StoneX Group Inc. - FORM 10-Q - February 8, 2017

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EX-32.2 - SECTION 906 CFO CERTIFICATION - StoneX Group Inc.intlexhibit32212312016.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - StoneX Group Inc.intlexhibit32112312016.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - StoneX Group Inc.intlexhibit31212312016.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - StoneX Group Inc.intlexhibit31112312016.htm

 
 
 
 
 
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 December 31, 2016
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 February 6, 2017, there were 18,639,836 shares of the registrant’s common stock outstanding.
 
 
 
 
 


INTL FCStone Inc.
Quarterly Report on Form 10-Q for the Quarterly Period Ended December 31, 2016
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.
 
 
 
 



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTL FCStone Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in millions, except par value and share amounts)
December 31,
2016
 
September 30,
2016
ASSETS
 
 
 
Cash and cash equivalents
$
278.8

 
$
316.2

Cash, securities and other assets segregated under federal and other regulations (including $715.7 and $618.8 at fair value at December 31, 2016 and September 30, 2016, respectively)
983.1

 
1,136.3

Securities purchased under agreements to resell
770.5

 
609.6

Deposits with and receivables from:
 
 
 
Exchange-clearing organizations (including $921.0 and $868.5 at fair value at December 31, 2016 and September 30, 2016, respectively)
1,665.2

 
1,524.4

Broker-dealers, clearing organizations and counterparties (including $4.3 and $(15.2) at fair value at December 31, 2016 and September 30, 2016, respectively)
209.2

 
237.0

Receivables from customers, net
218.8

 
194.5

Notes receivable, net
20.2

 
18.9

Income taxes receivable
2.3

 
1.1

Financial instruments owned, at fair value (includes securities pledged as collateral that can be sold or repledged of $482.4 and $47.2 at December 31, 2016 and September 30, 2016, respectively)
1,730.0

 
1,606.1

Physical commodities inventory (including $129.8 and $71.2 at fair value at December 31, 2016 and September 30, 2016, respectively)
212.1

 
123.8

Deferred income taxes, net
38.0

 
34.5

Property and equipment, net
31.0

 
29.4

Goodwill and intangible assets, net
61.9

 
56.6

Other assets
69.6

 
61.9

Total assets
$
6,290.7

 
$
5,950.3

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable and other accrued liabilities (including $0.9 and $0.8 at fair value at December 31, 2016 and September 30, 2016, respectively)
$
153.4

 
$
161.3

Payables to:
 
 
 
Customers
2,793.0

 
2,854.2

Broker-dealers, clearing organizations and counterparties (including $6.4 and $3.5 at fair value at December 31, 2016 and September 30, 2016, respectively)
110.5

 
260.1

Lenders under loans
312.6

 
182.8

Senior unsecured notes
—

 
44.5

Income taxes payable
10.9

 
7.1

Securities sold under agreements to repurchase
1,566.2

 
1,167.1

Financial instruments sold, not yet purchased, at fair value
901.5

 
839.4

Total liabilities
5,848.1

 
5,516.5

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; 20,740,489 issued and 18,618,532 outstanding at December 31, 2016 and 20,557,175 issued and 18,435,218 outstanding at September 30, 2016
0.2

 
0.2

Common stock in treasury, at cost - 2,121,957 shares at December 31, 2016 and September 30, 2016
(46.3
)
 
(46.3
)
Additional paid-in capital
252.8

 
249.4

Retained earnings
261.4

 
255.1

Accumulated other comprehensive loss, net
(25.5
)
 
(24.6
)
Total stockholders' equity
442.6

 
433.8

Total liabilities and stockholders' equity
$
6,290.7

 
$
5,950.3

See accompanying notes to condensed consolidated financial statements.

1

INTL FCStone Inc.
Condensed Consolidated Income Statements
(Unaudited)
 
Three Months Ended December 31,
(in millions, except share and per share amounts)
2016
 
2015
Revenues:
 
 
 
Sales of physical commodities
$
5,896.0

 
$
3,252.6

Trading gains, net
83.0

 
79.7

Commission and clearing fees
69.2

 
49.1

Consulting and management fees
15.7

 
9.7

Interest income
10.4

 
8.7

Other income
0.1

 
0.1

Total revenues
6,074.4

 
3,399.9

Cost of sales of physical commodities
5,888.9

 
3,248.6

Operating revenues
185.5

 
151.3

Transaction-based clearing expenses
33.6

 
29.8

Introducing broker commissions
28.7

 
12.8

Interest expense
8.9

 
6.0

Net operating revenues
114.3

 
102.7

Compensation and other expenses:
 
 
 
Compensation and benefits
70.6

 
63.1

Communication and data services
10.1

 
7.9

Occupancy and equipment rental
3.4

 
3.3

Professional fees
4.8

 
2.9

Travel and business development
3.6

 
3.2

Depreciation and amortization
2.4

 
1.9

Bad debts
2.5

 
2.0

Other
8.5

 
6.3

Total compensation and other expenses
105.9

 
90.6

Income before tax
8.4

 
12.1

Income tax expense
2.1

 
3.3

Net income
$
6.3

 
$
8.8

Earnings per share:
 
 
 
Basic
$
0.34

 
$
0.47

Diluted
$
0.34

 
$
0.46

Weighted-average number of common shares outstanding:
 
 
 
Basic
18,248,244

 
18,648,150

Diluted
18,484,995

 
18,991,903

See accompanying notes to condensed consolidated financial statements.

2

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

 
Three Months Ended December 31,
(in millions)
2016
 
2015
Net income
$
6.3

 
$
8.8

Other comprehensive (loss) income, net of tax:
 
 
 
Foreign currency translation adjustment
(0.9
)
 
(5.6
)
Pension liabilities adjustment
—

 
(0.2
)
Reclassification of adjustments included in net income:


 


Periodic pension costs (included in compensation and benefits)
—

 
0.4

Reclassification adjustment included in net income:
—

 
0.4

Other comprehensive loss
(0.9
)
 
(5.4
)
Comprehensive income
$
5.4

 
$
3.4

 
 
 
 
See accompanying notes to condensed consolidated financial statements.

