prices at public exchanges for this issuance.
As part of the acquisition of G.X. Clarke & Co. (“G.X. Clarke”) (see Note 17), the Company acquired amounts receivable from and payable to broker-dealers, clearing organizations and counterparties in connection with U.S. Treasury obligations, U.S. Government agency obligations, and agency mortgage-backed obligations. Receivables from broker-dealers, clearing organizations and counterparties primarily include amounts receivable for securities sold but not yet delivered by the Company on settlement date (“fails-to-deliver”) and net receivables arising from unsettled trades. Payables to broker-dealers, clearing organizations and counterparties primarily include amounts payable for securities purchased, but not yet received by the Company on settlement date (“fails-to-receive”), net payables arising from unsettled trades and bonds loaned transactions. Due to their short-term nature, receivables from and payables to broker-dealers, clearing organizations and counterparties approximate fair value.
Also as part of the acquisition of G.X. Clarke (see Note 17), the Company acquired a significant amount of trading assets and liabilities. G.X. Clarke’s trading activities consists primarily of securities trading in connection with U.S. Treasury obligations, U.S. Government agency obligations, and agency mortgage-backed obligations. The acquired assets and liabilities, including derivatives, are recorded on a trade date basis at fair value.
The fair value estimates presented in the condensed consolidated financial statements are based on pertinent information available to management as of March 31, 2015 and September 30, 2014. 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 condensed consolidated financial statements since that date and current estimates of fair value may differ significantly from the amounts presented in the condensed consolidated financial statements.
Cash equivalents, securities, commodities warehouse receipts, derivative financial instruments, commodities leases, exchange common stock and contingent liabilities are carried at fair value, on a recurring basis, and are classified and disclosed into three levels in the fair value hierarchy. The Company did not have any fair value adjustments for assets or liabilities measured at fair value on a non-recurring basis during the six months ended March 31, 2015. 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;
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).

9
Table of Contents

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 March 31, 2015 and September 30, 2014 by level in the fair value hierarchy. There were no assets or liabilities that were measured at fair value on a nonrecurring basis as of March 31, 2015 and September 30, 2014.
 
March 31, 2015
(in millions)
Level 1
 
Level 2
 
Level 3
 
Netting and
Collateral
(1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Unrestricted cash equivalents - certificate of deposits
$
2.6

 
$
—

 
$
—

 
$
—

 
$
2.6

Commodities warehouse receipts
16.8

 
—

 
—

 
—

 
16.8

U.S. government obligations
—

 
492.2

 
—

 
—

 
492.2

Securities and other assets segregated under federal and other regulations
16.8

 
492.2

 
—

 
—

 
509.0

Money market funds
251.7

 
—

 
—

 
—

 
251.7

U.S. government obligations
—

 
621.5

 
—

 
—

 
621.5

Derivatives
5,146.1

 
—

 
—

 
(5,010.6
)
 
135.5

Deposits and receivables from exchange-clearing organizations
5,397.8

 
621.5

 
—

 
(5,010.6
)
 
1,008.7

Foreign government obligations
—

 
1.2

 
—

 
—

 
1.2

Derivatives
399.5

 
1.1

 
—

 
(430.4
)
 
(29.8
)
Deposits and receivables from broker-dealers, clearing organizations and counterparties - derivatives
399.5

 
2.3

 
—

 
(430.4
)
 
(28.6
)
Common and preferred stock and American Depositary Receipts (“ADRs”)
98.2

 
10.0

 
0.5

 
—

 
108.7

Exchangeable foreign ordinary equities and ADRs
8.1

 
—

 
—

 
—

 
8.1

Corporate and municipal bonds
8.3

 
3.1

 
3.6

 
—

 
15.0

U.S. government obligations
—

 
458.9

 
—

 
—

 
458.9

Foreign government obligations
—

 
10.4

 
—

 
—

 
10.4

Derivatives
322.7

 
1,988.1

 
—

 
(2,258.7
)
 