3

INTL FCStone Inc.
Condensed Consolidated Cash Flows Statements
(Unaudited)
 
Three Months Ended December 31,
(in millions)
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
6.3

 
$
8.8

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
2.4

 
1.9

Bad debts
2.5

 
2.0

Deferred income taxes
(3.5
)
 
(2.8
)
Amortization of debt issuance costs and debt discount
1.2

 
0.2

Amortization of share-based compensation
0.8

 
0.9

Loss on sale of property and equipment
(0.3
)
 
—

Changes in operating assets and liabilities, net:
 
 
 
Cash, securities and other assets segregated under federal and other regulations
148.3

 
(39.5
)
Securities purchased under agreements to resell
(160.9
)
 
(9.9
)
Deposits with and receivables from exchange-clearing organizations
(145.1
)
 
(55.6
)
Deposits with and receivables from broker-dealers, clearing organizations, and counterparties
(6.3
)
 
87.9

Receivables from customers, net
(11.4
)
 
58.0

Notes receivable, net
(1.3
)
 
(9.7
)
Income taxes receivable
(1.3
)
 
2.1

Financial instruments owned, at fair value
(129.6
)
 
(158.2
)
Physical commodities inventory
(88.6
)
 
(15.1
)
Other assets
(7.8
)
 
(1.1
)
Accounts payable and other accrued liabilities
(7.6
)
 
(33.4
)
Payables to customers
(35.3
)
 
13.3

Payables to broker-dealers, clearing organizations and counterparties
(148.1
)
 
(176.6
)
Income taxes payable
4.0

 
(1.8
)
Securities sold under agreements to repurchase
399.1

 
131.6

Financial instruments sold, not yet purchased, at fair value
65.9

 
113.6

Net cash used in operating activities
(116.6
)
 
(83.4
)
Cash flows from investing activities:
 
 
 
Cash paid for acquisitions, net
(6.0
)
 
—

Purchase of property and equipment
(3.0
)
 
(5.9
)
Net cash used in investing activities
(9.0
)
 
(5.9
)
Cash flows from financing activities:
 
 
 
Net change in payable to lenders under loans
130.0

 
99.5

Repayment of senior unsecured notes
(45.5
)
 
—

Payments of note payable
(0.2
)
 
(0.2
)
Debt issuance costs
(0.1
)
 
(0.1
)
Exercise of stock options
2.0

 
1.6

Excess income tax benefit on stock options and awards
0.6

 
0.7

Net cash provided by financing activities
86.8

 
101.5

Effect of exchange rates on cash and cash equivalents
1.4

 
(6.0
)
Net (decrease) increase in cash and cash equivalents
(37.4
)
 
6.2

Cash and cash equivalents at beginning of period
316.2

 
268.1

Cash and cash equivalents at end of period
$
278.8

 
$
274.3

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
7.6

 
$
4.4

Income taxes paid, net of cash refunds
$
2.4

 
$
5.1

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Identified intangible assets and goodwill on acquisitions
$
6.0

 
$
—

Additional consideration payable related to acquisitions, net
$
—

 
$
0.2

See accompanying notes to condensed consolidated financial statements.

4

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, 2016
$
0.2

 
$
(46.3
)
 
$
249.4

 
$
255.1

 
$
(24.6
)
 
$
433.8

Net income
 
 
 
 
 
 
6.3

 
 
 
6.3

Other comprehensive loss
 
 
 
 
 
 
 
 
(0.9
)
 
(0.9
)
Exercise of stock options
 
 
 
 
2.6

 
 
 
 
 
2.6

Share-based compensation
 
 
 
 
0.8

 
 
 
 
 
0.8

Balances as of December 31, 2016
$
0.2

 
$
(46.3
)
 
$
252.8

 
$
261.4

 
$
(25.5
)
 
$
442.6

See accompanying notes to condensed consolidated financial statements.

5

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”), is a diversified global financial services organization providing execution, risk management and advisory services, market intelligence, and clearing services across assets classes and markets around the world. The Company’s services include comprehensive risk management advisory services for commercial customers; execution of listed futures and options on futures contracts on all major commodity exchanges; structured over-the-counter (“OTC”) products in a wide range of commodities; physical trading and hedging of precious metals and select other commodities; trading of more than 140 foreign currencies; market-making in international equities; fixed income; debt origination and asset management.
The Company provides these services to a diverse group of more than 20,000 predominantly wholesale organizations located throughout the world, including producers, processors and end-users of nearly all widely-traded physical commodities to manage their risks and enhance margins; to commercial counterparties who are end-users of the firm’s products and services; to governmental and non-governmental organizations; and to commercial banks, brokers, institutional investors and major investment banks.
Basis of Presentation and Consolidation
The accompanying condensed consolidated balance sheet as of September 30, 2016, 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. 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, 2016 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 measurement 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.
In the condensed consolidated income statements, the total revenues reported combine gross revenues for the physical commodities business and net revenues for all other businesses. The subtotal ‘operating revenues’ in the condensed consolidated income statements is calculated by deducting physical commodities cost of sales from total revenues. The subtotal ‘net operating revenues’ in the condensed consolidated income statements is calculated as operating revenues less transaction-based clearing expenses, introducing broker commissions and interest expense. Transaction-based clearing expenses represent variable expenses paid to executing brokers, exchanges, clearing organizations and banks in relation to transactional volumes. Introducing broker commissions include commission paid to non-employee third parties that have introduced customers to the Company. Net operating revenues represent revenues available to pay variable compensation to risk management consultants and traders and direct non-variable expenses, as well as variable and non-variable expenses of operational and administrative employees.

6


Recent Accounting Pronouncements
In April 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. In June 2015, the FASB issued ASU 2015-15 as an amendment to this guidance to address the absence of authoritative guidance for debt issuance costs related to line-of-credit arrangements. The SEC staff stated that they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 required retrospective application to all prior periods presented in the financial statements. This new guidance was effective for the Company in the first quarter of 2017. As a result of adopting this standard on October 1, 2016, deferred financing costs of $1.0 million as of September 30, 2016, previously reported within other assets, were reclassified to senior unsecured notes in the consolidated balance sheets. As of December 31, 2016, there were no deferred financing costs as the senior unsecured notes were redeemed during the three months ended December 31, 2016, as discussed in Note 9.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU requires entities to recognize at the transaction date the income tax consequences of intercompany asset transfers other than inventory. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The adoption of this standard should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company expects to adopt this guidance starting with the first quarter of fiscal year 2019. The adoption of this standard is not expected to have a material impact on the financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The adoption of this standard should be applied using a retrospective transition method to each period presented. The Company expects to adopt this guidance starting with the first quarter of fiscal year 2019. The Company has not yet determined the impact of this Update on its financial position, results of operations and cash flows.
In January 2017, the FASB issued ASU 2017-01, Business Combinations - Clarifying the Definition of a Business, which clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The adoption of this standard should be applied prospectively on or after the effective date. Early adoption is permitted for transactions for which the acquisition date occurs before the issuance date or effective date of the amendments and only when the transaction has not been reported in financial statements that have been issued or made available for issuance. The Company has early adopted this guidance effective October 1, 2016, and applied the guidance in determining whether the acquisition discussed in Note 16 is the acquisition of an asset or of a business.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, which eliminates Step 2 of the goodwill impairment test. Companies will now perform their goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. This ASU is effective for public business entities for its annual or any interim goodwill impairment tests beginning in periods after December 15, 2019. The Company expects to adopt this guidance starting with the first quarter of fiscal year 2021. The Company does not expect this Update to have a significant impact on its financial position, results of operations and cash flows.
Note 2 – Earnings per Share
The Company presents basic and diluted earnings per share (“EPS”) using the two-class method which requires all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends and therefore participate in undistributed earnings with common stockholders be included in computing earnings per share. Under the two-class method, net earnings are reduced by the amount of dividends declared in the period for each class of common stock and participating security. The remaining undistributed earnings are then allocated to common stock and participating securities, based on their respective rights to receive dividends. Restricted stock awards granted to certain employees and directors contain non-forfeitable rights to dividends at the same rate as common stock, and are considered participating securities. Basic EPS has been computed by dividing net income by the weighted-average number of common shares outstanding.

7

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 December 31,
(in millions, except share amounts)
2016
 
2015
Numerator:
 
 
 
Net income
$
6.3

 
$
8.8

Less: Allocation to participating securities
(0.1
)
 
(0.1
)
Net income allocated to common stockholders
$
6.2

 
$
8.7

Denominator:
 
 
 
Weighted average number of:
 
 
 
Common shares outstanding
18,248,244


18,648,150

Dilutive potential common shares outstanding:
 
 
 
Share-based awards
236,751

 
343,753

Diluted weighted-average shares
18,484,995

 
18,991,903

The dilutive effect of share-based awards is reflected in diluted net income per share by application of the treasury stock method, which includes consideration of unamortized share-based compensation expense required under the Compensation – Stock Compensation Topic of the ASC.
Options to purchase 914,453 and 909,459 shares of common stock for the three months ended December 31, 2016 and 2015, respectively, were excluded from the calculation of diluted earnings per share as they would have been anti-dilutive.
Note 3 – Assets and Liabilities, at Fair Value
The Company’s 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 with and receivables from exchange-clearing organizations, broker-dealers, clearing organizations and counterparties
•
Financial instruments owned and sold, not yet purchased
•
Physical commodities inventory
•
Accounts payable and other accrued liabilities
•
Payables to broker-dealers, clearing organizations and counterparties
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, obligations issued by government sponsored entities, and commodities warehouse receipts. Deposits with and receivables from exchange-clearing organizations, broker-dealers, clearing organizations and counterparties and payables to 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, obligations issued by government sponsored entities, and mortgage-backed and asset-backed securities. These balances also include the fair value of exchange-traded futures and options on futures and exchange-cleared swaps and options determined by prices on the applicable exchange. Financial instruments owned and sold, not yet purchased include the value of U.S. and foreign government obligations, corporate debt securities, derivative financial instruments, exchange stock, commodities warehouse receipts and leases, mutual funds and investments in managed funds. The fair value of exchange common stock is determined by quoted market prices. Physical commodities inventory includes precious metals that are a part of the trading activities of the regulated broker-dealer subsidiary and is recorded at fair value using spot prices. Physical commodities inventory also includes agricultural and energy commodities that are part of the trading activities of a non-broker dealer subsidiary and are also recorded at fair value using spot prices. The carrying value of receivables from customers, net and notes receivable, net approximates fair value, given their short duration. Payables to lenders under loans carry variable rates of interest and thus approximate fair value.
Deposits with and receivables from broker-dealers, clearing organizations and counterparties 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

8

unsettled trades and bonds loaned transactions. Due to their short-term nature, deposits with and receivables from and payables to broker-dealers, clearing organizations and counterparties approximate fair value.
The fair value estimates presented in the condensed consolidated financial statements are based on pertinent information available to management as of December 31, 2016 and September 30, 2016. 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. Except as disclosed in Note 6, the Company did not have any fair value adjustments for assets or liabilities measured at fair value on a non-recurring basis during the three months ended December 31, 2016.
The three levels of the fair value hierarchy under the Fair Value Measurement Topic of the ASC are:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 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

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 December 31, 2016 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 December 31, 2016.
 
December 31, 2016
(in millions)
Level 1
 
Level 2
 
Level 3
 
Netting and
Collateral
(1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Unrestricted cash equivalents - certificate of deposits
$
2.9

 
$
—

 
$
—

 
$
—

 
$
2.9

Commodities warehouse receipts
24.0

 
—

 
—

 
—

 
24.0

U.S. government obligations
—

 
691.7

 
—

 
—

 
691.7

Securities and other assets segregated under federal and other regulations
24.0

 
691.7

 
—

 
—

 
715.7

Money market funds
405.2

 
—

 
—

 
—

 
405.2

U.S. government obligations
—

 
600.4

 
—

 
—

 
600.4

Derivatives
2,363.5

 
—

 
—

 
(2,448.1
)
 
(84.6
)
Deposits with and receivables from exchange-clearing organizations
2,768.7

 
600.4

 
—

 
(2,448.1
)
 
921.0

"To be announced" (TBA) and forward settling securities
—

 
7.8

 
—

 
(0.9
)
 
6.9

Derivatives
—

 
2.2

 
—

 
(4.8
)
 
(2.6
)
Deposits with and receivables from broker-dealers, clearing organizations and counterparties
—

 
10.0

 
—

 
(5.7
)
 
4.3

Common and preferred stock and American Depositary Receipts (“ADRs”)
31.8

 
2.6

 
0.2

 
—

 
34.6

Exchangeable foreign ordinary equities and ADRs
28.1

 
3.9

 
—

 
—

 
32.0

Corporate and municipal bonds
3.4

 
1.8

 
—

 
—

 
5.2

U.S. government obligations
—

 
489.9

 
—

 
—

 
489.9

Foreign government obligations
—

 
44.8

 
—

 
—

 
44.8

Mortgage-backed securities
—

 
971.5

 
—

 
—

 
971.5

Derivatives
239.1

 
1,198.5

 
—

 
(1,318.8
)
 
118.8

Commodities leases
—

 
92.0

 
—

 
(85.4
)
 
6.6

Commodities warehouse receipts
10.2

 
—

 
—

 
—

 
10.2

Exchange firm common stock
6.9

 
—

 
—

 
—

 
6.9

Mutual funds and other
9.5

 
—

 
—

 
—

 
9.5

Financial instruments owned
329.0

 
2,805.0

 
0.2

 
(1,404.2
)
 
1,730.0

Physical commodities inventory
129.8

 
—

 
—

 
—

 
129.8

Total assets at fair value
$
3,254.4

 
$
4,107.1

 
$
0.2

 
$
(3,858.0
)
 
$
3,503.7

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

 
$
—

 
$
0.9

 
$
—

 
$
0.9

TBA and forward settling securities
—

 
7.3

 
—

 
(0.9
)
 
6.4

Derivatives
2,172.7

 
203.2

 
—

 
(2,375.9
)
 