52.1

Commodities leases
—

 
82.8

 
—

 
(81.2
)
 
1.6

Exchange firm common stock
5.7

 
—

 
—

 
—

 
5.7

Mutual funds and other
2.4

 
—

 
—

 
—

 
2.4

Mortgage-backed securities
—

 
554.2

 
—

 
—

 
554.2

Financial instruments owned
445.4

 
3,107.5

 
4.1

 
(2,339.9
)
 
1,217.1

Total assets at fair value
$
6,262.1

 
$
4,223.5

 
$
4.1

 
$
(7,780.9
)
 
$
2,708.8

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

 
$
—

 
$
3.1

 
$
—

 
$
3.1

Payable to broker-dealers, clearing organizations and counterparties - derivatives
5,294.9

 
2.6

 
—

 
(5,296.0
)
 
1.5

Common and preferred stock and ADRs
108.8

 
1.2

 
—

 
—

 
110.0

Exchangeable foreign ordinary equities and ADRs
10.8

 
—

 
—

 
—

 
10.8

U.S. government obligations
—

 
327.3

 
—

 
—

 
327.3

Mortgage-backed securities
—

 
0.5

 
—

 
—

 
0.5

Derivatives
311.9

 
2,006.4

 
—

 
(2,236.3
)
 
82.0

Commodities leases
—

 
92.4

 
—

 
(9.7
)
 
82.7

Financial instruments sold, not yet purchased
431.5

 
2,427.8

 
—

 
(2,246.0
)
 
613.3

Total liabilities at fair value
$
5,726.4

 
$
2,430.4

 
$
3.1

 
$
(7,542.0
)
 
$
617.9

 
(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 is included in that level.

10
Table of Contents

 
September 30, 2014
(in millions)
Level 1
 
Level 2
 
Level 3
 
Netting and
Collateral
(1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Unrestricted cash equivalents - certificates of deposits
$
1.5

 
$
—

 
$
—

 
$
—

 
$
1.5

Commodities warehouse receipts
14.8

 
—

 
—

 
—

 
14.8

U.S. government obligations
—

 
0.5

 
—

 
—

 
0.5

Securities and other assets segregated under federal and other regulations
14.8

 
0.5

 
—

 
—

 
15.3

Money market funds
826.8

 
—

 
—

 
—

 
826.8

U.S. government obligations
—

 
702.5

 
—

 
—

 
702.5

Derivatives
3,397.1

 
—

 
—

 
(3,671.0
)
 
(273.9
)
Deposits and receivables from exchange-clearing organizations
4,223.9

 
702.5

 
—

 
(3,671.0
)
 
1,255.4

Deposits and receivables from broker-dealers, clearing organizations and counterparties - derivatives
549.0

 
—

 
—

 
(550.1
)
 
(1.1
)
Common and preferred stock and American Depositary Receipts (“ADRs”)
66.8

 
15.0

 
0.7

 
—

 
82.5

Exchangeable foreign ordinary equities and ADRs
27.2

 
—

 
—

 
—

 
27.2

Corporate and municipal bonds
7.1

 
9.0

 
3.6

 
—

 
19.7

U.S. government obligations
—

 
0.3

 
—

 
—

 
0.3

Foreign government obligations
—

 
10.7

 
—

 
—

 
10.7

Derivatives
332.4

 
2,328.3

 
—

 
(2,616.4
)
 
44.3

Commodities leases
—

 
60.1

 
—

 
(58.0
)
 
2.1

Commodities warehouse receipts
3.6

 
—

 
—

 
—

 
3.6

Exchange firm common stock
4.8

 
—

 
—

 
—

 
4.8

Mutual funds and other
2.7

 
—

 
—

 
—

 
2.7

Financial instruments owned
444.6

 
2,423.4

 
4.3

 
(2,674.4
)
 
197.9

Total assets at fair value
$
5,233.8

 
$
3,126.4

 
$
4.3

 
$
(6,895.5
)
 