—

Payable to broker-dealers, clearing organizations and counterparties
2,172.7

 
210.5

 
—

 
(2,376.8
)
 
6.4

Common and preferred stock and ADRs
28.7

 
0.4

 
—

 
—

 
29.1

Exchangeable foreign ordinary equities and ADRs
27.4

 
4.6

 
—

 
—

 
32.0

Corporate and municipal bonds
0.2

 
2.4

 
—

 
—

 
2.6

U.S. government obligations
—

 
589.8

 
—

 
—

 
589.8

Foreign government obligations
—

 
8.6

 
—

 
—

 
8.6

Mortgage-backed securities
—

 
0.1

 
—

 
—

 
0.1

Derivatives
231.4

 
1,587.8

 
—

 
(1,652.9
)
 
166.3

Commodities leases
—

 
200.0

 
—

 
(127.0
)
 
73.0

Financial instruments sold, not yet purchased
287.7

 
2,393.7

 
—

 
(1,779.9
)
 
901.5

Total liabilities at fair value
$
2,460.4

 
$
2,604.2

 
$
0.9

 
$
(4,156.7
)
 
$
908.8

 
(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


The following table sets forth the Company’s financial and nonfinancial assets and liabilities accounted for at fair value, on a recurring basis, as of September 30, 2016 by level in the fair value hierarchy. There were no assets or liabilities that were measured at fair value on a nonrecurring basis as of September 30, 2016.
 
September 30, 2016
(in millions)
Level 1
 
Level 2
 
Level 3
 
Netting and
Collateral
(1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Unrestricted cash equivalents - certificates of deposits
$
7.1

 
$
—

 
$
—

 
$
—

 
$
7.1

Commodities warehouse receipts
23.3

 
—

 
—

 
—

 
23.3

U.S. government obligations
—

 
595.5

 
—

 
—

 
595.5

Securities and other assets segregated under federal and other regulations
23.3

 
595.5

 
—

 
—

 
618.8

Money market funds
512.7

 
—

 
—

 
—

 
512.7

U.S. government obligations
—

 
472.1

 
—

 
—

 
472.1

Derivatives
2,149.9

 
—

 
—

 
(2,266.2
)
 
(116.3
)
Deposits with and receivables from exchange-clearing organizations
2,662.6

 
472.1

 
—

 
(2,266.2
)
 
868.5

TBA and forward settling securities
—

 
0.3

 
—

 
—

 
0.3

Derivatives
—

 
8.0

 
—

 
(23.5
)
 
(15.5
)
Deposits with and receivables from broker-dealers, clearing organizations and counterparties
—

 
8.3

 
—

 
(23.5
)
 
(15.2
)
Common and preferred stock and ADRs
34.6

 
1.7

 
0.2

 
—

 
36.5

Exchangeable foreign ordinary equities and ADRs
25.2

 
0.5

 
—

 
—

 
25.7

Corporate and municipal bonds
36.9

 
0.9

 
3.0

 
—

 
40.8

U.S. government obligations
—

 
514.9

 
—

 
—

 
514.9

Foreign government obligations
—

 
14.6

 
—

 
—

 
14.6

Mortgage-backed securities
—

 
747.5

 
—

 
—

 
747.5

Derivatives
206.9

 
1,350.8

 
—

 
(1,363.8
)
 
193.9

Commodities leases
—

 
137.2

 
—

 
(129.1
)
 
8.1

Commodities warehouse receipts
8.9

 
—

 
—

 
—

 
8.9

Exchange firm common stock
6.4

 
—

 
—

 
—

 
6.4

Mutual funds and other
8.8

 
—

 
—

 
—

 
8.8

Financial instruments owned
327.7

 
2,768.1

 
3.2

 
(1,492.9
)
 
1,606.1

Physical commodities inventory, net - precious metals
71.2

 
—

 
—

 
—

 
71.2

Total assets at fair value
$
3,091.9

 
$
3,844.0

 
$
3.2

 
$
(3,782.6
)
 
$
3,156.5

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

 
$
—

 
$
0.8

 
$
—

 
$
0.8

TBA and forward settling securities
—

 
2.6

 
—

 
0.9

 
3.5

Derivatives
1,961.7

 
97.5

 
—

 
(2,059.2
)
 
—

Payable to broker-dealers, clearing organizations and counterparties
1,961.7

 
100.1

 
—

 
(2,058.3
)
 
3.5

Common and preferred stock and ADRs
23.5

 
0.4

 
—

 
—

 
23.9

Exchangeable foreign ordinary equities and ADRs
25.3

 
0.5

 
—

 
—

 
25.8

U.S. government obligations
—

 
509.8

 
—

 
—

 
509.8

Corporate and municipal bonds
6.9

 
—

 
—

 
—

 
6.9

Derivatives
199.4

 
1,319.3

 
—

 
(1,307.8
)
 
210.9

Commodities leases
—

 
207.8

 
—

 
(145.7
)
 
62.1

Financial instruments sold, not yet purchased
255.1

 
2,037.8

 
—

 
(1,453.5
)
 
839.4

Total liabilities at fair value
$
2,216.8

 
$
2,137.9

 
$
0.8

 
$
(3,511.8
)
 
$
843.7

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

11

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 December 31, 2016 and September 30, 2016 are summarized below:
(in millions)
December 31, 2016
 
September 30, 2016
Total level 3 assets
$
0.2

 
$
3.2

Level 3 assets for which the Company bears economic exposure
$
0.2

 
$
3.2

Total assets
$
6,290.7

 
$
5,950.3

Total assets at fair value
$
3,503.7

 
$
3,156.5

Total level 3 assets as a percentage of total assets
—
%
 
0.1
%
Level 3 assets for which the Company bears economic exposure as a percentage of total assets
—
%
 
0.1
%
Total level 3 assets as a percentage of total financial assets at fair value
—
%
 
0.1
%
The following tables set forth a summary of changes in the fair value of the Company’s level 3 financial assets and liabilities during the three months ended December 31, 2016 and 2015, 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 December 31, 2016.
 
Level 3 Financial Assets and Financial Liabilities For the Three Months Ended December 31, 2016
(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
$
0.2

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
0.2

Corporate and municipal bonds
3.0

 
—

 
—

 
—

 
(3.0
)
 
—

 
—

 
$
3.2

 
$
—

 
$
—

 
$
—

 
$
(3.0
)
 
$
—

 
$
0.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent liabilities
$
0.8

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
0.8

 
Level 3 Financial Assets and Financial Liabilities For the Three Months Ended December 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
$
0.5

 
$
—

 
$
(0.2
)
 
$
—

 
$
—

 
$
—

 
$
0.3

Corporate and municipal bonds
3.2

 
—

 
—

 
—

 
—

 
—

 
3.2

 
$
3.7

 
$
—

 
$
(0.2
)
 
$
—

 
$
—

 
$
—

 
$
3.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent liabilities
$
3.3

 
$
—

 
$
0.2

 
$
—

 
$
—

 
$
—

 
$
3.5

The Company had debentures issued by a single asset owning company of Suriwongse Hotel located in Chiang Mai, Thailand. As of September 30, 2016, the Company’s investment in the hotel was $3.0 million, and was included within the corporate and municipal bonds classification in the level 3 financial assets and financial liabilities tables. In December 2016, the Company sold the debentures and collected an amount approximating their carrying value.
The Company is required to make additional future cash payments based on certain financial performance measures of its acquired businesses. The Company is required to remeasure the fair value of the cash earn-out 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

12

the contingent earn-out 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 earn-outs 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 interest rate environment. From the dates of acquisition to December 31, 2016, 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 by less than $0.1 million and $0.2 million during the three months ended December 31, 2016 and 2015, respectively, with the corresponding amount classified as ‘other’ 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 in and out of levels 1, 2, and 3 during the three months ended December 31, 2016 and 2015.
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 December 31, 2016 at the fair values of the related financial instruments. The Company will incur losses if the fair value of the underlying financial instruments increases subsequent to December 31, 2016. The total financial instruments sold, not yet purchased of $901.5 million as of December 31, 2016 includes $166.3 million for derivative contracts, which represents a liability to the Company based on their fair values as of December 31, 2016.
Derivatives
The Company utilizes derivative products in its trading capacity as a dealer in order to satisfy customer needs and mitigate risk. The Company manages risks from both derivatives and non-derivative cash instruments on a consolidated basis. The risks of derivatives should not be viewed in isolation, but in aggregate with the Company’s other trading activities. The majority of the Company’s derivative positions are included in the condensed consolidated balance sheets in ‘deposits with and receivables from exchange-clearing organizations’, ‘financial instruments owned, at fair value’, ‘financial instruments sold, not yet purchased, at fair value’ and payables to broker-dealers, clearing organizations and counterparties’.
The Company employs an interest rate risk management strategy using derivative financial instruments in the form of interest rate swaps as well as outright purchases of medium-term U.S. Treasury notes to manage a portion of the aggregate interest rate position. The Company’s objective when using interest rate swaps under the strategy, is to invest certain amounts of customer deposits in high quality, short-term investments and swap the resulting variable interest earnings into medium-term interest earnings. When used, the risk mitigation of these interest rate swaps are not within the documented hedging designation requirements of the Derivatives and Hedging Topic of the ASC, and as a result are recorded at fair value, with changes in the fair value of the interest rate swaps recorded within 'trading gains, net' in the condensed consolidated income statements. At September 30, 2016, the Company had $375.0 million in notional principal of interest rate swaps outstanding with a weighted-average remaining life of 15 months. During the three months ended December 31, 2016, the Company settled these interest rate swaps in advance of their original maturity date.

13

Listed below are the fair values of the Company’s derivative assets and liabilities as of December 31, 2016 and September 30, 2016. Assets represent net unrealized gains and liabilities represent net unrealized losses.
 
December 31, 2016
 
September 30, 2016
(in millions)
Assets (1)
 
Liabilities (1)
 
Assets (1)
 
Liabilities (1)
Derivative contracts not accounted for as hedges:
 
 
 
 
 
 
 
Exchange-traded commodity derivatives
$
2,132.1

 
$
2,152.4

 
$
2,022.1

 
$
1,920.5

OTC commodity derivatives
989.1

 
1,384.6

 
1,217.0

 
1,188.9

Exchange-traded foreign exchange derivatives
46.2

 
36.0

 
12.2

 
7.5

OTC foreign exchange derivatives
447.6

 
442.2

 
346.5

 
290.2

Exchange-traded interest rate derivatives
128.7

 
125.7

 
78.7

 
120.5

Equity index derivatives
59.6

 
54.2

 
39.1

 
50.3

TBA and forward settling securities
7.8

 
7.3

 
0.3

 
2.6

Gross fair value of derivative contracts
3,811.1

 
4,202.4

 
3,715.9

 
3,580.5

Impact of netting and collateral
(3,772.6
)
 
(4,029.7
)
 
(3,653.5
)
 
(3,366.1
)
Total fair value included in ‘Deposits with and receivables from exchange-clearing organizations’
$
(84.6
)
 
 
 
$
(116.3
)
 
 
Total fair value included in ‘Deposits with and receivables from broker-dealers, clearing organizations and counterparties’
$
4.3

 
 
 
$
(15.2
)
 
 
Total fair value included in ‘Financial instruments owned, at fair value’
$
118.8

 
 
 
$
193.9

 
 
Total fair value included in ‘Payables to broker-dealers, clearing organizations and counterparties
 
 
$
6.4

 
 
 
$
3.5

Fair value included in ‘Financial instruments sold, not yet purchased, at fair value’
 
 
$
166.3

 
 
 
$
210.9

(1)
As of December 31, 2016 and September 30, 2016, the Company’s derivative contract volume for open positions were approximately 4.1 million and 4.0 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 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.
The Company has derivative instruments, which consist of mortgage-backed TBA securities and forward settling transactions that are used to manage risk exposures in the trading inventory of the Company’s domestic fixed income institutional business. 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’.

14

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 deposits with and receivables from and 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 December 31, 2016 and September 30, 2016, these transactions are summarized as follows:
 
December 31, 2016
 
September 30, 2016
(in millions)
Gain / (Loss)
 
Notional Amounts
 
Gain / (Loss)
 
Notional Amounts
Unrealized gain on TBA securities purchased within receivables from and payables to broker-dealers, clearing organizations and counterparties and related notional amounts (1)
$
5.4

 
$
834.4

 
$
0.8

 
$
289.8

Unrealized loss on TBA securities purchased within receivables from and payables to broker-dealers, clearing organizations and counterparties and related notional amounts (1)
$
(0.1
)
 
$
109.3

 
$
(0.8
)
 
$
485.5

Unrealized gain on TBA securities sold within receivables from and payables to broker-dealers, clearing organizations and counterparties and related notional amounts (1)
$
0.9

 
$
(548.1
)
 
$
1.3

 
$
(702.3
)
Unrealized loss on TBA securities sold within receivables from and payables to broker-dealers, clearing organizations and counterparties and related notional amounts (1)
$
(5.6
)
 
$
(1,198.1
)
 
$
(1.7
)
 
$
(754.3
)
Unrealized gain on forward settling securities purchased within receivables from and payables to broker-dealers, clearing organizations and counterparties and related notional amounts
$
1.5

 
$
259.2

 
$
0.1

 
$
607.9

Unrealized (loss) gain on forward settling securities sold within receivables from and payables to broker-dealers, clearing organizations and counterparties and related notional amounts
$
(1.7
)
 
$
(251.3
)
 
$
0.2

 
$
(470.4
)
(1) The notional amounts of these instruments reflect the extent of the Company's involvement in TBA and forward settling 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 December 31, 2016 and 2015, in accordance with the Derivatives and Hedging Topic of the ASC. The gains set forth below are included in ‘trading gains, net’ in the condensed consolidated income statements.
 