$
1,469.0

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

 
$
—

 
$
5.5

 
$
—

 
$
5.5

Payable to broker-dealers, clearing organizations and counterparties - derivatives
3,469.8

 
—

 
—

 
(3,469.8
)
 
—

Common and preferred stock and ADRs
92.8

 
2.6

 
—

 
—

 
95.4

Exchangeable foreign ordinary equities and ADRs
5.8

 
—

 
—

 
—

 
5.8

Corporate and municipal bonds
2.8

 
—

 
—

 
—

 
2.8

Derivatives
327.0

 
2,257.7

 
—

 
(2,500.3
)
 
84.4

Commodities leases
—

 
176.0

 
—

 
(100.4
)
 
75.6

Financial instruments sold, not yet purchased
428.4

 
2,436.3

 
—

 
(2,600.7
)
 
264.0

Total liabilities at fair value
$
3,898.2

 
$
2,436.3

 
$
5.5

 
$
(6,070.5
)
 
$
269.5

(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 is included in that level.
Realized and unrealized gains and losses are included in ‘trading gains, net’ in the condensed consolidated income statements.

11
Table of Contents

Information on Level 3 Financial Assets and Liabilities
The Company’s financial assets at fair value classified in level 3 of the fair value hierarchy as of March 31, 2015 and September 30, 2014 are summarized below:
(in millions)
March 31, 2015
 
September 30, 2014
Total level 3 assets
$
4.1

 
$
4.3

Level 3 assets for which the Company bears economic exposure
$
4.1

 
$
4.3

Total assets
$
4,462.6

 
$
3,039.7

Total financial assets at fair value
$
2,708.8

 
$
1,469.0

Total level 3 assets as a percentage of total assets
0.1
%
 
0.1
%
Level 3 assets for which the Company bears economic exposure as a percentage of total assets
0.1
%
 
0.1
%
Total level 3 assets as a percentage of total financial assets at fair value
0.2
%
 
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 months ended March 31, 2015 and 2014, 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 March 31, 2015.
 
Level 3 Financial Assets and Financial Liabilities
For the Three Months Ended March 31, 2015
 
 
(in millions)
Balances at
beginning of
period
 
Realized gains
(losses) during
period
 
Unrealized
gains (losses)
during period
 
Purchases/issuances
 
Settlements
 
Transfers in
or (out) of
Level 3
 
Balances at
end of period
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock and ADRs
$
0.6

 
$
—

 
$
(0.1
)
 
$
—

 
$
—

 
$
—

 
$
0.5

Corporate and municipal bonds
3.5

 
—

 
0.1

 
—

 
—

 
—

 
3.6

 
$
4.1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
4.1

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent liabilities
$
2.2

 
$
—

 
$
0.1

 
$
1.5

 
$
(0.7
)
 
$
—

 
$
3.1

 
Level 3 Financial Assets and Financial Liabilities
For the Six Months Ended March 31, 2015
 
 
(in millions)
Balances at
beginning of
period
 
Realized gains
(losses) during
period
 
Unrealized
gains (losses)
during period
 
Purchases/issuances
 
Settlements
 
Transfers in
or (out) of
Level 3
 
Balances at
end of period
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock and ADRs
$
0.7

 
$
—

 
$
(0.2
)
 
$
—

 
$
—

 
$
—

 
$
0.5

Corporate and municipal bonds
3.6

 
—

 
—

 
—

 
—

 
—

 
3.6

 
$
4.3

 
$
—

 
$
(0.2
)
 
$
—

 
$
—

 
$
—

 
$
4.1

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent liabilities
$
5.5

 
$
—

 
$
0.2

 
$
1.5

 
$
(4.1
)
 
$
—

 
$
3.1

 
Level 3 Financial Assets and Financial Liabilities
For the Three Months Ended March 31, 2014
 