Three Months Ended December 31,
(in millions)
2016
 
2015
Commodities
$
4.9

 
$
20.0

Foreign exchange
1.2

 
1.8

Interest rate
(1.0
)
 
(1.9
)
TBA and forward settling securities
13.4

 
0.7

Net gains from derivative contracts
$
18.5

 
$
20.6

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

15

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. 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 December 31, 2016 and September 30, 2016 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
The allowance for doubtful accounts related to receivables from customers was $11.8 million as of December 31, 2016 and $9.5 million as of September 30, 2016. The allowance for doubtful accounts related to notes receivable was $0.2 million as of December 31, 2016 and September 30, 2016, respectively.
During the three months ended December 31, 2016, the Company recorded bad debt expense of $2.5 million. The provision for bad debts is primarily related to $2.5 million of LME Metals customer deficits in the Company’s Commercial Hedging segment.
During the three months ended December 31, 2015, the Company recorded bad debt expense of$2.0 million, including provision increases of $1.9 million and direct write-offs of $0.1 million. The provision for bad debts is primarily related to $1.7 million of OTC customer deficits in the Company’s Commercial Hedging segment.
The Company originates short-term notes receivable from customers with the outstanding balances typically being insured 90% to 98% by a third party, including accrued interest, subject to applicable deductible amounts. The total balance outstanding under insured notes receivable was $2.3 million and $5.0 million as of December 31, 2016 and September 30, 2016, respectively. The Company has sold $2.1 million and $4.6 million of the insured portion of the notes through non-recourse participation agreements with other third parties as of December 31, 2016 and September 30, 2016, respectively. The Company completed its exit of the majority of this activity during fiscal 2016. The Company believes the run-off of the remaining activity will have a minimal impact on the Company.
See discussion of notes receivable related to commodity repurchase agreements in Note 10.

16

Note 6 – Physical Commodities Inventory
The Company’s inventories consist of finished physical commodities. Inventories by component of the Company’s Physical Commodities segment are shown below.
(in millions)
December 31,
2016
 
September 30,
2016
Physical Ag & Energy(1)
$
137.5

 
$
65.9

Precious metals - held by broker-dealer subsidiary(2)
18.1

 
5.3

Precious metals - held by non-broker-dealer subsidiaries(3)
56.5

 
52.6

Physical commodities inventory
$
212.1

 
$
123.8

(1) Physical Ag & Energy maintains agricultural and energy commodity inventories, including corn, soybeans, wheat, dried distillers grain, canola, sorghum, coffee, coal and others. The agricultural commodity inventories are carried at net realizable value, which approximates fair value less disposal costs, with changes in net realizable value included as a component of ‘cost of sales of physical commodities’ on the condensed consolidated income statements. The agricultural inventories have reliable, readily determinable and realizable market prices, have relatively insignificant costs of disposal and are available for immediate delivery.
(2) Precious metals held by the Company’s subsidiary, INTL FCStone Ltd, a United Kingdom based broker-dealer subsidiary, is measured at fair value, with changes in fair value included as a component of ‘trading gains, net’ on the condensed consolidated income statements, in accordance with U.S. GAAP accounting requirements for broker-dealers.
(3) Precious metals inventory held by subsidiaries that are not broker-dealers are valued at the lower of cost or market value.
The Company has recorded lower of cost or market (“LCM”) adjustments for certain precious metals inventory of $0.6 million as of December 31, 2016 and September 30, 2016. 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 segments as follows:
(in millions)
December 31,
2016
 
September 30,
2016
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

Note 8 – Intangible Assets
During the three months ended December 31, 2016 , the Company recorded additional intangible assets of $6.0 million as part of the ICAP acquisition. See Note 16 - 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:
 
December 31, 2016
 
September 30, 2016
(in millions)
Gross Amount
 
Accumulated
Amortization
 
Net Amount
 
Gross Amount
 
Accumulated
Amortization
 
Net Amount
Intangible assets subject to amortization
 
 
 
 
 
 
 
 
 
 
 
Trade name
$
1.1

 
$
(0.7
)
 
$
0.4

 
$
1.1

 
$
(0.6
)
 
$
0.5

Software programs/platforms
2.7

 
(2.4
)
 
0.3

 
2.7

 
(2.4
)
 
0.3

Customer base
20.0

 
(6.3
)
 
13.7

 
14.0

 
(5.7
)
 
8.3

Total intangible assets
$
23.8

 
$
(9.4
)
 
$
14.4

 
$
17.8

 
$
(8.7
)
 
$
9.1

Amortization expense related to intangible assets was $0.7 million and $0.4 million for the three months ended December 31, 2016 and 2015, respectively.

17

As of December 31, 2016, the estimated future amortization expense was as follows:
(in millions)
 
Fiscal 2017 (remaining nine months)
$
2.1

Fiscal 2018
2.2

Fiscal 2019
2.2

Fiscal 2020
2.0

Fiscal 2021 and thereafter
5.9

 
$
14.4

Note 9 – Credit Facilities
Variable-Rate Credit Facilities
The Company has four committed credit facilities under which the Company and its subsidiaries may borrow up to $447.0 million, subject to the terms and conditions for these facilities. The amounts outstanding under these credit facilities are short term borrowings and carry variable rates of interest, thus approximating fair value. The Company’s committed credit facilities consist of the following:
•
$247 million facility available to INTL FCStone Inc. for general working capital requirements.
•
$75 million facility available to the Company’s wholly owned subsidiary, INTL FCStone Financial Inc., for short-term funding of margin to commodity exchanges. The facility is subject to annual review and guaranteed by INTL FCStone Inc.
•
$100 million facility available to the Company’s wholly owned subsidiary, FCStone Merchant Services, LLC, for financing traditional commodity financing arrangements and commodity repurchase agreements. The facility is subject to annual review and is guaranteed by INTL FCStone Inc.
•
$25 million facility available to the Company’s wholly owned subsidiary, INTL FCStone Ltd, for short-term funding of margin to commodity exchanges. The facility is subject to annual review and is guaranteed by INTL FCStone Inc.
The Company also has a secured, uncommitted loan facility, under which the Company’s wholly owned subsidiary, INTL FCStone Financial Inc. may borrow up to $50 million, collateralized by commodity warehouse receipts, to facilitate U.S. commodity exchange deliveries of its customers, subject to certain terms and conditions of the credit agreement.
The Company also has a secured uncommitted loan facility under which the Company’s wholly owned subsidiary, INTL FCStone Ltd may borrow up to approximately $25 million, collateralized by commodity warehouse receipts, to facilitate financing of commodities under repurchase agreement services to its customers, subject to certain terms and conditions of the credit agreement.
The Company also has a secured uncommitted loan facility under which the Company’s wholly owned subsidiary Sterne, Agee & Leach, Inc. may borrow for short term funding of firm and customer margin requirements, subject to certain terms and conditions of the agreement. The uncommitted maximum amount available to be borrowed is not specified, and all requests for borrowing are subject to the sole discretion of the lender.
On January 26, 2017, Sterne, Agee & Leach, Inc. entered into an additional secured uncommitted loan facility under which it may borrow up to $100 million for short term funding of firm and customer margin requirements, subject to certain terms and conditions of the agreement.
Note Payable to Bank
In April 2015, the Company obtained a $4.0 million loan from a commercial bank, secured by equipment purchased with the proceeds. The note is payable in monthly installments, ending in March 2020. The note bears interest at a rate per annum equal to LIBOR plus 2.00%.
Senior Unsecured Notes
In July 2013, the Company completed an offering of $45.5 million aggregate principal amount of the Company’s 8.5% Senior Notes due 2020 (the “Notes”). The net proceeds of the sale of the Notes were used for general corporate purposes. On September 15, 2016, the Company provided notice, through the trustee of the Notes, to the record holders of the Notes that the Company would redeem the outstanding$45.5 million aggregate principal amount of the Notes in full. On October 15, 2016,

18

the Company redeemed the Notes at a price equal to 100% of the principal amount redeemed plus accrued and unpaid interest to, but not including, the redemption date of October 15, 2016.
The following table sets forth a listing of credit facilities, the committed amounts as of December 31, 2016 on the facilities, and outstanding borrowings on the facilities as well as indebtedness on a promissory note and on senior notes as of December 31, 2016 and September 30, 2016:
(in millions)
 
 
 
 
 
 
 
 
Credit Facilities
 
 
 
 
 
Amounts Outstanding
 
Borrower
 Security
Renewal / Expiration Date
 
Total Commitment
 
December 31,
2016
 
September 30,
2016
 
INTL FCStone Inc.
Pledged shares of certain subsidiaries
March 18, 2019
 
$
247.0

 
$
205.0

 
$
136.5

 
INTL FCStone Financial Inc.
None
April 6, 2017
 
75.0

 
—

 
—

 
INTL FCStone Financial Inc.
Commodity warehouse receipts
n/a
 
—

 
—

 
—

 
FCStone Merchants Services, LLC
Certain commodities assets
May 1, 2018
 
100.0

 
90.0

 
43.5

 
INTL FCStone Ltd
None
October 27, 2017
 
25.0

 
—

 
—

 
INTL FCStone Ltd
Commodity warehouse receipts
n/a
 
—

 
—

 
—

 
Sterne, Agee & Leach, Inc.
Certain pledged securities
n/a
 
—

 
15.0

 
—

 
 
 
 
 
$
447.0

 
310.0

 
180.0

Note Payable to Bank
 
 
 
 
 
 
 
 
 
Monthly installments, due March 2020 and secured by certain equipment
 
 
 
2.6

 
2.8

Senior Unsecured Notes
 
 
 
 
 
 
 
 
 
8.50% senior notes, due July 30, 2020 (redeemed on October 15, 2016)
 
 
 
—

 
44.5

Total indebtedness
 
 
 
 
 
$
312.6

 
$
227.3

As reflected above, $100 million of the Company’s committed credit facilities are scheduled to expire within twelve months of this filing. The Company intends to renew or replace this facility when it expires, and based on the Company’s liquidity position and capital structure, the Company believes it will be able to do so.
The Company’s credit facility agreements contain financial covenants relating to financial measures on a consolidated basis, as well as on a certain stand-alone subsidiary basis, including minimum tangible net worth, minimum regulatory capital, minimum net unencumbered liquid assets, maximum net loss, minimum fixed charge coverage ratio and maximum funded debt to net worth ratio. Failure to comply with these covenants could result in the debt becoming payable on demand. As of December 31, 2016, the Company was in compliance with all of its financial covenants under its credit facilities.
Note 10 – Commodity and Other Repurchase Agreements and Collateralized Transactions
The Company’s outstanding notes receivable in connection with sale/repurchase agreements, whereby customers sell certain commodity inventory and agree to repurchase the commodity inventory at a future date at a fixed rate, as of December 31, 2016 and September 30, 2016 were $5.8 million and $1.5 million, respectively.
The Company enters into securities purchased under agreements to resell and payables under repurchase agreements primarily to finance financial instruments, acquire securities to cover short positions or to acquire securities for settlement. These agreements are recorded at their contractual amounts plus accrued interest. The related interest is recorded in the condensed consolidated income statements as interest income or interest expense, as applicable. In connection with these agreements and transactions, it is the policy of the Company to receive or pledge cash or securities to adequately collateralize such agreements and transactions in accordance with general industry guidelines and practices. The value of the collateral is valued daily and the Company may require counterparties to deposit additional collateral or return collateral pledged, when appropriate. The carrying amounts of these agreements and transactions approximate fair value due to their short-term nature and the level of collateralization.
The Company pledges financial instruments owned to collateralize repurchase agreements. At December 31, 2016, on a settlement date basis, financial instruments owned of $482.4 million were pledged as collateral under repurchase agreements. The counterparty has the right to repledge the collateral in connection with these transactions. These financial instruments owned have been pledged as collateral and have been parenthetically disclosed on the condensed consolidated balance sheet.