 
(in millions)
Balances at
beginning of
period
 
Realized gains
(losses) during
period
 
Unrealized
gains (losses)
during period
 
Purchases/issuances
 
Settlements
 
Transfers in
or (out) of
Level 3
 
Balances at
end of period
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock and ADRs
$
0.7

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
0.7

Corporate and municipal bonds
3.4

 
—

 
—

 
—

 
—

 
—

 
3.4

 
$
4.1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
4.1

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent liabilities
$
9.1

 
$
—

 
$
0.1

 
$
—

 
$
—

 
$
—

 
$
9.2


12
Table of Contents

 
Level 3 Financial Assets and Financial Liabilities
For the Six Months Ended March 31, 2014
 
 
(in millions)
Balances at
beginning of
period
 
Realized gains
(losses) during
period
 
Unrealized
gains (losses)
during period
 
Purchases/issuances
 
Settlements
 
Transfers in
or (out) of
Level 3
 
Balances at
end of period
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock and ADRs
$
0.7

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
0.7

Corporate and municipal bonds
3.5

 
—

 
(0.1
)
 
—

 
—

 
—

 
3.4

 
$
4.2

 
$
—

 
$
(0.1
)
 
$
—

 
$
—

 
$
—

 
$
4.1

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent liabilities
$
9.6

 
$
—

 
$
0.3

 
$
—

 
$
(0.7
)
 
$
—

 
$
9.2

In accordance with the Fair Value Measurements Topic of the ASC, the Company has estimated on a recurring basis each period the fair value of debentures issued by a single asset owning company of Suriwongse Hotel located in Chiang Mai, Thailand. As of March 31, 2015, the Company’s investment in the hotel is $3.6 million, and included within the corporate and municipal bonds classification in the level 3 financial assets and financial liabilities tables. 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. The Company estimates the fair value of its investment in these debentures by using a management-developed forecast, which is based on the income approach. There has been no significant change in the fair value of the debentures, and no additional loss has been recognized during the three months ended March 31, 2015 and 2014.
The Company is required to make additional future cash payments based on certain financial performance measures of its acquired businesses. During the six months ended March 31, 2015, the Company paid $3.4 million, related to the final balance of contingent liability for the Hencorp acquisition. The Company is required to remeasure the fair value of the cash earnout arrangements on a recurring basis in accordance with the guidance in the Business Combinations Topic of the ASC. The Company has classified its liabilities for the contingent earnout arrangements within level 3 of the fair value hierarchy because the fair value is determined using significant unobservable inputs, which include projected cash flows. The estimated fair value of the contingent purchase consideration is based upon management-developed forecasts, a level 3 input in the fair value hierarchy. These cash flows are discounted employing present value techniques in arriving at fair value. The discount rate was developed using market participant company data and there have been no significant changes in the discount rate environment. From the dates of acquisition to March 31, 2015, certain acquisitions have had changes in the estimates of undiscounted cash flows, based on actual performances fluctuating from estimates. The fair value of the contingent consideration increased $0.1 million during the three months ended March 31, 2015 and 2014, respectively, and increased $0.2 million and $0.3 million during the six months ended March 31, 2015 and 2014, respectively, with the corresponding amount classified as ‘other expense’ in 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 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 during the three and six months ended March 31, 2015.
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 other comprehensive income (“OCI”) until realized. As of March 31, 2015, the cost and fair value of all the equity investments in exchange firms was $3.7 million and $5.7 million, respectively. As of September 30, 2014, the cost and fair value of the equity investments in exchange firms was $3.7 million and $4.8 million, respectively.
The Company recorded unrealized gains of $4.1 million, net of income tax expense of $2.5 million as of March 31, 2015, and unrealized gains of $0.7 million, net of income tax expense of $0.4 million as of September 30, 2014, in OCI related to U.S. government obligations, mortgage-backed securities and the remaining equity investments in exchange firms classified as available-for-sale securities.

13
Table of Contents

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 March 31, 2015 and September 30, 2014:
March 31, 2015
Amounts included in deposits with and receivables from exchange-clearing organizations and securities segregated:
 
Amortized
Cost
 
Unrealized Holding
 
Estimated
Fair Value
(in millions)
Gains
 
(Losses)
 
U.S. government obligations
$
1,076.7

 
$
4.5

 
$
—

 
$
1,081.2

September 30, 2014
Amounts included in deposits with and receivables from exchange-clearing organizations:
 
Amortized
Cost
 
Unrealized Holding(1)
 
Estimated
Fair Value
(in millions)
Gains
 
(Losses)
 
U.S. government obligations
$
666.8

 
$
—

 
$
—

 
$
666.8

(1) Unrealized gain/loss on U.S. government obligations as of September 30, 2014, was less than $0.1 million.
As of March 31, 2015 and September 30, 2014, investments in debt securities classified as available-for-sale (“AFS”) mature as follows:
March 31, 2015
 
Due in
 
Estimated
Fair Value
(in millions)
Less than 1 year
 
1 year or more
 
U.S. government obligations
$
398.5

 
$
682.7

 
$
1,081.2

September 30, 2014
 
Due in
 
Estimated
Fair Value
(in millions)
Less than 1 year
 
1 year or more
 
U.S. government obligations
$
287.6

 
$
379.2

 
$
666.8

There were no sales of AFS securities during the three months ended March 31, 2015 and 2014, and as a result, no realized gains or losses were recorded for the three months ended March 31, 2015 and 2014.
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.
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 March 31, 2015 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 March 31, 2015. The total of $613.3 million as of March 31, 2015 includes $82.0 million for derivative contracts, which represents a liability to the Company based on their fair values as of March 31, 2015.
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 in ‘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 employs an interest rate risk management strategy that uses derivative financial instruments in the form of interest rate swaps to manage a portion of the aggregate interest rate position. The Company’s objective is to invest the majority of customer segregated deposits in high quality, short-term investments and swap the resulting variable interest earnings into the medium-term interest stream. The risk mitigation of these interest rate swaps is not within the documented hedging designation requirements of the Derivatives and Hedging Topic of the ASC, and as a result they are recorded at fair value, with changes in the marked-to-market valuation of the financial instruments recorded within 'trading gains, net' in the consolidated

14
Table of Contents

income statements. At March 31, 2015, the Company had $100.0 million in notional principal of interest rate swaps outstanding with a weighted-average life of 34 months.
Listed below are the fair values of the Company’s derivative assets and liabilities as of March 31, 2015 and September 30, 2014. Assets represent net unrealized gains and liabilities represent net unrealized losses.
 
March 31, 2015
 
September 30, 2014
(in millions)
Assets (1)
 
Liabilities (1)
 
Assets (1)
 
Liabilities (1)
Derivative contracts not accounted for as hedges:
 
 
 
 
 
 
 
Exchange-traded commodity derivatives
$
4,985.2

 
$
4,709.6

 
$
3,777.7

 
$
3,255.4

OTC commodity derivatives
2,252.0

 
2,227.7

 
1,852.3

 
1,842.9

Exchange-traded foreign exchange derivatives
30.3

 
27.7

 
93.5

 
90.2

OTC foreign exchange derivatives
456.3

 
492.6

 
808.0

 
741.8

Exchange-traded interest rate derivatives
102.8

 
141.6

 
13.4

 
10.2

Equity index derivatives
28.9

 
14.0

 
61.9

 
114.0

Gross fair value of derivative contracts
7,855.5

 
7,613.2

 
6,606.8

 
6,054.5

Impact of netting and collateral
(7,698.6
)
 
(7,531.2
)
 
(6,837.5
)
 
(5,970.1
)
Total fair value included in ‘Deposits and receivables from exchange-clearing organizations’
$
135.5

 
 
 
$
(273.9
)
 