19

In addition, as of December 31, 2016, the Company pledged settlement date financial instruments owned of $912.7 million and securities received under reverse repurchase agreements of $206.5 million to cover collateral for tri-party repurchase agreements. For these securities, the counterparty does not have the right to sell or repledge the collateral.
At December 31, 2016, the Company has accepted collateral that it is permitted by contract or custom to sell or repledge. This collateral consists primarily of securities received in reverse repurchase agreements. The fair value of such collateral at December 31, 2016, was approximately $766.3 million of which $558.3 million was used to cover securities sold short which are recorded in financial instruments sold, not yet purchased on the condensed consolidated balance sheet. In the normal course of business, this collateral is used by the Company to cover financial instruments sold, not yet purchased and to obtain financing in the form of repurchase agreements. At December 31, 2016, substantially all of the above collateral had been delivered against financial instruments sold, not yet purchased or repledged by the Company to obtain financing.
The Company has margin securities, securities borrowed and securities held on behalf of correspondent brokers, on terms which permit it to repledge the securities to others. At December 31, 2016, the Company had obtained and had available securities, on a settlement date basis, with a fair value of $202.7 million on such terms, of which $30.3 million have either been pledged or otherwise transferred to others in connection with the Company’s financing activities or to satisfy commitments under short sales.
Note 11 – Commitments and Contingencies
Legal Proceedings
From time to time and in the ordinary course of business, the Company is involved in various legal actions and proceedings, including tort claims, contractual disputes, employment matters, workers’ compensation claims and collections. The Company carries insurance that provides protection against certain types of claims, up to the policy limits of the insurance.
As of December 31, 2016 and September 30, 2016, the condensed consolidated balance sheets include loss contingency accruals recorded prior to these periods then ended, which are not material, individually or in the aggregate, to the Company’s financial position or liquidity. In the opinion of management, possible exposure from loss contingencies in excess of the amounts accrued, is not likely to be material to the Company’s earnings, financial position or liquidity.
There have been no material changes to the legal actions and proceedings as compared to September 30, 2016.
Contractual Commitments
Contingent Liability - Acquisition
Under the terms of the purchase agreement related to the acquisition listed below, the Company has an obligation to pay additional consideration if specific conditions and earnings targets are met. In accordance with the Business Combinations Topic of the ASC, the fair value of the additional consideration is recognized as a contingent liability as of the acquisition date. The contingent liability for these estimated additional purchase price considerations of $0.9 million and $0.8 million are included in ‘accounts payable and other accrued liabilities’ in the condensed consolidated balance sheets as of December 31, 2016 and September 30, 2016. The acquisition date fair value of additional consideration is remeasured to its fair value each reporting period, with changes in fair value recorded in current earnings. The change in fair value during the three months ended December 31, 2016 and 2015 were increases of less than $0.1 million and $0.2 million, respectively, and are included in ‘other’ in the condensed consolidated income statements.
The Company has a contingent liability relating to the January 2015 acquisition of G.X. Clarke, which may result in the payment of additional purchase price consideration. The contingent consideration in no event shall exceed $1.5 million. The estimated total purchase price, including contingent consideration, is $28.7 million as of December 31, 2016, of which $0.9 million remains outstanding and is included in ‘accounts payable and other accrued liabilities’ in the condensed consolidated balance sheet.
Self-Insurance
The Company self-insures its costs related to medical and dental claims. The Company is self-insured, up to a stop loss amount, for eligible participating employees and retirees, and for qualified dependent medical and dental claims, subject to deductibles and limitations. As of December 31, 2016, the Company had $0.9 million accrued for self-insured medical and dental claims included in ‘accounts payable and other liabilities’ in the condensed consolidated balance sheet.

20

Note 12 – Capital and Other Regulatory Requirements
The Company’s activities are subject to significant governmental regulation, both in the United States and overseas. The subsidiaries of the Company were in compliance with all of their regulatory requirements as of December 31, 2016, as follows:
(in millions)
 
 
 
 
 
As of December 31, 2016
Subsidiary
Regulatory Authority
Jurisdiction
 
Requirement Type
 
Actual
 
Minimum
Requirement
INTL FCStone Financial Inc.
Securities and Exchange Commission ("SEC") and Commodity Futures Trading Commission ("CFTC")
United States
 
Net capital
 
$
129.3

 
$
80.2

INTL FCStone Financial Inc.
CFTC
United States
 
Segregated funds
 
$
2,130.4

 
$
2,079.0

INTL FCStone Financial Inc.
CFTC
United States
 
Secured funds
 
$
126.5

 
$
109.8

Sterne Agee Clearing Inc.
SEC
United States
 
Net capital
 
$
1.1

 
$
0.1

Sterne, Agee & Leach, Inc.
SEC
United States
 
Net capital
 
$
26.7

 
$
2.0

Sterne Agee Financial Services, Inc.
SEC
United States
 
Net capital
 
$
4.7

 
$
0.4

INTL FCStone Ltd(1)
Financial Conduct Authority ("FCA")
United Kingdom
 
Net capital
 
$
160.1

 
$
85.5

INTL FCStone Ltd
FCA
United Kingdom
 
Segregated funds
 
$
58.9

 
$
52.4

INTL Netherlands BV(1)
FCA
United Kingdom
 
Net capital
 
$
155.5

 
$
84.4

INTL FCStone DTVM Ltda.
Brazilian Central Bank and Securities and Exchange Commission of Brazil
Brazil
 
Capital adequacy
 
$
2.5

 
$
0.5

INTL Gainvest S.A.
National Securities Commission ("CNV")
Argentina
 
Capital adequacy
 
$
8.0

 
$
0.1

INTL Gainvest S.A.
CNV
Argentina
 
Net capital
 
$
4.0

 
$
0.1

INTL Capital S.A.
General Inspector of Justice (Argentina)
Argentina
 
Net capital
 
$
14.8

 
$
12.7

INTL CIBSA S.A.
CNV
Argentina
 
Capital adequacy
 
$
6.9

 
$
1.0

INTL CIBSA S.A.
CNV
Argentina
 
Net capital
 
$
10.7

 
$
0.6

(1) INTL Netherlands BV is a holding company that includes the ownership equity of INTL FCStone Ltd. The associated net capital amounts and minimum requirements should not be considered in aggregate.
Sterne, Agee & Leach, Inc. is also subject to Rule 15c3-3 of the Securities Exchange Act of 1934, as amended (“Customer Protection Rule”) inclusive of computations for proprietary accounts of broker-dealers (“PABs”). As of December 31, 2016, Sterne, Agee & Leach, Inc. had $1,000 of cash in a Special Reserve Bank Account for the exclusive benefit of customers under the Customer Protection Rule pursuant to SEC Rule 15c3-3, Computation for Determination of Reserve Requirements and no reserve requirement. Also, as of December 31, 2016, Sterne, Agee & Leach, Inc. had $1,000 of cash in a Special Reserve Bank Account pursuant to SEC Rule 15c3-3, Computation for Determination of PAB Reserve Requirements and no reserve requirement.
Certain other non-U.S. subsidiaries of the Company are also subject to capital adequacy requirements promulgated by authorities of the countries in which they operate. As of December 31, 2016, these subsidiaries were in compliance with their local capital adequacy requirements.
Note 13 – Other Expenses
Other expenses for the three months ended December 31, 2016 and 2015 consisted of the following:
 
Three Months Ended December 31,
(in millions)
2016
 
2015
Contingent consideration, net
$
—

 
$
0.2

Insurance
0.5

 
0.4

Advertising, meetings and conferences
0.9

 
0.7

Non-trading hardware and software maintenance and software licensing
2.9

 
1.5

Office supplies and printing
0.6

 
0.3

Other clearing related expenses
0.4

 
0.2
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