 
Total fair value included in ‘Deposits and receivables from broker-dealers, clearing organizations and counterparties’
$
(29.8
)
 
 
 
$
(1.1
)
 
 
Total fair value included in ‘Financial instruments owned, at fair value’
$
51.2

 
 
 
$
44.3

 
 
Fair value included in ‘Financial instruments sold, not yet purchased, at fair value’
 
 
$
82.0

 
 
 
$
84.4

(1)
As of March 31, 2015 and September 30, 2014, the Company’s derivative contract volume for open positions were approximately 4.4 million and 4.5 million contracts, respectively.
The Company’s derivative contracts are principally held in its Commercial Hedging and Clearing and Execution Services segments. The Company assists its Commercial Hedging segment customers in protecting the value of their future production by entering into option or forward agreements with them on an OTC basis. The Company also provides its Commercial Hedging segment customers with sophisticated option products, including combinations of buying and selling puts and calls. The Company mitigates its risk by offsetting the customer’s transaction simultaneously with one of the Company’s trading counterparties or with a similar but not identical position on the exchange. The risk mitigation of these offsetting trades is not within the documented hedging designation requirements of the Derivatives and Hedging Topic of the ASC. These derivative contracts are traded along with cash transactions because of the integrated nature of the markets for these products. The Company manages the risks associated with derivatives on an aggregate basis along with the risks associated with its proprietary trading and market-making activities in cash instruments as part of its firm-wide risk management policies. In particular, the risks related to derivative positions may be partially offset by inventory, unrealized gains in inventory or cash collateral paid or received.
Also as part of the acquisition of G.X. Clarke (see Note 17), the Company acquired derivative instruments, which consist of futures, mortgage-backed “to be announced” (TBA) securities and forward settling transactions, that are used to manage risk exposures in the newly acquired subsidiary’s trading inventory. The fair value on these transactions are recorded in receivables or payables to broker-dealers, clearing organizations and counterparties. Realized and unrealized gains and losses on securities and derivative transactions are reflected in ‘trading gains, net’.

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Table of Contents

The Company enters into TBA securities transactions for the sole purpose of managing risk associated with the purchase of mortgage pass-through securities. TBA securities are included within payables to broker-dealers, clearing organizations and counterparties. Forward settling securities represent non-regular way securities and are included in financial instruments owned and sold. As of March 31, 2015, these transactions are summarized as follows:
 
 
Gain / (Loss)
Notional Amounts
Unrealized gain on TBA securities purchased within payables to broker-dealers, clearing organizations and counterparties and related notional amounts (1)
 
$
0.9

$
276.3

Unrealized loss on TBA securities purchased within payables to broker-dealers, clearing organizations and counterparties and related notional amounts (1)
 
$
(0.2
)
$
153.6

Unrealized gain on TBA securities sold within payables to broker-dealers, clearing organizations and counterparties and related notional amounts (1)
 
$
0.2

$
(217.4
)
Unrealized loss on TBA securities sold within payables to broker-dealers, clearing organizations and counterparties and related notional amounts (1)
 
$
(2.4
)
$
(608.3
)
Unrealized gain on forward settling securities purchased within financial instruments owned and related notional amounts
 
$
0.3

$
206.6

Unrealized gain on forward settling securities sold within financial instruments owned and related notional amounts
 
$
0.6

$
(254.7
)
(1) The notional amounts of these instruments reflect the extent of the Company's involvement in TBA securities and do not represent risk of loss due to counterparty non-performance.
 
 
 
The following table sets forth the Company’s gains (losses) related to derivative financial instruments for the three months ended March 31, 2015 and 2014, in accordance with the Derivatives and Hedging Topic of the ASC. The gains set forth below are included in ‘trading gains, net’ and ‘income (loss) from discontinued operations, net of tax’ in the condensed consolidated income statements.
 
Three Months Ended March 31,
 
Six Months Ended March 31,
(in millions)
2015
 
2014
 
2015
 
2014
Commodities
$
21.2

 
$
21.9

 
$
46.4

 
$
30.6

Foreign exchange
1.7

 
2.7

 
3.9

 
4.8

Interest rate
0.1

 
—

 
0.1

 
—

TBA and forward settling securities
2.5

 
—

 
2.5

 
—

Net gains from derivative contracts
$
25.5

 
$
24.6

 
$
52.9

 
$
35.4

Credit Risk
In the normal course of business, the Company purchases and sells financial instruments, commodities and foreign currencies as either principal or agent on behalf of its customers. If either the customer or counterparty fails to perform, the Company may be required to discharge the obligations of the nonperforming party. In such circumstances, the Company may sustain a loss if the fair value of the financial instrument or foreign currency is different from the contract value of the transaction.
The majority of the Company’s transactions and, consequently, the concentration of its credit exposure are with commodity exchanges, customers, broker-dealers and other financial institutions. These activities primarily involve collateralized and uncollateralized arrangements and may result in credit exposure in the event that a counterparty fails to meet its contractual obligations. The Company’s exposure to credit risk can be directly impacted by volatile financial markets, which may impair the ability of counterparties to satisfy their contractual obligations. The Company seeks to control its credit risk through a variety of reporting and control procedures, including establishing credit and/or position limits based upon a review of the counterparties’ financial condition and credit ratings. The Company monitors collateral levels on a daily basis for compliance with regulatory and internal guidelines and requests changes in collateral levels as appropriate.
The Company is a party to financial instruments in the normal course of its business through customer and proprietary trading accounts in exchange-traded and OTC derivative instruments. These instruments are primarily the result of the execution of orders for commodity futures, options on futures and forward foreign currency contracts on behalf of its customers, substantially all of which are transacted on a margin basis. Such transactions may expose the Company to significant credit risk in the event margin requirements are not sufficient to fully cover losses which customers may incur. The Company controls the risks associated with these transactions by requiring customers to maintain margin deposits in compliance with individual exchange regulations and internal guidelines. The Company monitors required margin levels daily and, therefore, may require customers to deposit additional collateral or reduce positions when necessary. The Company also establishes credit limits for customers, which are monitored daily. The Company evaluates each customer’s creditworthiness on a case by case basis.

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Table of Contents

Clearing, financing, and settlement activities may require the Company to maintain funds with or pledge securities as collateral with other financial institutions. Generally, these exposures to both customers and exchanges are subject to master netting, or customer agreements, which reduce the exposure to the Company by permitting receivables and payables with such customers to be offset in the event of a customer default. Management believes that the margin deposits held as of March 31, 2015 and September 30, 2014 were adequate to minimize the risk of material loss that could be created by positions held at that time. Additionally, the Company monitors collateral fair value on a daily basis and adjusts collateral levels in the event of excess market exposure. Generally, these exposures to both customers and counterparties are subject to master netting or customer agreements which reduce the exposure to the Company.
Derivative financial instruments involve varying degrees of off-balance sheet market risk whereby changes in the fair values of underlying financial instruments may result in changes in the fair value of the financial instruments in excess of the amounts reflected in the condensed consolidated balance sheets. Exposure to market risk is influenced by a number of factors, including the relationships between the financial instruments and the Company’s positions, as well as the volatility and liquidity in the markets in which the financial instruments are traded. The principal risk components of financial instruments include, among other things, interest rate volatility, the duration of the underlying instruments and changes in foreign exchange rates. The Company attempts to manage its exposure to market risk through various techniques. Aggregate market limits have been established and market risk measures are routinely monitored against these limits.
Note 5 – Receivables From Customers, Net and Notes Receivable, Net
Receivables from customers, net and notes receivable, net include an allowance for bad debts, which reflects the Company’s best estimate of probable losses inherent in the receivables from customers and notes receivable. The Company provides for an allowance for doubtful accounts based on a specific-identification basis. The Company continually reviews its allowance for bad debts. The allowance for doubtful accounts related to receivables from customers was $7.2 million as of March 31, 2015 and $5.7 million as of September 30, 2014. The allowance for doubtful accounts related to notes receivable was $1.0 million as of March 31, 2015 and $0.1 million as of September 30, 2014.
During the three months ended March 31, 2015, the Company recorded bad debt expense of $2.8 million, including provision increases of $2.6 million and direct write-offs of $0.3 million, net of recoveries of $0.1 million. The provision increases are primarily related to LME customer deficits and notes receivable related to loans pertaining to a former acquisition.
The Company originates short-term notes receivable from customers with the outstanding balances being insured 90% to 98% by a third party, including accrued interest. The total balance outstanding under insured notes receivable was $40.4 million and $33.8 million as of March 31, 2015 and September 30, 2014, respectively. The Company has sold $30.6 million and $25.8 million of the insured portion of the notes through non-recourse participation agreements with other third parties as of March 31, 2015 and September 30, 2014, respectively.
See discussion of notes receivable related to commodity repurchase agreements in Note 10.
Note 6 – Physical Commodities Inventory
Physical commodities inventories are stated at the lower of cost or market (“LCM”) using the weighted-average price and first-in first-out cost method. Cost includes finished commodity or raw material and processing costs related to the purchase and processing of inventories. The carrying values of the Company’s inventory, which consist of all finished commodities inventory, are $59.6 million and $40.0 million as of March 31, 2015 and September 30, 2014, respectively.
As a result of the declining market prices of certain commodities, the Company has recorded LCM adjustments for physical commodities inventory of $0.4 million and $1.0 million as of March 31, 2015 and September 30, 2014, respectively. The adjustments are included in ‘cost of sales of physical commodities’ in the condensed consolidated income statements.
Note 7 – Goodwill
The carrying value of goodwill is allocated to the Company’s operating segment as follows:
(in millions)
March 31,
2015
 
September 30,
2014
Commercial Hedging
$
30.7

 
$
30.7

Global Payments
6.3

 
6.3

Physical Commodities
2.4

 
2.4

Securities
8.1

 
8.1

Goodwill
$
47.5

 
$
47.5


17
Table of Contents

Note 8 – Intangible Assets
During the six months ended March 31, 2015, the Company recorded additional intangible assets of $3.0 million as part of the
G.X. Clarke acquisition. See Note 17 - Acquisitions for additional discussion.
The gross and net carrying values of intangible assets as of the balance sheet dates, by major intangible asset class are as follows:
 
March 31, 2015
 
September 30, 2014
(in millions)
Gross Amount
 
Accumulated
Amortization
 
Net Amount
 
Gross Amount
 
Accumulated
Amortization
 
Net Amount
Intangible assets subject to amortization
 
 
 
 
 
 
 
 
 
 
 
Software programs/platforms
$
3.7

 
$
(2.1
)
 
$
1.6

 
$
2.2

 
$
(1.9
)
 
$
0.3

Customer base
14.4

 
(4.4
)
 
10.0

 
12.9

 
(3.8
)
 
9.1

 
18.1

 
(6.5
)
 
11.6

 
15.1

 
(5.7
)
 
9.4

Intangible assets not subject to amortization
 
 
 
 
 
 
 
 
 
 
 
Trade name
1.1

 
—

 
1.1

 
1.1

 
—

 
1.1

Total intangible assets
$
19.2

 
$
(6.5
)
 
$
12.7

 
$
16.2

 
$
(5.7
)
 
$
10.5

Amortization expense related to intangible assets was $0.8 million and $0.6 million for the six months ended March 31, 2015 and 2014, respectively.
As of March 31, 2015, the estimated future amortization expense was as follows:
(in millions)
 
Fiscal 2015 (remaining six months)
$
0.8

Fiscal 2016
1.5

Fiscal 2017
1.5

Fiscal 2018
1.3